Specialty Podcast: How does the Russian Invasion of Ukraine Impact the Aviation Industry?

Intro (00:00):
You're listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Sandy Crystal (00:09):
Welcome to another Alliant Specialty Podcast, my name is Sandy Crystal, Managing Director here at Alliant, and I'll be your host today with me is Lou Timpanaro, who's with our Aviation Group and our topic today is the Aviation Marketplace. Given the situation in Ukraine and Russia, obviously, the events going on in Ukraine are horrific, humanitarian perspective and other perspectives, but has also had a very, very substantial impact on the Aviation Marketplace. Lou, I'm going to turn it over to you. But with all that we hear on the news about Ukraine and Russia these days, how is this affecting the Aviation Marketplace?

Lou Timpanaro (00:42):
Well, Sandy, it can have a huge ramification in the Aviation Insurance community. As we've all seen in the media, it is a very complex and fluid situation that will take some time to sort out, there's an evolving landscape going on right now. Namely, Russia won't return any aircraft to lessors. They are re-registering aircraft under the Russian flag, and there is the Russian decree out there, which is basically a law that prohibits Russian insurers to get into agreements with insurers, reinsures or brokers associated with the unfriendly countries.

Sandy Crystal (01:30):
So, reading in the newspapers, you see numbers as high as 10 billion, if not more in losses to the aviation market, over 500 planes that are effectively trapped, in Russia, what do you see is the short-term, long-term ramifications that this will have on both the insurance marketplace and on our clients?

Lou Timpanaro (01:49):
There are a number of reports out there as to the magnitude of this situation. I've heard between 550 and 700 aircrafts; I've also heard as many as a thousand airplanes. It has estimated that the potential loss can be between 10 and 20 billion. So, from a short-term perspective, I think the immediate issue is a cash call from capital providers. This isn't a liability concern that will be paid out over an annuity, many years to come. It is something where capital providers have to pay for these assets immediately upon demand as respects the long-term ramification. I think it will, sustain the sustainability of the war risk market unless the government steps in. And when we're talking about a worldwide premium base of 200 million or so in the war risk market versus a potential claim of 10 to 20 billion, it's definitely going to have an impact on the sustainability of that marketplace going forward.

Sandy Crystal (03:05):
Lou, you talked about war risk policies for the listeners could you just give a sense of what we mean by that? And how our typical aviation clients are buying insurance specifically for war as opposed to more traditional risks?

Lou Timpanaro (03:17):
Sure. In the airline community, typically there are two types of insurance policies that airlines and lessors alike, purchase in aviation insurance marketplace. First and foremost, is the basic reliability insurance program, which covers your asset and your legal liability associated with the ownership, maintenance, and use of the aircraft. Then you have the war risk, physical damage coverage. That coverage is placed separately in the London marketplace, where it provides coverage specific to any war or warlike related activities associated with the operation of that airline or the lessor’s portfolio.

Sandy Crystal (04:03):
Thank you. And understanding what you said before about the ramifications on the war risk market, given the magnitude of losses we're talking here, do you see that spilling over to more of the traditional aviation market as well, or will it be contained to a war risk problem?

Lou Timpanaro (04:17):
Well, Sandy, that is something that is developing right now on the horizon where it appears to be a preponderance of what we hear in the news is its war related activities, right? Starting with Ukraine and then trickling into Russia with the sanctions. The complexity of the situation is such that on the surface, it's very apparent that some, if not all of this is war related and most domestic underwriters are taking the posture right now that it is war related, whether it be Ukraine or Russian aircraft. And that is because the preponderance of the issue stems from war with regard to bringing in the domestic carriers. There has been some talk in the community where lessors will be putting claims for theft under their primary home liability insurance policy. So, there's going to be kind of a two-pronged approach here.
I think, underwriters will try to pursue the theft claim and then eventually underwriters will either have to defend that or accept it. And if they defend it, they likely will pass on to the war risk marketplaces where war risks underwriters have to respond. And then if it gets to the war risk community, there is a strong possibility of the war risk underwriters trying to invoke the 50/50 clause. The 50/50 clause is an endorsement that goes on primary home liability insurance policies and the war risk hold policies to basically say that if a claim happens and we're not sure whether it's war or not, we split it 50/50. An example of that is the Malaysian aircraft that disappeared a number of years ago in the ocean. And couldn't determine whether it was a terrorist act or not, the market in that situation split that claim 50/50. So, there is some, potential of that happening and falling back in the primary home liability carriers.

Sandy Crystal (06:41):
So, what do we see lessors doing in the marketplace now to protect their interests? As well as thinking about going forward?

