Skip to main content
Article

Pandemic, premiums and perspective:

Aerospace liability premium analysis

Luftfart og romfart
N/A

By John Rooley | May 26, 2020

As the global disruption caused by pandemics such as COVID-19 increases, what are the implications for aerospace organisations and their insurance premiums?

As the impact of the COVID-19 health and economic crisis sends shockwaves around the globe, the aerospace industry faces intensifying pressure under the strain of continued travel restrictions. The extent of the reduction in global passenger numbers is significantly impacting all parts of the industry.

On 9 April 2020, ACI EUROPE released their latest report1 detailing how passenger numbers at Europe’s airports have been affected.

Passenger traffic has fallen by almost 60% during March, taking overall Q1 passenger traffic down by 21%.

Europe’s airports still handled 5.1m passengers on 1 March (-11.7% compared to that date in 2019), that number had reduced to just 174,000 by 31 March (-97.1% compared to that date in 2019).

This huge drop in activity has led to many aerospace organisations reviewing their insurances and seeking premium adjustments. This report looks to address the following points:

  1. What position are underwriters taking on premium adjustments for airport and aerospace companies?
  2. Analysis: Does the data support underwriters’ position?
  3. What action plan is Willis Towers Watson putting in place to support our clients?

  1. 01

    What is the underwriters’ stance on premium adjustments and why are they taking this position?

    COVID-19 has occurred at a difficult time for the aviation insurance market. The past three years have been loss-making to underwriters, across all lines of business - aerospace, airlines, space and general aviation and the preceding years were only marginally profitable. As a result of this, underwriters continue to find themselves under scrutiny from capital providers to turn this around. Failure to do so will result in further capacity reduction and corresponding upward pressure on rates.

    The vast majority of aerospace policies do not have the benefit of adjustable premiums or any form of credit for ‘lay-up’ type exposures

    Underwriters have so far been unwilling to offer return premium consideration for current policies in place for aerospace organisations impacted by the COVID-19 crisis or slow the pace of rate increases for those which have had renewal dates during the pandemic. This has been the position even where an extreme reduction in exposures has occurred, and the stance has been consistent throughout the aerospace sector, for MRO’s, groundhandlers and airports. The vast majority of aerospace policies do not have the benefit of adjustable premiums or any form of credit for ‘lay-up’ type exposures. As well as this, extension requests are not being considered on pro-rata terms in most cases. Underwriters are insisting upon renewal rate increases to apply for the period of any extension which negates any attempt to save premium costs.

    Underwriters do understand the severity of the situation and are sympathetic towards insurance buyers. There is, however a concern that if allowances are made for any one client, this will be expected across underwriter’s portfolios, which will see them move further into the red. Underwriters are looking at an industry wide position to see if they can provide some relief to clients.

    One of the main reasons posited by underwriters is the technical premium inadequacies that exist in the sector, created by a sustained period of soft market conditions. The overcapacity available in the market has driven premiums down to levels which were significantly less than the modelled price derived from actuarial analysis of the risks, exposures and limits. Driven by the market, premiums continued to reduce against the flow of increased passenger and aircraft numbers year on year. As a consequence, underwriters found that the premium received barely covered the costs of providing the limits and catering for smaller day to day claims, leaving very little for the unexpected catastrophe loss.

  2. 02

    Does the data support this?

    Willis Towers Watson is focused upon using our data to challenge the insurance market and inform our clients. We reviewed data from 97 airports and looked at a portfolio aggregated comparison between premiums and passenger numbers.

    Chart: Passengers Vs. Premium 2010 – 2019
    Passengers Vs. Premium 2010 – 2019

    We also took rate on line data from 2011, 2015 and 2019 and applied these to passenger numbers for each of the last 10 years to produce a premium index figure.

    Chart: Premium Index Vs. Passengers at 2011, 2015 and 2019 premium rates
    Premium Index Vs. Passengers at 2011, 2015 and 2019 Premium Rates
    37%
    Premiums for the airports in our study decreased by 37% since 2011, while passenger numbers have grown by over 62%.
    46%
    When adjusted for passenger growth, premium levels in our index are 46% lower today than they were in 2011.
    $463K
    According to our index, an airport who had seen their premium reduce to USD250,000 in 2019, would have been paying USD463,408 had their rate per passenger remained at the same level it was in 2011.

