A new report from Moody’s has stated that at this stage it is unclear whether insurers will have to pay all current claims for lessors, in regards to the new Russian aircraft law effectively preventing foreign lessors from repossessing their aircrafts.
Under usual circumstances, lessors are insured for this risk, but they are now turning to insurers to recover these losses.
But insurers may not have to pay all these claims, because of the amount and timing of impairment charges to be taken by lessors are subject to a number of a variables, as well as negotiations with airlines, which will ultimately affect assumptions regarding future value.
However, as Moody’s explained in the report, even though many insurers withdrew their coverage before the new law came into effect, they may not have provided sufficient notice to exonerate themselves from their liabilities.
The definition of the event triggering the claim which will affect the outcome for insurers will also be subject to legal proceedings.
Moody’s said: “We believe lessors are ready to start legal proceedings against insurers if necessary.”
The report also states that the exact size of the ultimate insured loss remains unclear, and will likely become known after lengthy legal proceedings. However as result of the new Russian legislation, Moody’s estimates that global re/insurers face potential claims of $9-11 billion.
Analysts at Fitch Ratings recently warned that insurers could face claims as high as $10 billion due to the grounding of planes in Russia, with 30-40% of them likely to be passed on to reinsurers.
Moody’s said that they do not expect the Russian aircraft law to affect the capital of global diversified players, however the impact may vary widely by company and could be more severe for specialised players.
Moody’s agrees that reinsurers will share some of this loss knowing that they typically cede 20-30% of their marine, aviation and transport premiums to the reinsurance sector, meaning that reinsurers are likely to bear a large proportion of the potential loss. Given the complexity of this event, disputes between insurers and reinsurers are likely to happen, which will further delay the settlement of claims.
In addition, the report states that this on-going event will only affect a sub-segment of the aviation insurance market – a global market that is dominated by large and well diversified insurers, and includes specialised players that includes some Lloyd’s syndicates and Lancashire Holdings Ltd.
“If claims materialize, they will therefore not be distributed among aviation insurers according to their market share”, the report reads. If it materialised, the expected aviation loss would be the largest direct claims event stemming from Russia’s invasion of Ukraine to date.
Losses are also expected to creep higher in other insurance lines, military conflict could lead to an increase in claims in other lines of insurance business, this includes political risk, cyber risk, trade credit, and property.
Trade credit insurers’ exposure to Russia is relatively limited, amounting to no more than 1-2% of their total exposures and insurers can also cancel some of these exposures too. Credit insurers can also cover political risk, and they typically share risks with reinsurers through proportional and non-proportional treaties.
Moody’s said: “An additional risk for trade credit insurers is the spill over impact of the military conflict on the global economy. We have recently reduced our forecasts for economic growth in the G-20 countries, although we expect growth to remain positive.”
The ongoing conflict also raises additional inflation and investment risks, including market volatility, for insurers.