The aviation insurance industry has gone through some significant up and down cycles over the past 10 years and the Russia-Ukraine conflict will further impact the market for many years to come. Reuters has already reported an 11% spike in premiums in the first quarter of 2022, per insurance broker Marsh.
A few days following the invasion of Ukraine, the European Union orders lessors to get their planes back. The lessors seized nearly 30 jets in Istanbul, Mexico City, and Hong Kong. After that, however, the Kremlin banned international flights for Russian airlines.
As a result, nearly 400 planes owned by foreign companies were stranded in the country. Following that, Ireland, Bermuda, and other places where the jets were registered withdrew safety certifications.
Countering this move, Russia encouraged the carriers to register the jets at home. However, the insurance market was unanticipated by the move since it’s in non-compliance with the global aviation treaties.
Nevertheless, the hulls, engines, and equipment stranded in Russia will likely be there, as per Garrett Hanrahan, the global head of aviation at Marsh.
Thus, there’s a close link between the Ukraine war and aviation insurance since aircraft lessors, particularly the ones whose planes are stranded in Russia, have to pay nearly ten times the original premium.
Specialty Insurance and Potential Losses
Specialty insurance refers to the coverages that are not included in standard aviation insurance policies. For instance, war risk insurance is a type of specialty insurance triggered due to an act of war, such as the Russia-Ukraine conflict.
According to S&P Global, the insurance loss due to the Ukraine-Russia conflict could reach a valuation of $35 billion. Besides aviation, other specialty lines will also be affected by this conflict.
These include marine war insurance and political risk insurance.
AerCap, the largest aircraft lessor in the world, has filed a $3.5 billion insurance claim for over 100 of its jets stranded in Russia. The S&P believes that it will take years for the incurred losses to be settled by aircraft leasing companies.
The S&P also says that the top 21 insurers will suffer half of the global loss. Besides affecting their earnings, this will also reduce their capacity to issue new policies.
How Do Sanctions Against Russia Impair Claims Handling?
Russia’s ”military operation” in Ukraine led to many countries imposing sanctions against it. For instance, the United States and the European Union have sanctioned Russian banks, energy companies, and individuals.
Besides, they’ve also restricted the export of goods that can be used for military purposes. As a result, many insurers have become hesitant to handle claims arising out of the Ukraine-Russia conflict.
AGCS spokesperson reports that the company is fully committed to honoring its contractual obligations. But when sanctions against businesses, individuals, or financial institutions come into play, the company is prohibited from making any payments.
AGCS and other companies are working with compliance and legal experts to take measures to comply and implement sanctions and other legal changes. Insurance companies are also trying to minimize their exposure to the conflict by reviewing their policies.
However, it’s not easy to avoid the conflict since it’s a global market, and many companies have business dealings with Russia.
Long-Term Impact of Ukraine-Russia Conflict on Aviation Insurance
Since the insurers expect the recovery process to be long, it will significantly impact their ability to issue new policies in the future and increase costs.
The claims from the Ukraine-Russia conflict are likely to stay open for years. Moreover, some of the jets stranded in Russia may never fly again, resulting in a total loss for the insurer.
This means that the Ukraine-Russia conflict will have a long-term impact on the aviation insurance markethttps://bwifly.com/blog/the-10-best-aviation-insurance-companies/, increasing the length of the current hard-market for many years. High aircraft insurance premiums are here to stay and aviation insurance costs will continue to increase and be expensive in the future.
Flying has become much safer over the years. As a result, the premiums have gone down. However, the industry was not prepared for the conflict leading to hundreds of planes being stuck in Russia at the risk of confiscation.
James Healy-Pratt, a Keystone Law partner, in reference to the September 11, 2001, attack, said that four planes crashing at once was unexpected. Consequently, insurance companies actively canceled terrorism and war policies. The governments had to provide coverage as a result of this cancellation.
The same is happening right now. The mass seizure of nearly 500 planes by Russia was unexpected and unprecedented. Therefore, it will cause a price shock in the insurance market. As expected, aviation insurance will become much more expensive in the future due to this incident.
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