Following Russia’s move to nationalise jets stranded in the wake of Western sanctions, analysts and industry leaders have warned that the aviation insurance market could be facing a historic loss.
More than 500 Western-built aircraft worth roughly $10 billion are thought to be grounded in Russia, as authorities in the country have blocked the leased planes from leaving its airspace.
And the problem has been compounded since the country swiftly enacted a new law to ‘ensure the stable functioning of the national transport system’ by allowing the vehicles to be certified and registered within the country.
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 magnitude of potential loss here is staggering,” Garrett Hanrahan, Global Head of Aviation and Space for Marsh, was quoted as saying by the New Zealand Herald. “This could potentially be the biggest aviation insurance loss in market history.”
It’s thought that Lloyd’s provides the majority of aviation coverage at risk, with the Financial Times having previously reported that the marketplace is expecting an ultimate loss of between $1 billion and $4 billion, after reinsurance.
But it still remains unclear exactly how the insurance markets will interact with the losses, given that some insurers are already cancelling some policies, including for war risk, and that many will likely challenge claims on coverage still in force.
Analysts at Credit Suisse expect to see “significant debate” over coverage issues, but believe that secondary coverage held by aircraft lessors with insurers that are unrelated to Russian entities are likely to remain effective.
KBRA understands that Russian airlines willing to pay rent are currently able to transfer funds to Western banks, but given restrictions on dollar reserves and the potential sanctions-related compliance restrictions on the ability of Western banks to accept payments from Russian entities, it is likely that airlines in Russia will soon be unable to make such payments regardless of their willingness to do so.
Notably, global lessors hold maintenance reserves and security deposits on aircraft leased in Russia, which should help alleviate some of the initial pain from potential missed rent payments.
Lessees are responsible for insurance under triple net leases, which generally cover hull, liability, and war, KBRA analysts explained. However, the insurance policies of Russian carriers may be cancelled due to the conflict.
That said, lessors generally maintain contingent insurance policies that should provide the same coverage in the event of a lapse in primary or reinsurance policies, or when aircraft are off-lease.
For aircraft insured before February 25, 2022, the provision of contingent insurance in case of total loss are technically in effect, but given the sheer amount of such coverage which may need to be paid by insurance companies and the possibility of challenge by the insurance companies, in a worst-case scenario, it could take years for any such insurance claims to be resolved.
Russia’s move to nationalise the planes grounded within its borders follows the nullification by Bermuda and Ireland—the most common jurisdictions for the registration of aircraft—of their certificates of airworthiness for all Russian-operated aircraft registered in the two jurisdictions, thereby making it illegal for such aircraft to fly.
By re-registering the aircraft in Russia, the government aims to bypass the rulings by Bermuda and Ireland so that Russian aircraft can be flown in its domestic airspace. Still, chances of these aircraft operating outside of Russian airspace, where they can be repossessed, remain very remote.