State of the Domestic Aviation Liability Market

There are several challenges that persist in the airport liability space that merit vigilant observation, namely the Russia-Ukraine War. We have seen a trickle-effect pattern as a result of the war and only time will tell how much the war will impact the U.S. airport liability market.

Impacts of the Russia-Ukraine War

ⁱSince the onset of the Russia-Ukraine conflict, several countries, including Canada, the E.U., U.K and U.S., have prohibited Russian aircraft from entering their airspace. Russia has reciprocated by restricting 36 countries from flying through its airspace. These mutual sanctions and air restrictions have disrupted the aviation sector, leading to flight cancellations or rerouting, increased airfare prices, elevated fuel costs and challenges in sourcing titanium, among other global economic issues such asⁱⁱ air cargo, merchandise trade and increased military spending.

Additionally, ⁱⁱⁱRussia seized some 500 leased Boeing and Airbus airliners after invading Ukraine and there is a fear in the aviation insurance marketplace that these will be forced to be declared as constructive total losses. ^ivRelating to hull war, this seizure has also forced a complete reappraisal of pricing of this policy purchase and there is likely to be ramifications to the entire aviation market over the next couple of years.

Aviation Insurance Implications

These events are anticipated to create at least a $20b loss event for the aviation sector. With an estimated $6b in aviation premium compared to such a large scale loss, this is expected to have a significant impact on insurance including airport liability. ^vMost recently in a London court case, insureds (international aircraft lessors) have filed claims in the amount of $15b seeking to recoup from aircraft and engines deemed irrecoverable as a result of Russia’s invasion of Ukraine in 2021. The amount of insurability is still in question. Furthermore, leading underwriter executives from the world's largest aviation liability carriers believe there is an impact to the domestic markets via reinsurance, but the extent of the impact has yet to be seen.  

The aviation liability sector, known for its responsive nature, experienced an immediate and reflexive impact from the war. Reinsurers exerted pressure on domestic carriers to impose coverage restrictions related to war and advocated for rate hikes to ensure expected adequacy in the face of potential substantial losses. Many markets, for instance, limited their war capacity between $250 to $350 million, a significant reduction from the previous norm of $750 million. And we are seeing losses being paid out as a result of the conflict. For example:^vi

• The world's largest aircraft lessor has agreed to settle an insurance claim over Russia's refusal to return 17 jets leased to airline Aeroflot, a landmark agreement in a dispute over 400 Western planes stranded in the wake of the Ukraine invasion.
• Ireland-based AerCap received $645 million from insurance company NSK in full settlement of insurance claims in relation to 17 aircraft and five spare engines leased to state-controlled airline Aeroflot and its subsidiary Rossiya.

Domestic Aviation Liability Market

Due to the rising trend in claims resulting from the war, an inevitable impact on domestic markets is anticipated. While it remains uncertain whether leading domestic markets have directly faced war-related claims, the global reinsurance market is expected to bear the brunt. This, in turn, raises company expenses, subsequently passed down to clients. The severity of the impact on the airport liability market is yet to be determined, and only time will unveil the full extent of the consequences.

Other Factors Influencing the Aviation Liability Market

To make matters worse, we are experiencing some of the largest liability claims in history as the industry grapples with the repercussions of overall losses and challenges such as nuclear verdicts. We have witnessed unprecedented hull losses, such as the Boeing 737 crash in 2019, where an already disbursed $3.5 billion constitutes part of the payout, with the claim still pending.

Furthermore, there are two tangible challenges most carriers face today that will impact the aviation market going forward: managing limits (whether to continue offering specific limits and affordability considerations) and portfolio management (risk segmentation and profitability assessments).

Despite these issues, the industry displays resilience, benefiting from advancements in actuarial science and computer technology that enhance underwriters' ability to analyze data effectively. This has led to a trend where underwriters increasingly rely on data-driven decisions. As a result, we are expecting high single to double digit increases in the coming year. Insureds with sensible deductible programs may fare better. Importantly, these dynamics are in addition to the impacts we have seen from Russia's war on Ukraine on reinsurance, and only time will reveal the true extent of the war's impact.