A realistic estimate of aviation insurance and reinsurance losses for the grounding of planes in Russia falls in the $5-$6 billion range, but a worst-case estimate of $10 billion would be the biggest in history, Fitch Ratings said.
In a media statement yesterday, Fitch noted that there are more than 500 plane stranded in Russia due to sanctions imposed by numerous western countries in response to Russia’s invasion of Ukraine, which are financed or owned by non-Russian lessors.
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 said, noting that most aviation policies are underwritten through the Lloyd’s of London market, and estimating that 30-40 percent of primary insurers’ exposure is ceded to reinsurers.
Citing industry experts, who put the total insured residual value of the grounded aircraft at $13 billion, Fitch suggest that potential hull insurance claims should be less than half that amount because hull insurance contracts typically have aggregate loss limits in place. As a result, Fitch estimates its $5-$6 billion realistic scenario.
“However, we believe total insurance claims could be as high as $10 billion in a worst-case scenario, which would be by far the largest annual claims in the history of aviation insurance,” Fitch said.
Other factors get in the way of making estimates of ultimate claims, including the prospect of legal disputes over the cover that applies. “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.”
Fitch said that even if the $10 billion worst case plays out, the rating agency does not expect material changes in financial strength ratings given that most insurers and reinsurers would suffer only a hit to earnings, rather than capital depletion. “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 Fitch announcement said.
Still, drawing a parallel to the recent combinations of major claims—$30 billion of non-life insurance claims related to the COVID-19 pandemic and natural catastrophe claims of more than $100 billion in 2021—Fitch noted the resiliency of credit profiles for insurers and reinsurers, who were helped by very strong capital positions and healthy underlying earnings.
“The same factors should 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 said.
Going forward, Fitch expects insurers and reinsurers to react to multibillion-dollar aviation insurance losses by increasing premiums, incorporating more exclusion clauses in their contracts and cutting their exposure.
The Fitch announcement did not address insurance or reinsurance industry exposure to the crash of China Eastern Airlines Boeing 737-800 on Monday with 132 people on board.