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Changing times bring changing risk profiles

Have you considered your aggregation of assets?

Aerospace
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By David Boyle | June 16, 2020

The aggregation of aircraft on the ground, potentially brings a new risk profile for aircraft owners. This article highlights the main concerns from a risk perspective.

In recent months we have seen extraordinary changes to the way that the world operates which have affected every aspect of our daily lives. There is not an area of the world that hasn’t been impacted by COVID-19 in some shape, or form, not least the aviation industry.

As countries have restricted borders, the flow of business and leisure traffic across the world has all but ceased and we have witnessed the largest grounding of aircraft in our history. Thousands of aircraft are being parked in every available space at airports around the world, resulting in large amounts of high-valued assets being concentrated in a restricted number of locations – a situation which has not been ignored by insurers.

The concentration of aircraft on the ground brings new operational logistics through lack of parking, ongoing maintenance, storage preparations, protection of aircraft from terrorist threats, wildlife hazards and climate considerations such as humidity, or adverse seasonal weather conditions.

This brings potentially a new risk profile for airlines, operators and owners of aircraft through the aggregation of aircraft/assets on the ground. In this briefing we highlight some aspects that should be considered which will fall under the two main concerns from a risk perspective; first, war and terrorism and second, adverse weather.

  1. 01

    War and terrorism

    The aviation industry has always been a target for terrorists (Lockerbie, 9/11) and has often been impacted by war (Bandaranaike Airport, Tripoli Airport) with the resultant loss of life and destruction of assets.

    As the virus spreads, security forces are increasingly being redeployed in the support of governments’ efforts, to combat the spread of COVID-19. In view of this, underwriters may wish for greater understanding and confidence that counter-insurgency/terrorism measures continue at past levels.

    As an operator or owner of an aircraft you will have in place a hull war risks and allied perils policy that provides cover for loss or damage caused by war and allied perils as specified in paragraphs (a) and (c) to (g) of the War, Hi-jacking and Other Perils Exclusion Clause AVN48B.

    Within this policy, there will usually be an annual aggregate limit, and this is generally based on the value of the maximum number of aircraft in any one location during normal operations but will be tempered by available capacity and premium cost.

    Does your existing policy aggregate adequately cover your asset value currently on the ground?

    As all operators are now facing a change in their risk profile, please consider: Does your existing policy aggregate adequately cover your asset value currently on the ground?

    This will differ from operator to operator depending on their business model, fleet size and value. For example, an airline with a network of operating bases may have aircraft spread far and wide and the maximum accumulation of aircraft in any one location compared to the aggregate limit purchased, may be adequate. Nevertheless, there could be a possibility of damage in more than one location that would exhaust the aggregate limit under the policy.

    A review of the accumulation of assets and their values (both individual and combined) must be assessed and then the following should be considered:

    • The political environment where the aircraft are located
    • What level of Intelligence is being resourced for groups that might consider an airport or aircraft to be a suitable target for their aims
    • What security measures are in place at the facility where the aircraft are parked
      • Manpower (armed or unarmed)
      • Static cameras (night vision/infra-red etc) / drones or other celestial monitoring equipment
    • Who has care, custody and control of the aircraft?
    • How far apart are the aircraft spaced?
    • Are the aircraft parked in clusters?
    • What is the risk for a “domino effect” following a blast or a resultant fire from a blast? Do you have analytical tools available from your broker that can help with this?
    • Review of lease agreements to ensure that minimum levels of insurance coverage are still met

    What solutions are there for aircraft operators?

    A comprehensive cost of risk analysis should be undertaken to determine the optimal balance between transfer of risk and self-retention so that the financial implications are clear.

    Once this review is completed you may need to investigate purchasing higher limits in the insurance market. It might be that there is insufficient capacity for this risk within the traditional aviation hull war market. This would require seeking additional capacity through an excess placement – either in the traditional hull war market or, placed with insurers that have not traditionally covered hull war in the aviation market in the past but are willing to allocate capacity (at an agreed price) for this risk.

    Information that will be required to approach the market will include:

    Location of aircraft

    Concentration of parking

    Agreed value and type of aircraft in each location

    Security arrangements at each location (Including details of parties responsible for such arrangements)

    Strikes, riots, civil commotion and malicious acts

    It must be remembered that hull war coverage is not just limited to war and terrorism and there are several other perils that should be considered when reviewing the adequacy of your limits, such as:

    • Has the socio-economic environment around where the aircraft are located changed in any way?
    • Has there been heightened unrest in the location where the aircraft are present?
    • Have there been any demonstrations relating to COVID-19 or any other political disturbances that could potentially heighten the risk to insurers against assets that might be owned, or controlled by the government (including airports and/or their perimeters)?
    • COVID-19 has resulted in large numbers of employees being temporarily furloughed or permanently losing their jobs. As such, the risk of disgruntled staff needs to be considered with regards to any potential malicious acts against company assets.
  2. 02

    Adverse weather

    Weather and natural catastrophes are nothing new to the aviation industry, but have your day to day operations changed? And to what extent would they now be affected in the event of adverse weather?

