How Social Inflation is Impacting the Aviation Industry

How Social Inflation is Impacting the Aviation Industry
October 3, 2024 9 mins

How Social Inflation is Impacting the Aviation Industry

How Social Inflation is Impacting the Aviation Industry

The aviation industry is watching the rise in nuclear verdicts with concern as social inflation and associated risks continue to squeeze the sector. Organizations should review their risk management processes to limit the dollar value of future losses.

Key Takeaways
  1. Social inflation is on insurers’ radar as a number of industries reckon with the impact of costly legal awards — including aviation, where the trend has deepened.
  2. Climbing attritional losses are squeezing insurer profitability further in an already competitive market.
  3. Risk management strategies can help mitigate exposure to growing social inflation trends and position them as better risks to underwriters.

The aviation insurance market has been significantly impacted by social inflation, with recent passenger incidents attracting widespread media attention.

Overall, airline safety is improving, with 2023 seen as an exceptionally good year. Some experts also estimate that airline all-risk net premium may have exceeded incurred claims cost by as much as $2.75 billion over the past four years.1 Nonetheless, fierce competition in the aviation insurance market has slowed premium increases, while attritional losses have risen as the industry returns to pre-pandemic norms.

Highly publicized aviation awards, which are growing due to social inflation, are also placing significant pressure on aviation organizations and their insurers, as well as influencing underwriting sentiment. To navigate this evolving risk landscape, organizations across the sector should focus on adapting their risk management and risk transfer strategies.

Charting the Course of Social Inflation

Social inflation broadly refers to the ways in which insurers’ claims costs rise over and above general economic inflation and claim trends. More specifically, the term refers to the legislative and litigation developments that impact insurers’ legal liabilities and claims costs.2

Recent signs have shown that social inflation is again becoming a disruptive issue. Average jury verdicts are increasing at rates well above inflation, reaching into the tens of millions of dollars for personal injury cases.3

Factors contributing to social inflation include:

  • Wage and price inflation
  • Evolving litigation and legal practices, such as the use of virtual attorneys
  • Medical cost inflation
  • Societal shifts, such as changing public sentiment toward corporations
  • Prevalence of social media
  • Emerging risks, including new scientific evidence of harmful substances and products4

Insurers see social inflation as a phenomenon that will encompass more geographies and accelerate in severity in the years ahead. Consequently, related loss costs will continue to increase, pressuring excess casualty and liability lines of coverage most significantly. In response, insurers are pushing for tort reform, greater transparency in third-party litigation financing, and relationships with government officials and business groups to try to stave off the effects of social inflation on the economy.

While social inflation has historically been a U.S. issue, experts see its impacts creeping into other jurisdictions, where claimants for smaller scale losses are seeking higher damages. However, due to the nature of both the federal and state-level court systems, the U.S. remains a key playing field for nuclear verdicts, which are jury verdicts exceeding $10 million in punitive and compensatory awards.5 Cases have also historically been moved to the U.S., where plaintiffs' attorneys try to forum shop for a jurisdiction that offers a higher probability of successfully securing a large settlement.

Additionally, the increased use of “virtual attorneys” in the U.S. has made the legal system more accessible and is broadening the plaintiff attorney’s reach. Cases that were previously uneconomic are now in scope due to virtual claims. Nuisance claims are consequently better advocated and more costly to defend.

The Risk Horizon in Aviation

While the aviation insurance industry has seen an unprecedented period of safe commercial operations and resulting profitability in the airline sector, several other factors are weighing on insurers’ minds:

  • Due to the Russia-Ukraine conflict, over 600 aircrafts leased to Russian airlines have not been returned to their lessors and are the subject of theft and confiscation claims in numerous jurisdictions.6 While there are signs that some settlements are now being made, a substantial majority of claims remain unresolved.
  • The increasing cost of materials used by aviation manufacturers is expected to drive up the cost of commercial insurance claims. Maintenance costs for airlines are also soaring as a result.7
  • Increased use of composite materials has rendered traditional repair schemes redundant, which means that attritional physical damage claims are no longer attritional.
  • Supply chain challenges due to labor and raw material shortages are hampering some manufacturers’ ability to meet demand for new planes and driving up the costs of repair. Supply chain constraints are also impacting insurance policies, specifically with loss of use coverage where claims are much more substantial post-pandemic.

As for social inflation, several incidents in the aviation industry have shown the trend at work, including the Alaska Airlines incident in January 2024 that led passengers to sue Boeing for $1 billion. There were also two fatal crashes involving Ethiopian Airlines and Lion Air in 2018 and 2019, which together resulted in allegations of punitive damages that drove settlements to new levels, thereby impacting the broader insurance market.

While not all airline incidents have resulted in staggering compensatory figures, the fallout can still impact insurers. Following the Singapore Airlines flight that encountered severe turbulence in May 2024, all passengers were reportedly offered a ticket refund. Those with both minor and serious injuries were also offered settlements. Overall, this incident proved to be more expensive than typically seen for similar turbulence-related incidents.