    This analysis begins to explain why underwriters aren’t currently offering rebates for shrinking exposures. The rate per passenger has been reduced to such a low level that the base premium which remains is required independent of reduced passenger numbers. The level of premium charged is being driven by other underwriting considerations, such as cost of capital for limit, account specific claims history and losses across the whole aerospace book. These factors are key in dictating the premiums required for underwriters to continue to support aerospace liability risks.

    Underwriters are also concerned about the residual exposure that remains, even when aircraft are not flying. Whilst the risk of a catastrophe loss and bodily injury claims is clearly reduced, ground collisions and other physical damage events (e.g hailstorm, typhoon, or a terrorist attack) remain a risk for underwriters and with the number of grounded aircraft parked in close proximity there is still a considerable exposure. Whilst some of these physical damage events may be recoverable under an airline’s hull policy, it is easy to see how an airport or other organisation may be drawn into a claim for such damage despite any terms and conditions which the airport has in place with the airlines and which are intended to limit their liability towards them. Damage to aircraft on the tarmac has been a leading cause of insured losses and the costs of repairing physical damage to aircraft has increased2. These factors are at the forefront of underwriters’ minds as they review premium adjustment requests.

  3. 03

    Willis Towers Watson Action Plan

    As COVID-19 continues to impact aviation businesses, Willis Towers Watson continues to ensure underwriters commit to find ways to support our clients.

    • Data driven - Focusing on data by asking our clients to provide detailed information about the impact of the downturn on their exposures. This is then being communicated clearly and regularly with underwriters.
    • Encouraging underwriters to look at each renewal on a case by case basis and focus on individual clients’ data to achieve improved premium outcomes. Not all aerospace organisations will follow the average trend – so Willis Towers Watson are focused on getting the best renewal result for each and every client according to their particular circumstances. Capacity varies by aerospace sub-sector but there is still enough for us to explore alternative placement options where necessary.
    • Looking forensically at what parts of our clients’ business are impacted; could limits be reassessed or reduced either temporarily or permanently; might a complete shutdown in area of responsibility impact an underwriting renewal position?
    • Delivering market insight - engaging underwriters to determine their appetite and attitude during this crisis. Maintaining and delivering regular updates of market information to our clients.
    • Pro-actively looking at what can be done with our clients' policies to help with insurance programme costs and cashflow management; through negotiating with underwriters for:
      • premium instalment deferral
      • restructuring of terms of credit
      • return premium credit factored into renewal pricing
      • early lock in of renewal pricing with return premium credit allowance
    • Underwriters may require detailed operational risk information to assist with their decision-making process and have noted each risks eligibility for such measures are, of course, looked at on a case-by-case basis.

In Summary

The impact of COVID-19 has been unprecedented, with the aerospace industry one of the worst hit sectors globally. Understandably, organisations are scrutinising how costs can be controlled and cashflow protected. As companies turn to their aviation underwriters for relief, underwriters are in turn wrestling with their own issue of a sustained period of unprofitability and are not immune from the same risks that affect all businesses in times of great uncertainty.

The scale of the challenge for our aerospace clients is clear and the Willis Towers Watson aerospace team are ready and equipped to support you through this difficult period.

We welcome the opportunity to discuss with you any key risk, exposure and insurance programme considerations and priorities that may be of interest.

Footnotes

1. ACI Europe: Unprecedented impact of pandemic on European airports clear as March passenger numbers are released
https://www.aci-europe.org/media-room/247-unprecedented-impact-of-pandemic-on-european-airports-clear-as-march-passenger-numbers-are-released.html
Accessed 20/04/20

2. AGCS: Aviation claims trends 2018
https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/global-claims-review-2018-aviation-claims-trends.html
Accessed 20/04/20

Contact Us
Related content tags, list of links Article Aerospace and Space Aerospace and Space

Related Solutions