    Weather and natural catastrophes are nothing new to the aviation industry, but have your day to day operations changed?

    Unlike the hull war policy, your hull all risks policy has no aggregate limit but hull damage under the hull all risks policy is subject to a hull deductible. The amount of the deductible will vary depending on the type of aircraft and any elected self-insured retention. Some operators will have purchased a buy-down hull Deductible policy, and this will be subject to an annual aggregate.

    No operator wants to expose their assets to any form of avoidable risk, so a full review of all potential harmful impacts should be carried out and procedures designed and implemented in order to prevent loss or damage to your aircraft, based on their location.

    When the wind blows: Hurricanes, typhoons and cyclones

    Depending on your location in the world, severe weather patterns may affect you in different ways and you will already have standard procedures/actions to be taken in the event of a threat of oncoming severe weather. However, these procedures will have to be reviewed and adapted to take into consideration a different operating environment.

    Review of existing procedures

    Generally, the standard procedure in the event of a hurricane or typhoon is to move aircraft away from their expected path. As an operator, have you considered the additional challenges that face you in the current climate of COVID-19?

    • Where would you fly the aircraft?
      • Many of the usual locations may already be at their full capacity
    • What state of storage/preservation are your aircraft in?
      • How quickly can aircraft be moved?
    • What state of readiness are your crew?
    • Do you have sufficient crew (ground engineers and flight crew) to be able to move the entire fleet from any one location?
    • Where are your aircraft parked? Parking bays, ramp hardstands, taxiways or even car parks? Are there aircraft parked on taxiways that might prevent or slow you down in moving aircraft to a runway ready for re-deployment to another location?
    • What other operators share the same airport as you?
    • What procedures are in place in respect of sharing evacuation procedures with other operators, the airport and ground support companies?
    • In shoring your aircraft, it is necessary to tie down the aircraft at the jack points and other structure locations of the aircraft (i.e. production joints landing gears etc). Where your aircraft are parked, do you have tie-down points and are there enough? If not are there other anchors that can be used (e.g. concrete blocks)
    • Given the number of aircraft grounded, will you be able to shore all of them correctly?
    • How closely concentrated are your aircraft? An aircraft that jumps its chocks during high winds will pivot in the wind, so what is it likely to hit?

    When the wind blows: Ground FOD risk

    As operators utilise all available space to park aircraft, the operating environment around the aircraft is likely to have changed. Reviews should be taken to determine:

    • What structures, or objects are in close proximity to the aircraft that could damage an aircraft if they were to be moved from their normal position by strong winds?
    • Is there a higher concentration of ground service equipment near parked aircraft due to reduced activity of operations? Who is responsible for the equipment and how is it being stored and secured?

    Other natural perils to consider

    Tornados

    Tornados can be unique to certain parts of the globe. For those operators in tornado prone zones:

    • Do you have a large concentration of aircraft parked in these areas?
    • Are you able to move them to other areas that are not susceptible to tornados?
    • Do your procedures need to be reviewed in the event of heightened tornado activity?

    Hail

    The front of an aircraft is strengthened to protect against hail in flight, but sat on the ground in large clusters, they create a large target area. Have you considered:

    • Are your aircraft in an area prone to hail?
    • Are you able to protect flight controls that can be vulnerable to damage?
    • What are the knock-on effects of multiple crown skins being damaged, repair time, cost, impact on Insurance policy premium claims statistics, barriers to be able to return quickly to commercial operations once the effects of COVID-19 are minimised and demand for commercial flights returns?

    Flooding

    When considering flood risk:

    • Are any aircraft accumulations in flood prone areas?
    • How easy would it be to move said aircraft in the event of increased flood risk?

    Lightning strikes

    When aircraft are parked they are supposed to be grounded at an earth point. However, with so many aircraft parked on the ground have all the aircraft been grounded?

    Consider the resultant damage and knock on effects of mass lightning strikes to unearthed aircraft. There will be entry and exit points and depending on the type (composite or metal) this could lead to expensive repair costs.

    Fire

    • Fire can be a consequence of lightning strikes. Where your aircraft are parked is there an adequate fire service to cope with a fire on multiple aircraft?
    • Can the fire service obtain proper access to where the aircraft are parked?
    • Is the surrounding area of the airport susceptible to forest fires, are there adequate boundaries in place to prevent a forest fire jumping to where aircraft are parked?

    Earthquake and tsunami

    • Do you have a greater concentration of aircraft in earthquake zones compared to normal?
    • Has your accumulation of aircraft on the ground increased in coastal areas that could be subjected to a tsunami?

Conclusion

Risk dynamics have evolved and are continuing to evolve due to the changing operating environment.

Risk dynamics have evolved and are continuing to evolve due to the changing operating environment

While we all hope that the airline industry returns to normality as soon as possible, it is likely that this will take some time. As such, it is important to continually assess the evolving risks to your operations and access a risk advisory team with the expertise and tools to help you make informed decisions to protect your changing risk profile.

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