Aon and McLarens warn on losses, reduced capacity in Asia’s aviation market
But there are tentative signs of recovery in the sector, after a torrid year so far.
14 September 2020 by Yvonne Lau
In a regular year, early September would be one of the busy seasons for air travel, with families and individuals returning home from summer holidays.
Back in March, InsuranceAsia News (IAN) wrote about Asia’s aviation sector risk amid the pandemic fallout.
Six months later, a Covid-19 vaccine is still not yet ready for public use, many borders remain closed and ‘back-to-normal travel’ has certainly not yet resumed. Air travel and associated industries remain in limbo.
The aviation insurance market has not been exempt as all segments of the air transport markets are undergoing severe strain.
The latest forecast from the International Air Transport Association (IATA) predicts total revenue losses for 2020 will reach a staggering US$419 billion. Loss estimates in March were pegged at US$252 billion — a US$167 billion loss increase.
What has the pandemic’s impact been on the aviation insurance sector to date, and what will a potential restart look like?
Pandemic fallout
The aviation insurance market has not been exempt as all segments of the air transport markets are undergoing severe strain.
Gary Moran, head of aviation, Asia at Aon Commercial Risk Solutions, spoke to IAN about the pandemic’s impact.
An overall decrease for aviation premium levels are likely, says Aon’s Gary Moran, with the decline impacting traditional coverages and across segments, such as on the “people side” of business.
Aviation insurers are staying cautious and reduce capacity, as the months progress with no vaccine. Capacity is not even close to the “abundance of previous years,” notes Moran, as carriers manage capital exposure by reducing participation in certain types of aviation risk.
As pricing relies on capacity, premium rates continue to increase, he adds. A premium rate increase however, “does not necessarily mean an increase in premium. Every client will be [evaluated individually], wherein changes in risk profile and exposures will factor into the final outcome.”
An overall decrease for aviation premium levels are likely, says Moran, with the decline impacting traditional coverages and across segments, such as on the “people side” of business.
Moran says: “In some cases, these adjustments would have been triggered mid-term. These returns will undoubtedly be significant, and further erode the 2020 premium pool.”
Andy Pickford, regional director at loss adjuster McLarens Aviation, told IAN that on the claims side, handling could be impacted in numerous ways. For instance, older aircrafts are likely to be decommissioned early. This will have a claims impact as “new aircrafts use different materials, and are generally more expensive to repair.” There may also be “limited options for repair facilities,” depending on support on a country-by-country basis, impacting costs.
“This creates a challenge for insurers and capacity providers. It further compounds seven years of non-profitability — where now it is difficult to budget and plan given the high degree of uncertainty,” added Moran.
Continued losses
Losses are still occurring, despite the decrease in airborne risk exposures.
Pickford highlighted that while new claims undoubtedly have dropped, clients are dealing with pre-existing ones in addition to ground collision losses from grounded planes.
Last month, the Ethiopian Airlines’ cargo plane fire in Shanghai means insurers face a US$190 million loss in an already tough market. Even before Covid, there was a transition to a hard market.
This was followed by a devastating Air India Express crash in Kerala. 90% of the airline’s reinsurance is underwritten by global reinsurers and the total loss claim likely stands at US$50 million; carriers involved include AIG and GIC Re. The airline may face increased costs for cover during next year’s renewals.
Brokers . . . continue to work with operators on impact mitigation measures — short and long-term business plans, fleet status and overall financial situations.
For loss adjusters who usually work on the ground, undertaking site surveys and other parts of the job have become more difficult amid the pandemic, says Pickford.
It has been important to tap into a regional network of local specialists and engineers. “These team members undertake activities under remote supervision so we can get first-hand, independent information [on losses],” he noted.
The restart
Only a vaccine will “return passenger confidence, and give the aviation industry the much-needed boost it needs. However, given the depth of the pandemic’s impact, the industry will take time to recover,” said Moran.
For McLarens, Pickford noted the loss adjuster has been conversing with insurers about “post-Covid preparation — [on] new risks [regarding] the operations of airlines and new hazards, etc.”
Certain pockets of air travel in Asia however, are seeing a “significant increase in aviation activity, and subsequent claims.” Pickford notes Vietnam and China have been “fairly busy [and] able to perform normal duties since around May and June. Domestic travel has recovered to about where it was pre-pandemic.”
Brokers such as Aon continue to work with operators on impact mitigation measures — short and long-term business plans, fleet status and overall financial situations.
As for the global restart, when it happens, implementing safety measures on flights and in airports for full passenger confidence is vital. It’s predicted that a full recovery in terms of pre-Covid air activity will return by 2023 at the earliest, added Moran.
This interview was first published in the Insurance Asia News on September 14, 2020. The original article can be found here.
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