Analysts at Fitch Ratings have warned that insurers could face claims as high as $10 billion in a worst-case scenario due to the grounding of planes in Russia, with 30-40% likely to be passed on to reinsurers.
More than 500 planes that are financed or owned by non-Russian lessors are stranded in Russia due to sanctions imposed by numerous western countries in response to Russia’s invasion of Ukraine.
And the problem has been compounded since the country swiftly enacted a new law to ‘ensure the stable functioning of the national transport system’ that could allow the vehicles to be taken over and nationalised by the state.
If jets continue to be seized and are not returned, it’s feared that the firms leasing the aircraft will incur huge losses, many of which will in turn be passed on to the insurance and reinsurance markets.
The lessors have hull and liability insurance, as well as specific aviation war cover, and will call on their insurance to be indemnified against expropriation of their planes.
Fith notes that it will remain hard to quantify the ultimate claims cost as outcomes are likely to be subject to legal disputes over the cover that applies, particularly 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.
Industry experts estimate the total insured residual value of the grounded aircraft at USD13 billion.
The rating agency explains that hull insurance will typically have aggregate loss limits in place, which means that potential hull insurance claims should be significantly below the $13 billion total insured residual value of the grounded aircraft, possibly at $5-6 billion in a realistic scenario.
However, it believes total insurance claims could be as high as $10 billion in a worst-case scenario, which would be by far the largest annual claims in the history of aviation insurance, a fact that was also highlighted by Marsh’s Garrett Hanrahan earlier this week.
But even in such a scenario, Fitch says most insurers and reinsurers would suffer only a hit to earnings, rather than capital depletion, although here might be rare exceptions among specialised Lloyd’s carriers, where aviation losses in combination with other large claims could lead to modest capital depletion.
The eventual loss will therefore pale in comparison to recent losses from COVID or natural catastrophe claims, but aviation insurance exposure is more concentrated among insurers than business-interruption, event-cancellation insurance, or property catastrophe insurance.
It seems probable, then, that some Lloyd’s underwriters are likely to suffer above-average losses, which would make their credit profiles more vulnerable to further large losses or external shocks.
“Multi-billion-dollar aviation insurance claims could have significant knock-on effects on the aviation insurance market,” Fitch concluded. “We would expect insurers and reinsurers to respond by increasing premiums, incorporating more exclusion clauses in their contracts, and cutting their exposure.”