In Focus: Aerospace Infrastructure - 28 January 2022

In our last update, we reported a continuing trend towards market stabilisation, primarily derived from a more measured approach by insurers as industry stakeholders collectively emerged into what appeared to be the beginnings of a post-pandemic era. This trend continued throughout Q4, but by year-end it was clear that there will be further pandemic headwinds that need to be navigated as we move into 2022.

Current trends

Previous editions of Plane Talking have highlighted the necessity to manage the implications and impacts of the COVID-19 pandemic, which has extended its reach to overshadow a second round of renewals within the aerospace infrastructure sector. Positively, in 2021, restrictions eased and by Q3 the industry found itself on a path to exposure recovery, one of the key drivers of insurer pricing models. However, as the year concluded the emergence of the new Omicron variant provided a reminder to insurers of what has come before and the potential uncertainty that lies ahead as it continues to push for a sustainable Premium base.

The claims of the past ten years, in particular 2018/19 where the overall loss to the Aerospace Infrastructure market was circa USD2bn, continue to dominate Insurers’ pricing models. Many insurers were looking to the next 12-24 months as a post pandemic period with the expectations that premium income would grow as risk exposure came back online.

Insurers remain focussed on inflating their premium base to ensure a sustainable platform to write from in the future, so if exposure does not return as expected, then the knock on effect is likely to be a period of uncertainty while insurers review their budgets and strategies. A strong market balance sheet will ultimately benefit our clients in the aerospace community over the longer term, but it does mean that premium increases are still being targeted, albeit at more moderate levels, and this is continuing to hinder clients as they also look to rebuild their balance sheets during these uncertain times.

While the push for premium increases remains, we have observed more willingness from Insurers to work harder and be more flexible to maintain shares on risks they value. This is a step change from 2020/early 2021, when many Insurers were prepared to walk away from any risk, regardless of its quality, if they were unable to achieve the required increase mandated by their senior management. This more commercial approach should lead to a more stable market in 2022 and can only benefit clients in moving negotiations more in favour of buyers, but we remain someway off from a return to a soft market.

Capacity

Since Q3, capacity has steadily increased as appetite from individual insurers creeps back, particularly in those more desirable sectors. With premiums still on the rise and approaching a more adequate level, insurers are now more willing to deploy greater capacity on individual risks. This will ultimately drive competition, but at this point insurers still proclaim that further premium growth is needed to achieve true sustainability, once the world fully re-opens and operations return to pre-pandemic levels. This message remained consistent for the second half of 2021, but as the year closed, a small number of Insurers did look to trade pricing against share of risk to cover budget shortfalls.

Losses

2020 and 2021 remain inactive in terms of large losses so far in this sector. There is a concern about the level of attritional losses in the airport and ground handling sectors, with continued claims during the pandemic when exposures have been limited, and this is fuelling insurers’ worries about premium income sufficiency. The focus does remain on US litigation though, where social inflation continues to push claims awards higher, and in some cases to extreme levels as evidenced in the recent award against Allied Aviation Fueling (Allied) following an incident in 2019.

The 2021 verdict found both Allied and its employee liable and a significant sum of over USD352 million in damages was awarded to the Plaintiff and his family. This award has naturally concerned insurers, both those participating on the Allied policy and those writing similar types of business globally. Many Insurers cite this as further evidence of “social inflation” and some may attempt to re-rate certain risks arguing that claims should be settled faster to try to avoid similar outcomes.

Future outlook

• We have a far more confident outlook as we move into Q1 2022 in the form of a marketplace that seems to be stabilising, but the impact of Omicron needs to be monitored.
• Capacity continues to grow, but may level-off as markets begin to fill 2022 budgets.
• Less consistency in premium percentage change due to differing exposure development.
• Rating adequacies remain at the forefront of insurers underwriting.