Price rises of 50% to 100% are expected on aviation war risks, following losses in Iran and Kenya.
The tragedy of Ukraine International Airlines (UIA) Flight 752, which was shot down over Iran last month, will cost aviation war underwriters dearly.
Sources estimate the war loss to be at least $53m, wiping out the majority of premium and making steep price rises in the niche specialty line inevitable for 2020.
The annual market-wide premium pot for aviation war business is understood to be less than $100m, the majority of which was wiped out within little more than a week of 2020.
UIA Flight 752 was shot down in error by an Iranian air defence missile, shortly after take-off from Tehran’s Imam Khomeini International Airport on January 8. The tragedy occurred hours after Iranian missiles struck US bases in neighbouring Iraq, following a US drone attack that killed Iranian general Qasem Soleimani in Iraq on January 3.
Iran’s admission of guilt for downing the Boeing 737 removes the possibility the war market might share the claims bill with the all-risks market. Tokio Marine Kiln is reportedly the lead underwriter, but like most events in this market, sources suggest the risk will be spread among a panel of London market carriers.
Aside from a $53m hull payout, war liability payments will inflate the claims bill. Some 82 of the 176 victims were Iranians. Insurers and their lawyers have been working to obtain permission from US authorities to pay compensation payments to Iranian families of passengers aboard, which would otherwise violate US sanctions on the country.
“We appreciate the dedication and efficient efforts of international lawyers, insurance and reinsurance companies they make to undergo specific procedures aimed at obtaining licences in the US and starting with reimbursement under the conditions of sanctions regime,” UIA’s chief executive, Yevhenii Dykhne, said on January 31.
There was another major war loss, albeit less widely reported, only three days before the UIA disaster. On January 5, Somali Al-Shabaab terrorists targeted aircraft on the ground in a dawn attack on Manda air base in Simba, northern Kenya. The Simba attack will cost aviation war underwriters around $15m, a senior source within that market tells Insurance Day.
Such losses, involving light aircraft involved in government work in an area of political tensions, tend to be of higher frequency, sources suggest. It just so happens the market has also been hit by losses perceived as low-frequency and high-severity, such as the IUA crash.
“By the second week in January the market had probably lost most of its premium pot,” the source says. “You’re never going to make your money back on an individual risk. Ever. The premium pot is just not enough.”
Brit and Markel are among the recent exits from the aviation war risk market, while others such as Hiscox have cut back and become more selective, following several loss-making years. “When you look at this market, and a $70m to $80m loss bill, it’s just not attractive for capital to support that,” an underwriting source says.
Previous heavy loss years have not led to turnarounds towards hard pricing. “2014 was a catastrophic year and the worst on record,” the underwriting sources add. “Payback only comes if there’s a void of capacity and there wasn’t.”
At the turn of this year the market was already licking its wounds from a long-running dispute over Malaysia Airlines MH-370, the Boeing 777 that went off course and disappeared into the Indian Ocean in March 2014, killing all 239 people on board.
A private arbitration decision last year ended badly for war risk underwriters. It passed 100% of the $110m claims bill to the airline’s war risk insurers, led by Atrium, after it was concluded the airliner was crashed deliberately, wiping out 2019’s premium pot, plus some. The claim had previously been split 50:50 between, on the one hand, Atrium and the war risk insurers, and on the other, the airline’s all-risks policy, led by Allianz Global Corporate & Specialty.
This is not the first time the aviation war market has paid out for an apparent pilot suicide: Germanwings Flight 9525 crashed into the French Alps in 2015; and Mozambique Airlines Flight 470 crashed in Namibia in 2013. Both of these losses led to war risk payouts.
‘By the second week in January the market had probably lost most of its premium pot. You’re never going to make your money back on an individual risk. Ever. The premium pot is just not enough’
Prices were already up roughly 20% on average by the end of last year, largely as a result of the belated MH-370 loss, in addition to increasing pressure from Lloyd’s on underperforming classes of business. For aviation war business renewing in 2020, those rises are likely to be far steeper.
“One man’s feast is another man’s poison,” a senior underwriting source says. “The market will make grand statements about twofold increases. I think we’ll see 50% to 100% increases across the board.”
While major price rises are unavoidable, the source suggests there will be a disparity of rating across airlines, particularly for those flying routes perceived as more dangerous than others.
“Some are operating in tasty areas; some are more vanilla and benign. Some are wholly inadequately underpriced and you’d need to pay five times more premium before underwriting it. We look at the route structure, how often they’re flying, and the value of assets.” the source says.
Overflights are another source of risk, rather than just the more obvious hotspots for take-offs and landings. Major losses have occurred on the ground in recent years, such as this year’s attack in Kenya, and similar terrorist attacks have struck airports in Libya and Pakistan.
“Overflights are a real threat I don’t think is concentrated on, in comparison to risks on the ground,” an underwriting source says.
This year’s disaster over Iran echoed the shooting down of Malaysia Airlines MH-17 in July 2014 over eastern Ukraine, with 298 fatalities. Atrium led the $97m war hull placement on the Boeing 777, which was shot down by a missile smuggled into the country by Russia in support of Russian-backed separatist fighters.
Individual airlines regularly decide to avoid flying across certain airspace, but these decisions are often short term, in response to disasters that have taken place. The list of overflight hotspots meanwhile is considerable and has increased in recent years.
“People talk about the South China Sea but you don’t have to go as far as Asia-Pacific to find a hotspot,” an underwriting source says. “Syria, Yemen, Iran, Iraq and Libya are all hotspots. Saudi Arabia looks like a risk due to Iran-backed Houthi militia fighting against the Saudis in the war in Yemen.”
The same source also points to Mexico and South America, noting cartel violence, which in 2015 caused a $37.5m war loss when a Mexican government helicopter was shot down by cartel in Sedena, Jalisco.
As underwriters renew business in 2020, there is concern that many have never known hard market conditions. “A lot of this is about the wordings and the terms and conditions. There are a bunch of kids that have never even seen a hard market. If they think it’s all about pricing they’re wrong,” an underwriting source says.
“I think the aviation war market needs to get its house in order. In a soft cycle, capacity tends to rest with the brokers. Now we’re in a hard market, and capacity tends to take its pen back to underwrite more responsibly with it. I hope people are doing their due diligence and assessing what real risks look like as opposed to giving their pen to brokers,” the source adds.