COVID-19 and the aviation industry

Will pandemics change our view of risk?

As the global disruption caused by pandemics such as COVID-19 increases, airlines may need to consider a broader strategy to analyse risks across the organization. The International Air Transport Association (IATA) has warned that collective airline losses attributable to the global COVID-19 outbreak could reach $113 billion, if the virus continues unchecked.

If realized, the COVID-19 outbreak will see airlines lose more than 16 times as much revenue than they did during 2003’s SARS (Server Acute Respirator Syndrome) epidemic.

IATA, whose members carry 82% of the world’s air traffic, said Asia-Pacific airlines could see a 23% year-on-year fall in passenger numbers, with similar estimates for parts of Europe and the Middle East. Those new projections imply that Asia-Pacific airlines could see revenues fall by $49.7 billion this year, according to IATA’s update.

In context, when the dust had settled after the SARS contagion, IATA put global airline losses at about $7 billion. It took nine months for normalcy to return to the industry. At the time of writing, more than 4,292 have died from the spread of COVID-19 (SARs killed just under 1,000) and more than 118,322 people have been infected globally.3

Airline analysts believe the dark financial forecast for COVID-19 is largely attributable to two key factors: travel and flight restrictions imposed by the private and public sectors are expected to last longer than for SARs; and China’s contribution to global airline revenues today is far larger than it was 17 years ago.

Airline hull and liability coverage

While the ultimate cost this time – in lives and dollars – remains unclear, airline management may wish to consider the breadth of cover that may be provided by their current insurance program. There will also be questions about what more could be done to transfer risk and the inevitable revenue losses in preparation for future outbreaks.

Current airline hull and liability policies are not designed to protect airlines against non-damage business-interruption financial losses. Broadly, the hull section is designed to respond to physical damage to the aircraft, spares and equipment. Standard liability cover for airlines traditionally protects them against claims for bodily injury or property damage caused by an “occurrence,” defined as an accident or exposure to continued and repeated conditions that result in bodily injury or property damage that are unexpected or unintended by the insured. Bodily injury includes sickness, disease and death.

International airline liability is predominantly regulated by the Montreal Convention 1999. IATA and bodies such as the World Health Organisation set standards for the required response to epidemics, which cover best practices for screening of passengers, tracking customers who may have been exposed to a virus, and minimum requirements for crew resources and training, etc.

When those guidelines are followed, an airline would only be liable for bodily injury to passengers and third parties if the sickness is proven to be the result of an incident that happened onboard the aircraft or during embarking or disembarking. There must be an external event that causes the person to contract the sickness, such as evidence there was a failure to screen passengers in accordance with existing regulations when boarding.

It would also be very difficult for a passenger to prove that they contracted the virus on the aircraft or while embarking or disembarking, as opposed to at any other point in their journey. Even if a person could prove that they contracted the virus onboard the aircraft, establishing liability against the airline would be difficult if it had acted in accordance with procedures. If an airline was found liable for people contracting the virus, insurers would be obliged to defend the insured against these alleged claims, as they would potentially fall within the scope of the policy coverage.

Under the personal injury section, AVN60A in standard aviation liability contracts, a policy holder could also be protected against claims for non-physical injury stemming from the quarantine or detention of passengers, or from passengers having been denied boarding.

This could come into play if an overzealous employee at the gate refused boarding or detained someone purely based on their ethnicity, rather than in line with the mandated protocols for passenger screening. Possible allegations of discriminatory actions could be made and preventively leadership could reinforce employee learning when these types of events occur.

In summary, standard airline hull and liability cover is not designed to offer airlines protection for non-damage business interruption losses arising from global health threats such as COVID-19.

Parametric solutions for airlines

When a pandemic or epidemic occurs, it’s natural that we all start to look at risk through a slightly different lens and investigate possible solutions that may alleviate shareholder insecurity.

There are several dedicated epidemic / pandemic solutions available from the insurance market that offer cover for non-damage related revenue losses once pre-set triggers have been met. While these solutions have been available for some time, they have only been taken up by a limited number of airlines, cost being a decisive factor.

Pre COVID-19, the interest in these solutions from the airline sector was limited and, understandably, since the outbreak and its continued spread, COVID-19 is currently excluded from the cover offered. However, cover is available to companies looking for a long-term solution against future outbreaks.

Other parametric solutions feature a pre-agreed list of primary triggers such as natural perils, adverse weather, terrorism and pandemics. If one of the trigger events occur, the policy then responds based on either the intensity of the event or movements in a pre-agreed secondary index, which, for airlines, could be a reduction in passenger numbers or an increase in flight cancellations, for example.

Does a changing risk landscape call for a new approach?

As the impact of the current COVID-19 outbreak on the airline sector becomes apparent, so too could the interest in exploring parametric solutions to manage the potential impact of future pandemics and other costly events such as volcanic eruptions and extreme weather.

The insurance sector has the capacity to create solutions for these risks, but as each solution is customised to the specific risks and needs of the buyer, the structuring process takes time and requires a high level of commitment and collaboration between the airline, its risk advisor and its insurers.

As the world becomes increasingly interconnected and risk in turn, becomes even more global and complex, airlines may require their risk advisors to shift the focus from the traditional safety and reputational risks to a broader strategy of enterprise-risk management to analyze risks across the organization.

Novel Coronavirus (COVID-19) – POSTPONEMENT – ALAANZ National Conference, 6 – 8 May 2020

Dear Member,

The ALAANZ National Council have been very closely monitoring all Australian Government and World Health Organisation Int. advices regarding COVID-19 and the impact this may have on the forthcoming ALAANZ National Conference to be held in Brisbane, from 6 -8 May 2020.  The Council are aware the Australian Government (like many other international governments) has enacted various travel restrictions and quarantine measures for passengers arriving into Australia, and likewise, a number of corporate businesses are now also placing restrictions on non-essential staff travel (both international and domestic) and conference attendances.

In view of the ongoing uncertainty around the virus and its impacts, the ALAANZ National Council have made the very difficult decision to POSTPONE the ALAANZ National Conference scheduled for 6 – 8 May 2020 until Wednesday 21st – Friday 23rd October 2020.  Our members and delegates, sponsors, speakers, conference coordinators and suppliers are our top priority and we strongly believe this is the right decision given the international nature of our conference and the evolving public health risks, travel concerns and limitations and other circumstances.

For those members who have already registered for the May 2020 Conference, our conference coordinator Mecca Concepts will be in contact with you shortly to arrange a full refund of your registration fees.

When the conference is convened in October 2020, the conference location and venue will remain the same.  The ALAANZ National Council highly value the contribution our members and delegates make to the success of our annual national conferences and so in turn, our commitment to you remains 100% focused on delivering a world class aviation law conference in October 2020.  The conference organising committee are communicating with all of our sponsors and speakers to ensure we can deliver to you, our members, a safe and successful conference in late October 2020.

We thank you for your support at this time, and will be in contact with you in the coming months with an updated invitation to register and join us for the National Conference, in Brisbane from 21st to 23rd October 2020.

On behalf of the ALAANZ 2020 Conference Organising Committee and ALAANZ Council

Aviation War Rates To Soar As Premium Pot Nears Exhaustion

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.

Higher-frequency losses

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.”

MH-370 impact

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’
Underwriting source

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

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.