Aviation Re/insurers Face Claims as High as $10B From Planes Grounded in Russia

Insurers and reinsurers could face claims as high as US$10 billion in a worst-case scenario due to the grounding of planes in Russia, Fitch Ratings said.

More than 500 planes that are financed or owned by non-Russian lessors are stranded in Russia due to sanctions imposed by numerous western countries in response to Russia’s invasion of Ukraine, a Fitch commentary states.

The lessors have hull and liability insurance, as well as specific aviation war cover, and will call on their insurance to be indemnified against expropriation of their planes, Fitch explained. Most aviation policies are underwritten through Lloyd’s of London, and Fitch estimated that 30%-40% of primary insurers’ exposure is ceded to reinsurers.

Industry experts estimate the total insured residual value of the grounded aircraft at US$13 billion, said Fitch. “Hull insurance will typically have aggregate loss limits in place, which means that potential hull insurance claims should be significantly below US$13 billion: we estimate US$5 billion-$6 billion in a realistic scenario,” Fitch added.

“However, we believe total insurance claims could be as high as US$10 billion in a worst-case scenario, which would be by far the largest annual claims in the history of aviation insurance.”

Even with such a scenario, Fitch believes most insurers and reinsurers would only suffer a hit to earnings, rather than capital depletion, and there would not be material ratings implications. “There might be rare exceptions among specialized Lloyd’s carriers, where aviation losses in combination with other large claims could lead to modest capital depletion,” the ratings agency added.

For comparison purposes, Fitch pointed to the fact that the pandemic has resulted in non-life insurance claims of about US$30 billion, and, during 2021, natural catastrophe claims were over US$100 billion. “Insurers’ and reinsurers’ credit profiles were resilient to both sets of claims, helped by very strong capital and healthy underlying earnings,” Fitch continued.

Re/insurers’ strong balance sheet also should help mitigate losses from aviation insurance and from indirect underwriting exposures to the Russia-Ukraine war, including the insurance of trade credit, cyber, marine and political risks, Fitch continued.

Aviation insurance exposure is more concentrated among insurers than business interruption and event cancellation insurance, those lines that brought the most pandemic-related claims, Fitch said, adding that aviation is also more concentrated than property catastrophe insurance.

Some Lloyd’s underwriters are likely to suffer above-average losses, which would make their credit profiles more vulnerable to further large losses or external shocks, Fitch continued.

Multi-billion-dollar aviation insurance claims could cause insurers and reinsurers to respond by increasing premiums, incorporating more exclusion clauses in their contracts, and cutting their exposure, the commentary went on to say.

Fitch noted that it is hard to quantify ultimate claims with a high degree of certainty as outcomes are likely to be subject to legal disputes over the cover that applies, said Fitch. In particular, there may be disputes over whether certain coverage automatically expired once sanctions were imposed, or was cancelled in time by the carrier before the actual claims event — the expropriation of planes.