Aviation insurers could face up to $10B in losses from grounded planes
Advisen
Aviation insurers could face up to $10B in losses from grounded planes
By Erin Ayers, Advisen
Citing a “worst-case scenario,” analysts at Fitch Ratings said the more than 500 planes currently stranded in Russia leave the insurance and reinsurance market open to up to $10 billion in potential losses.
In response to economic sanctions from several Western countries over the invasion of Ukraine, the Russian government passed a law allowing for the expropriation of foreign aircraft. Numerous reports have called the potential costs “the biggest loss event in history” for the aviation sector.
Fitch cited industry estimates putting the total insured value of the grounded aircraft at $13 billion. The total losses would include hull and liability insurance claims, as well as specific aviation coverage for war risks. Litigation over indemnification could also boost the losses, since insurers began cancelling some coverage prior to Russia’s invasion and as sanctions were issued, according to reports.
While $10 billion represents a worst-case scenario, Fitch said a more realistic number would be between $5 billion and $6 billion.
“It is hard to quantify ultimate claims with a high degree of certainty as outcomes are likely to be subject to legal disputes over the cover that applies,” commented Fitch in its report. “In particular, there may be disputes over whether certain coverage automatically expired once sanctions were imposed, or was cancelled in time by the carrier before the actual claims event – the expropriation of planes.”
Most aviation policies are insured through Lloyd’s of London, and a Financial Times report suggested the market expects a loss ranging from $1 billion to $4 billion. Fitch estimated the primary market cedes about 30% to 40% of the exposure to reinsurers.
Despite the relative concentration in the aviation insurance market, Fitch suggested the industry remains well-capitalized to withstand the potential losses. However, there will be ripple effects.
“Multi-billion-dollar aviation insurance claims could have significant knock-on effects on the aviation insurance market. We would expect insurers and reinsurers to respond by increasing premiums, incorporating more exclusion clauses in their contracts, and cutting their exposure,” said the firm.