Experts see several changes in the approaches of plaintiffs’ attorneys that are leading to social inflation in aviation specifically, such as the targeting of insurance policy limits and lawsuits involving psychological harm and mental anguish versus physical injury — the Alaska Airlines incident being one example.

As travel returns to pre-pandemic levels, insurers are seeing claims volumes returning to pre-pandemic levels as well. Airports have been subject to some of the highest compensatory awards seen in the industry to date,8 but the smaller claims are now increasingly costly in part due to the advent of the “virtual attorney.”

Market Reactions to Social Inflation

In response to social inflation, the past 12 months have seen several buyers in both the airline and aerospace sectors reevaluate limits of liability procured and look to increase limits where costs permit.

At the commercial end of the spectrum, capacity remains buoyant for the majority of buyers. However, the same cannot be said of the general aviation sector, where buyers are in some cases struggling to maintain existing limits. In providing lower limits to general aviation operators, insurers are exposing the manufacturing sector to “deep pocket” practices, where attorneys pursue legal action against numerous parties to secure the best possible outcome for their clientele.

Several drivers are impacting the insurance market dynamic for this sector:

  1. Insurance companies want to maintain a broad risk portfolio, with aviation risks seen as non-cumulative with other casualty lines of business.
  2. There has been an unprecedented period of safe airline operations.
  3. Insurance markets have yet to fully reconcile premiums against potential liabilities.
  4. Insurers have access to investment income opportunities from premium income today versus claims being paid in the future.
  5. Insurers are increasingly managing limits by moving away from single insurer placements to a quota-share basis, with several insurers subscribing to a single risk.

Nonetheless, social inflation is of increasing concern in the underwriting community as modeling risks becomes steadily more challenging. Insurers are under pressure to demonstrate premium adequacy when weighed against the potential for nuclear verdicts.

5 Strategies to Help Aviation Organizations Manage Social Inflation

Recent industry trends have prompted organizations to review potential losses and their balance sheet exposure. Aviation organizations should consider implementing the following risk management strategies to limit the impact of social inflation:

  • Create a culture of safety that’s evident inside and outside the organization.

    Demonstrating a systemic safety culture that is reinforced and supported by senior management can help mitigate exposure.

  • Undertake actuarial analysis to quantify the maximum foreseeable loss and likelihood of occurrence.

    This, in turn, can drive informed decision-making on limits of liability. Aon has been supporting clients to aid a better understanding of their potential exposures and ensure their limits are commensurate to those risks. Some airlines have also started to employ predictive risk management, using models to give each flight a risk rating based on factors like weather, time of day, departure or arrival airport and type of aircraft to adjust and mitigate their risk exposures.

  • Focus on contractual risk management.

    Robust contracting practices help ensure that suppliers carry adequate insurance liability limits. Insurance brokers are increasingly providing guidance on this critical area in conjunction with legal professionals.

  • Partner with the insurance community to improve levels of preparation.

    Insurers have been increasingly supportive of risk mitigation initiatives by offering risk management bursaries. The aim is to help promote a broad range of contract awareness training and media training workshops, as this work can reduce potential claims and defense costs.

  • Recognize the potential impact of social media on risk mitigation strategies.

    Have a robust crisis management plan to deal with the increasingly volatile post-incident environment where social media has accelerated risk velocities to unprecedented levels. The world generally knows about aviation incidents either in real time or moments after an incident takes place and organizations need to be increasingly agile in dealing with this.

In a climate of increasing insurer scrutiny, Aon advocates proactive engagement with underwriters, both during and outside the renewal process. This ensures that messaging around the organization’s safety and quality assurance practices is fully understood, thereby allowing insurers to offer suitable credits when undertaking exposure analysis.

Learn more about how your organization can benefit from aviation insurance and risk management.

Aon’s Thought Leaders
  • Chris Bhatt
    Chief Commercial Officer of Transportation and Logistics, Global
  • David Blackburn
    Chief Commercial Officer, Aviation, Global
  • Simon Macfadyen
    Managing Director, Aviation, U.S.
  • Patricia Moores
    Managing Director, Head of Claims for Aviation, North America
  • Paul Travers
    Director, Aviation, UK

1 Airline Safety & Losses Annual Review 2023 | Cirium
2 Social Inflation: Navigating the Evolving Claims Environment | The Geneva Association
3 Introduction to Litigation in the United States | Condon & Forsyth
4 Social Inflation: Navigating the Evolving Claims Environment | The Geneva Association
5 Social Inflation: A Thematic and Jurisdictional Guide | DAC Beachcroft
6 Airline Safety & Losses Annual Review 2023 | Cirium
7 Boom Time For The $110bn A Year Industry Keeping Airlines Flying | Financial Times
8 Ulysses Cruz and Tierney Darden

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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