A portion of the $283 million Swiss Re reserved in the first-quarter of 2022 for the ongoing war in Ukraine is for aviation, as the reinsurer believes “there is real loss there,” according to its Chief Financial Officer (CFO), John Dacey.
This morning, Swiss Re announced reserves of $154 million within P&C Re and $129 million in its Corporate Solutions business in relation to the Ukraine war.
With Russia’s invasion of its neighbour ongoing and showing no sign of stopping, it will take some time before the ultimate cost to insurance and reinsurance markets is understood.
However, Q1 reporting season is now in full-swing and many carriers have announced provisions for potential losses related to the war, with expectations of losses in numerous lines of business, such as credit insurance and aviation.
When it comes to the aviation market, the picture is extremely complex and uncertain, and it’s expected that the fate of stranded planes in Russia will have a significant impact on the ultimate industry loss.
Speaking this afternoon during the reinsurer’s Q1 2022 analysts call, Swiss Re’s CFO Dacey commented on the war, explaining that so far, Swiss Re has seen hardly any claims and continues to believe that the ultimate loss will be similar to a mid-sized natural catastrophe loss.
“When it comes to the impact on Swiss Re, we do not have any outsized exposures relative to our normal market share in the P&C reinsurance industry. On the affected specialty lines, we believe we actually have an underweight market position,” said Dacey.
Nevertheless, the firm decided to take a proactive approach in Q1 2022 and reserved the $283 million, which Dacey explained should cover a significant slice of its total ultimate loss from the war, covering exposures in both Ukraine and Russia across all relevant lines.
For Swiss Re, some of the lines of business expected to be impacted by the war include aviation, credit and surety, marine, political risk, and political violence.
According to Dacey, the longer the war goes on the more credit insurance claims might come through. But when it comes to how big the total loss will be, he explained that this will be linked to the airplanes and the ultimate terms of cessation of the war and to what degree there is salvageable value in those aircraft.
“And, here, the reason we’ve booked something in Q1 on aviation is because we actually think that there is real loss there. The magnitude to be seen, in terms of the existing or non-existence of policies, some of which were cancelled potentially before or after an event incurred. And then subsequent complexities around that both in terms of the actual number of aircraft and engines which have insured covers and the ultimate disposition of those. We’ll have to see,” said Dacey.
This is notable as, being one of the biggest reinsurance companies in the world, Swiss Re is saying it believes there’s a real aviation loss already related to the war in Ukraine, whereas some others have not been as explicit and others have said they are not yet booking any reserves for potential aviation claims.
Just yesterday, large European reinsurer Hannover Re said that its provision for the war does not include additional reserves for the aviation line of business, as it does not currently have a sufficient basis to set up any IBNR for this segment.
With market rumours suggesting there could be a legal battle over aviation leasing related claims, some companies are clearly reluctant to reserve too early for something that may not come to pass. But Swiss Re is clearly keen to book something for the aviation loss it sees as likely to occur, suggesting these other reinsurers will eventually need to book something too.
For Swiss Re, Dacey explained on the call that aviation is one of the lines where it thinks it’s probably around market weight, although he doesn’t feel the company is the biggest in the space.
The challenges for the aviation market relate to some 500 planes that are financed or owned by non-Russian lessors that are stranded in Russia due to sanctions imposed by numerous western countries in response to its invasion of Ukraine.
The issue has been compounded since Russia 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 re/insurance markets.
Industry experts estimate the total insured residual value of the grounded aircraft at USD 13 billion.
In a worst-case scenario, some analysts have warned that insurers could face claims as high as $10 billion due to the grounding of planes in Russia, with 30-40% likely to be passed on to reinsurers.
Highlighting just how complex the issue is, the specialists Lloyd’s market in London has reportedly hired law firm Clyde & Co. to give advice on the current situation.
