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A forward look at COVID-19’s impact on aviation insurance

Aerospace|Risk & Analytics|Corporate Risk Tools and Technology
COVID 19 Coronavirus

By Bridget Donley | April 21, 2020

Why the aviation industry needs to look to the future, not the past, for solutions

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

COVID-19 has already caused widespread economic upheaval, forcing many industries into crisis. The aviation industry is no exception. But before sharing our thoughts on insurance, we would first like to reflect on the crisis.

Understanding the COVID-19 tragedy

When a tragedy happens, we often say: never again. The irony of that statement is that it tends to be said again (and again), the same way in which history often repeats itself, or so we say it does.

There is an innate comfort found in a known comparison versus the unsettling fear of an unknown variance. Today, many are attempting to compare the novel coronavirus to the 1918 flu or the 2003 SARS epidemic. While comparison certainly gives us a starting point in terms of lessons learned and statistical figures, it can also serve as a crutch, or even an obstacle, to innovative thinking. As the name itself indicates, this novel coronavirus is new. Hence, we must approach it as such — with a fresh perspective.

Before we proceed with any insurance talk, we want to acknowledge the most noteworthy impact of this virus — the heartbreaking toll it’s already had on human life. Therefore, we thank all hospital employees who are working relentlessly around-the-clock, not to mention the workers who are filling the grocery shelves, cooking in empty restaurants, delivering necessities, and the like. We are forever indebted. Having said that, and necessarily so, we can now put our risk management hats back on and proceed.

What does COVID-19 mean for aviation insurance?

Recognizing that COVID-19 continues to evolve minute by minute, we are addressing your prevalent questions as well as our plan to help lessen the repercussions anticipated thus far.

Will COVID-19 make this hardening insurance market last longer than expected?

Contrary to the disheartening news that we’ve become accustomed to hearing, we at Willis Towers Watson Global Aerospace remain hopeful for the future. No, we’re not saying a soft market is right around the corner, but we are saying that COVID-19’s impact is already setting a different tone, one of necessary action, which is already being displayed throughout the insurance community.

So what does that mean for you, the aviation insurance buyer?

It means that creative solutions must be brought to the table in order for the market to sustain itself. Without solvent clients, insurance becomes irrelevant. And without an operative aviation industry, what becomes of our global, interconnected world? Regardless of the rationale — whether it’s professionally driven, economically focused, or purely based on a love for travel — many are keen to assist your business, which includes your insurers.

Should we look to how our aviation insurers handled the 2003 SARS epidemic for guidance?

Many want to look to the past for direction on how to address COVID-19. SARS, however, was not as far-reaching as the novel coronavirus. To the greatest extent, the cost of life was not nearly as dire.

According to the U.K.’s National Health Service (NHS), SARS claimed the lives of 774 people, contrasted against COVID-19’s current fatalities exceeding 100,000 at the time of this post being written, per The New York Times. Aviation-wise, where SARS mainly impacted Asia Pacific carriers, costing them $6 billion in revenue, and North American airlines, costing them $1 billion, the virus essentially spared the European airlines — a stark contrast to what is already a near global halt of the airline industry.

As of March 24, 2020, the International Air Transport Association (IATA) estimated a grim $252 billion passenger revenue drop in 2020. And that’s just accounting for the airlines — a decrease in passengers impacts the entire aviation supply chain, from airports and manufacturers to maintenance, repair and overhaul (MRO) companies and even the aircraft lessors themselves.

In short, the health and economic consequences of COVID-19 are already far worse than the SARS epidemic. But where today’s circumstances are ostensibly bleaker than 2003, they’re also more impactful, demanding a comprehensive commitment for resolution and collaboration.

Why are insurers not willing to offer the same kind of premium relief like they did in 2003?

It’s not so much that the insurers are not willing to assist, it’s more so that they don’t know the long-term impact on premium yet. Prior to COVID-19, the aviation market had already begun to correct itself after years of soft-market rates and industry-wide unprofitability. When SARS was identified in 2003, after its first case was found in 2002, it was over a year after 9/11, which subsequently drove the airline premiums to skyrocket to $3.8 billion, between four and five times that of the previous year. COVID-19, on the other hand, has entered our world, and this market, at a $1.75 billion global airline premium — meaning SARS had a whopping $2 billion head start in the airline sector and far less global influence.

Despite COVID-19 creating a considerably more drastic disruption in cash flow, we’ve already begun discussing various premium installment solutions and upfront credit opportunities in order to provide an immediate financial alleviation for our shared clients. Each risk’s eligibility for such measures are looked at on a case-by-case basis, often depending on relevance and urgency.

