Bank of America has said that the main issue for aviation lines centres on the 500-plus aircraft stranded in Russia because of sanctions arising from the country’s invasion of Ukraine.
The planes, valued at over $10bn, could lead to a surfeit of claims for the insurance industry, likely leading to litigation on whether the sanctions voided insurance coverage.
Bank of America wrote: “[…] if the sanctions didn’t void the cover, the insurers oſten have an ability to pull coverage for specific regions in the event of war for aviation policies. For aviation contingent war covers (policies issued to leasing companies, rather than airlines) there tends to be a 7 day cancellation notice period.”
It added: “According to industry press, notices have generally been sent since the 24th of February up to about a week ago, suggesting that any contingent war covers that can be pulled might have expired by now. For the contingent all-risk covers (issued to leasing companies, with war exclusions) the notice period is typically 30 days. Therefore even if policies have been notified the cover will exist for another couple of weeks.”
There were also questions that Bank of America has raised around when claims can or should be triggered. The bank questioned whether the introduction of sanctions was a trigger, or if the planes had not been returned by a certain point.
Bank of America also looked at different reinsurance companies around the world and their exposure through their aviation lines. Ultimately, losses could be substantial, the bank said.
It added: “If industry losses are large, the specialty reinsurance market will likely be impacted. As we understand it, specialty reinsurance tends to aggregate across all specialty lines (aviation, marine, energy) and it could be harder for the reinsurance industry to avoid losses, irrespective of whether they fall in the contingent all risks or contingent war market.”
It went on: “Industry press articles suggest that in the event of worst case scenarios for the industry, the losses are expected to exhaust reinsurance covers for the primary companies. The outcome of losses, as pointed out above, also highly depends on whether any possible loss is falling in the contingent war or contingent all-risk covers. If losses fall in the contingent all-risk market they are likely to be wider spread and possibly higher in total.”