Reinsurance giant Munich Re and low-cost carrier airline easyJet have collaborated to create a new insurance product that is designed to provide business interruption style coverage to airlines when major flight cancellation issues occur.
The comprehensive cover is being described as the first product to protect airlines against the costs of flight cancellations.
The insurance offers an airline financial protection against the type of large shock events that lead to business interruption losses in aviation, due to cancellation and re-routing costs.
The types of events this insurance product would protect an airline against financially include volcanic ash clouds, severe winter storms, or the grounding of a fleet on safety grounds.
Mike Hirst, Director of Treasury & Tax for easyJet, said, “We have been very impressed with Munich Re’s creativeness, professionalism and project management throughout the development of this innovative product. The product itself complements the combination of cash and Revolving Credit Facility that already supports our liquidity buffer and diversifies further our counterparty credit risk into the insurance market and, specifically, to a very creditworthy long-term partner in Munich Re.”
Rolf Heintzeler, Head of Aviation Facultative at Munich Re, added, “This deal is a real win-win for both parties: easyJet is the right partner for this kind of deal because, when it comes to safety and risk management, easyJet is top in class. As a diverse set of perils has to be covered, broad risk expertise is needed to develop such tailor-made solutions for the client.”
Claudia Hasse, Chief Underwriting Officer for Special Enterprise Risks at Munich Re, also said, “The successful development of this innovative coverage demonstrates our competence as a partner for corporates who want to look beyond what is available in commodity insurance. There is broad scope for innovation in corporate insurance, as every industry’s business is vulnerable to interruption. We see this solution as a blueprint, and are now working towards bringing this to other industries as well.”
Munich Re said that the coverage will allow an airline to partially reduce its liquidity reserve.
In this way the coverage is contingent in nature and akin to other capital markets backed sources of contingent financing. It’s not clear whether parametric triggers are utilised, but one could imagine that they may have a role to play in such policies as the specific risks would need to be tightly defined.
Munich Re’s Special Enterprise Risks unit and specialists from its aviation underwriting team have developed the policy, working alongside easyJet.
Playing an important part of the airline’s capital management, the coverage can provide liquidity of financing just when an airline would need it to compensate and recover from major flight delay issues.
Munich Re said that the pricing is competitive with other sources of funding, enabling a covered airline to free up capital that could be put to use within its business.
“The product demonstrates that insurance can be a valuable alternative to capital market instruments,” Munich Re explains.
Specific flight cancellations are valued at a “pre-agreed” fixed amount, which enables the insurance to provide a fast and effective payout. The product has been structured to limit airlines balance-sheet exposure from this type of business interruption loss.