Where the airline and airport sectors are being immediately and directly impacted, with demand in Italy alone plummeting 80% in recent weeks according to a recent article by Forbes, “How COVID-19 is Transforming Global Aviation’s Outlook,” we are seeing that the general aviation sector is being inadvertently interrupted, experiencing a hit through a trickle-down effect. Again, it’s all very situational, and we understand that. Where a charter company’s business may remain relatively stable given the avoidance of commercial flights, a tourism helicopter operator, on the other hand, is likely to ground their entire fleet due to the pause in vacation travel.

It’s also worth noting that government relief may play a role here as well, but that’s an outside factor to be addressed from a business perspective, not an insurance one. 

Can the airlines not turn to their lessors, as well, to help mitigate their cash-flow predicament?

While it’s certainly an alternative avenue for the airlines, and one that we know is already being vehemently explored, the aviation market insures those aircraft leasing companies as well.

Similar to the premium-relief requests being asked of our insurers, deferral or renegotiation requests of lease rental agreements are also surging. Aircraft lessors may be forced to repossess more aircraft than usual if airline clients go bankrupt. While government assistance may lessen this blow, insolvencies are still to be expected. Typically, when that happens, the repossessed fleet is then in need of a new home, which becomes increasingly difficult to find in an unsteady market. Nevertheless, the leasing sector notably has more substantial liquidity than the airlines, allowing them to fair better in a downturn.

But won’t there be fewer claims due to the decline in operations?

Curbing the risk, whether voluntary or not, should inevitably lessen the exposure. While it’s too soon to predict trends, we can only assume that the decrease in passengers and flights will equate with a decline in claims, especially within the airport segment, where we can certainly expect less slip and falls. 

We may also see faster claim settlements, perhaps even at lower demands, due to several circumstances — courts being shut down, fear of bankruptcies, and the like. And while we expect fewer claims, especially from a passenger perspective, the potential for a shock-loss or a catastrophic event always exists, which is one of the many reasons to purchase insurance in the first place.

Can less claim activity help mitigate the premium increases we’ve been seeing across-the-board?

It’s a theory that requires more of a wait-and-see mentality, but not one that we recommend adopting. Several factors will continue to play a role here:


  1. 01

    The market

    It remains unprofitable. While rates have increased, many underwriters are still projected to not turn a profit at current premium levels across all sectors.

  2. 02

    Reinsurance costs

    Beyond keeping the lights on, insurers have additional costs of their own, such as reinsurance — a market that is not handing out reductions any time soon. And most claims do not actually fall within an insurer’s reinsurance protection, meaning they must pay out of pocket for these costs through their premium reserves, and that could potentially leave very little to cover their operational costs.

  3. 03

    Groundings

    While planes are not flying, they’re not sitting idle either. Large fleets are currently grounded, in aggregated volume, which is a very different and large exposure in and of itself, increasing the risk of weather-related incidents being more detrimental than usual. While these groundings are airline-specific, the aviation market is an all-encompassing one where most insurers play a hand in each segment, meaning this exposure shift is impacting most.

  4. 04

    Financial strength

    While the consequences of COVID-19 continue to unfold, our Willis Towers Watson Security Group predicts that the insurance industry’s credit quality will surely suffer. From virus-related claims and defense costs to the financial market’s impact on investment portfolios and likely revenue reductions, insurers will not go unscathed. The effects will, of course, vary for each insurer depending on capital strength and portfolios, with the hope that rating agencies also consider these extraordinary times when performing their valuations.

Are there any positive messages?

Well, here it is: If the insurers don’t help you, they don’t help themselves either. While we optimistically believe that their needs are not their only motive, it’s certainly an underlying truth that only further helps our cause. (Disclaimer: We brokers are part of this food chain as well, which is duly noted.) Therefore, we all need to work together in partnership — insured, insurer and broker — and develop a feasible plan to maintain coverage while simultaneously allowing the market to stay up and running, (i.e., to process your claims, issue your policies and essentially earn their keep).

And while we can certainly reap the benefits of the do’s and don’ts of the past, we must look ahead and develop our own solutions based on the current needs of our time and the ever-evolving technologies of our future. In a nutshell, we all need each other now to outlast this virus for the future. This sentiment extends far beyond our small world of aviation insurance. Stay patient. Stay helpful. Stay kind. And most importantly, stay home!

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

Author

Assistant Vice President, Willis Towers Watson
Aerospace — North America

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