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Opportunity drives action

Opportunity drives action
Covid has created significant challenges for many industries, but aviation has undoubtedly been disrupted more than most. As a necessarily international industry aviation is particularly impacted by the variety of travel restrictions / quarentines being imposed and maintained around the world. 

This article will illuminate some of the key Covid related obstacles that aviation entities are striving to overcome before assessing how well equipped the aviation insurance market is to support the aviation industry wide recovery endeavour. 

Finally, this article will touch on how despite the somewhat competing interests between aviation entities and aviation insurers there remains an opportunity for aviation entities to drive opportunity within the sphere of insurance through thoughtful action. 

 

Challenges faced by aviation entities 

The uniqueness of the Covid challenge for the aviation industry is that it has proved to be both a demand side and a supply side shock. Passenger confidence and wealth erosion has reduced consumer demand while government-imposed travel restrictions have curtailed the ability of the industry to supply services. The extent of this challenge is underlined by the fact that according to IATA 2020 saw a 65.9% year on year reduction in total revenue passenger kilometers (RPKs).  

This impact, while at the front line shouldered by operators, reverberates through the entire aviation supply chain. If fewer passengers fly there is decreased airport footfall, a reduced need for related service providers and decreased demand for OEM products / services. Covid truly is an industry wide challenge. 

This continued crisis has put strain on company liquidity buffers, as such cash preservation, balance sheet protection and the use of unencumbered assets to unlock capital have all been commonplace. This action has often been accompanied by a relentless focus on fixed cost reduction. 

While these measures help industry participants to mitigate immediate threats to survival there are substantial medium-term issues to overcome. What are the cost implications of compliance with the inevitable health related measures that relevant authorities will impose? Beyond this, and perhaps more fundamentally, what will the shape of industry recovery be? Can the industry reasonably expect aviation activity to revert to ‘as before’ in both size and shape? 

It is important that the aviation insurance community, who provide an essential service to aviation entities, appreciate the scale of both current and future industry challenges when defining their offering to aviation clients. 

 

Challenges faced by aviation insurers 

While aviation entities are responding to an extended shock crisis brought about by the impact of Covid, aviation insurers themselves are responding to their own nuanced set of challenges. At the simplest level, aviation insurers articulate that 7 out of the last 10 years have been unprofitable on a pure premium vs claims basis (before operational and reinsurance costs are taken into account). As such even pre-Covid there was sentiment suggesting overall market premium was insufficient. 

While Covid induced aviation inactivity has resulted in fewer claims (particularly at the attritional level), the market continues to be impacted by large scale deterioration on prior losses. This is compounded by premium base erosion as a consequence of adjustable on exposure policies in some market sub-sectors. 

The challenge for aviation insurers then is how to thoughtfully respond to and support aviation clients in a time of need while simultaneously ensuring the long-term sustainability of the market and their own portfolios. Aviation clients need support and favourable treatment in the short-term, but also require a sustainable insurance marketplace with which to engage in the medium to long-term. 

This conundrum is complicated further by the Reinsurance market, which as a response to the aforementioned loss deterioration is imposing large premium increases on direct insurers.  

There is no one-size fits all policy that will conclusively resolve this dilemma and while aviation insurers will evolve their offering to remedy some of the above there is also an onus on aviation clients to ‘help insurers to help them’. 

 

Navigating through the turbulence 

Noting the size of the challenge and the need to strike a balance between the needs of all parties it is more crucial than ever that clients and their brokers are thoughtful about how they bring renewals to market to help insurers offer their participation at the best possible terms. 

Not taking action leaves open the possibility of aviation clients becoming beholden to the push and pull of market forces. In such a scenario the only certainty is that a market beating result will not be achieved. 

Those aviation clients that engage most successfully with the aviation insurance market will likely be those who are able to redefine their programmes to suit the new operating environment and the circumstances of their own business.  

What ‘success’ looks like will vary on a client by client basis and be dependent on what core drivers define strategy, but clients should ask themselves ‘is my current level of risk transfer fit for purpose? Am I transferring the appropriate quantum of risk into the market?’ 

The answers to these questions will help to formulate thoughts on what an optimal program looks like moving forward in an environment where insurance is purchased on a loss occurring basis and exposure is expected to be suppressed for the medium term. 

Overall, anything that a client can do to alter the risk profile being taken to market will serve to mitigate the impact of simply being ‘indexed’ against expiry and help insurers to differentiate their risk and offer the best available terms and conditions.

 


Philip Smaje is CEO of Piiq Risk Partners with a broad range of industry leading experience and skills, including sales, client management, broking, claims and operations.  Philip worked for Willis Towers Watson (WTW) for over 30 years during which he held a number of senior positions, most recently Global Head of Broking for the Insurance segment.  

The majority of Philip’s career has been spent in Aerospace insurance during which he gained significant experience in providing risk management solutions and managing large and complex placements and claims. He is a skilled negotiator for his clients, calm under pressure and an effective problem solver. 

Philip has recently returned to the Aerospace sector to co-lead Piiq Risk Partners, focused on challenging the status-quo in an effort to provide greater value for clients. 

Philip is an Associate of the Chartered Institute of Insurance. 

 

Henry Bexson is an Associate Partner at Piiq Partners. He joined Piiq’s London Office in February 2020 and has a background in analytics and market intelligence, as well as client service delivery. Henry occupies a multi-faceted role for Piiq and is therefore well placed to deliver valuable strategic insight to aviation clients. He has particular experience in the Airline and Manufacturing sectors and a sophisticated understanding of the aviation insurance market. 

In his previous role at Marsh Henry was responsible for the Analytics function of the Aviation Practice alongside engagement around placement and renewal strategies for major airline and manufacturing accounts. 
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