Insurers face uncertainty over exposures caused by airplanes and marine vessels laying idle, writes Tim Evershed
The Covid-19 pandemic will wipe trillions from the value of global trade this year as economic uncertainty continues, demand stalls and supply chains are disrupted. This disruption has included the grounding of a vast number of aircraft fleets and marine vessels.
These idle fleets are creating new risks for their owners, operators and (re)insurers, including accumulations of risk at ports and airports, maintenance challenges and crew issues.
According to estimates from researchers Russell Group, global trade will fall by $3trn (£2.38trn) in 2020, compared with last year, while airline passenger numbers dropped by more than 90% in May 2020 compared with May 2019, according to the International Air Transport Association.
Consequently, there is a significant drop in shipping and aircraft movements and even the unlocking of some of the world's economies will only provide limited relief.
Alex Stovold, head of aviation at law firm DAC Beachcroft, says: "The risks here are clear -- the aggregation of valuable aircraft assets in storage, often in locations that would not ordinarily have such a risk profile, requires careful review of various issues. These include any change to 'ground risks only' insurance from the usual 'flight risks', the oversight of appropriate physical security provision, the impact on maintenance schedules of the unexpected change of aircraft and fleet use and fundamentally the contractual protection that sits behind all of these factors.
"As the passenger numbers remain low, the risks facing the aircraft themselves will require continued oversight and management going forward, including from a currency and skills perspective when the aircraft are ready to take to the skies again."
Russell Group expects the grounding of aircraft to continue to varying degrees across the global routes operated by airlines, which will vary from region to region throughout 2020, with varying levels of return to pre-Covid-19 levels for airlines during that period.
The increasing disruption and economic pressures caused by the pandemic also have serious risk management implications for the maritime community and insurers alike
Suki Basi, CEO of Russell Group, says: "The reason why it should matter to an underwriter is concentration of exposures in a location. It increases the potential size of the event. So we are talking more about the severity as opposed to the frequency. Some of these locations where aircraft are currently located, are natural peril locations.
"Reinsurers should be more vigilant of developing exposures as airlines return to flight. Airlines are trying to retire older aircraft and some less fuel-efficient aircraft like the A380. During the return-to-flight phase, airlines want to be operational as quickly as possible, but safety restrictions will inhibit the return to pre-Covid-19 levels.
"As a result, airlines will be focusing on cashflow and trying to cut costs, trimming non-profitable routes and fleets that are expensive to run. As a consequence, (re)insurers face uncertainty over exposures during the return to flight phase and must monitor the exposure situation more regularly."
Although many ships have remained active through the coronavirus outbreak, many other vessels have been impacted, leading to a number lying idle. A vessel is considered to be on layup when it is taken out of service and is anchored at a fixed location for a considerable period of time without undertaking any commercial activities.
If the layup of vessels is not properly managed, including regular maintenance, problems can materialise when the ship is ready to sail again. Relieving crew has become more challenging due to travel restrictions, meaning more fatigued seafarers -- one of the main causes of human error on board.
Delays in the servicing and inspections of vessels and emergency equipment can result in any problems remaining undetected, while supply chain disruption means oils and consumables can take longer to arrive, which can result in machinery damage if incorrect alternatives are used. At the same time, an increase in the use of remote pilots -- to protect seafarers from the risk of infection -- can also have an impact on safe vessel navigation.
"The increasing disruption and economic pressures caused by the pandemic also have serious risk management implications for the maritime community and insurers alike," says Captain Rahul Khanna, global head of marine risk consulting at Allianz Global Corporate & Specialty.
"An unplanned layup can result in a prolonged recommissioning exercise that can last for months, even requiring docking. Comprehensive plans, including risk assessments covering storage and layup, are crucial for ensuring the safety of vessel during the downtime and its subsequent return to service," adds Captain Khanna.
He continues: "I do not expect passengers to start booking cruises, at least this year. There may be some local operators who might be able to run cruise services under strict restrictions, but in general the global cruise industry is expected to be severely affected by the Covid-19 impact. Other vessel types have many additional variables to consider for coming out of layup, such as oil prices for tankers and macroeconomic indicators for others.
"In general, insurers should ensure they are fully aware of the exposures they face and try to understand the quality of risks that are exposed. Initiate a constructive dialogue with the assureds to understand what steps they are taking to mitigate losses."
Tim Evershed is a freelance journalist