Lou Timpanaro (06:49):
Well, underwriters right now and lessors are trying to deal with this situation the best they can say. I don't think there's ever been precedent in the history of the insurance community, that we're dealing with right now. So, as we sort that out, areas are trying to figure out how to best approach this and support their policy holders, and the lessors are looking for ways to continue to do business in an economical fashion. I think some ways to do that would be basically to do a certificate tracking program for their lessees. I think being diligent on the underlying insurances in place is going to be very instrumental going forward, and that's because there's going to be a lot of sensitivity with underwriters, continuing on ensuring lessor portfolios around the globe, because Russia's not the only area of concern these days. So, they're likely going to offer renewal terms with larger the deductibles and, or even eliminating many territories around the world. So, lessors are going to need to adapt to that. They're going to need to do their due diligence with their lessees, and they may even have to self-insure that exposure and rely on that primary layer until this kind of blows over

Sandy Crystal (08:18):
Helpful advice. And as we think about the insurance marketplace going forward, it's obviously too early to tell you've got tremendous amount of losses, but the size of losses we're talking about here are enormous. Will our clients be able to get coverage going forward for war? And if not, what other solutions might exist?

Lou Timpanaro (08:40):
Well, there are a number of underwriters that have already taken the position that they are exiting the market. And those that have remain are scrutinizing every account on its own merits. Most lessors have a diverse portfolio, meaning that they have only a couple three aircraft in each country around the world to spread the risk. With regard to primary home liability insurance carriers, I think that there's going to be a contraction of capacity underwriters going to scrutinize exposure where, Russia, Ukraine, Crimea and Belarus, are not your only concerns these days, and underwriters are going to kind of sift through each portfolio and offer their terms going forward, which will include large deductibles of 25%. We've been seeing that on some accounts in the marketplace, we've seen significant restrictions and territorial coverage, and we've seen capacity going away where the risk to reward is not making sense to some management teams. On the war risk side, it will have a more immediate impact. There are underwriters that have exited the market, and there are those that are picking and choosing what portfolios they want to continue with going forward. It's an ongoing underwriting process and not an easy thing to deal with these days.

Sandy Crystal (10:32):
And look, obviously it's really dazed on the situation going on and these losses are going to take quite some time to play out. When anything time you've got something, this complex and numbers, this large, you definitely are going to have carriers taking a while to get to the place we all need them to be. But as we think about the market going forward, again, Lou, you've been doing this for over 30 years. Your team is extraordinarily experienced in dealing with this, this isn't the first massive disruption in the marketplace that you face, whether it was 9/11 or the, the issues with the Boeing 737 max and the like. What advice do you have for our clients, particularly our lesser clients in helping them keep their insurance costs manageable after this situation, what can they be doing to better position themselves with the marketplace? What are you advising our clients to do, in the coming months, as their insurance comes up for renewal?

Lou Timpanaro (11:21):
Well, Sandy, all coverage comes with a price and our job is to educate our customer with all the facts and honing in on the exposure for underwriters helps our customers achieve a better outcome. And that starts with a certificate tracking system to make sure that all the lessees are meeting with the insurance requirements, which are going to act as first line of defense on any claim of a leased aircraft. The second thing is lessors, if they feel the need for war risk may have to take a large deductible or just not buy the cover for a period of time, until this gets sorted out. There's a lot of confusion going on in the marketplace. And until that gets sorted out, I think there'll be a merit of responses in the market from significant premium increases to huge retentions in a form of deductible and or limitation in coverages. So, depending on how that price is out for our customer, they may make a business decision to kind of wait some or all of it out for a period of time, which eventually I think it will all come back to full circle

Sandy Crystal (12:45):
And then any advice for our non-lessor clients, it is a marketplace, as we all know, we have clients who don't have any direct impact from their own planes or their own operations in Ukraine or Russia or Belarus or other areas, and yet it's a marketplace and the marketplace is going to be impacted by a loss of this magnitude. Any advice that you'd have for our non-lessor clients as they face a more challenging marketplace going forward?

Lou Timpanaro (13:08):
I think lessees and or non-leasing customers should keep the line of communications open with their partners and the insurance community. I think that everybody being on the same page is very helpful with intent and in need of insurance protection. I think the insurance community, as a whole, is trying to do a right thing by its customer base, but communications is key in that regard. And as long as you have detailed underwriting submissions, and you're keeping the dialogue open with your partners, you could probably whether through that time warp.

Sandy Crystal (13:56):
Thank you. It's obviously a very complicated situation. That's going to continue to evolve over the coming days in months. And it certainly is an area where the repercussions are far beyond the insurance marketplace. I do look forward to catching up, finding out where things stand and how things are evolving on this.

Lou Timpanaro (14:11):
Thank you.