Insurers face substantial losses from planes grounded in Russia
Insurers and reinsurers could face claims as high as USD10 billion in a worst-case scenario due to the grounding of planes in Russia, Fitch Ratings says. 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.
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. Most aviation policies are underwritten through the Lloyd’s of London market, and we estimate that 30%–40% of primary insurers’ exposure is ceded to reinsurers.
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. 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.
Industry experts estimate the total insured residual value of the grounded aircraft at USD13 billion. Hull insurance will typically have aggregate loss limits in place, which means that potential hull insurance claims should be significantly below USD13 billion: we estimate USD5 billion–6 billion in a realistic scenario.
However, we believe total insurance claims could be as high as USD10 billion in a worst-case scenario, which would be by far the largest annual claims in the history of aviation insurance.
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Even in such a scenario, we believe most insurers and reinsurers would suffer only a hit to earnings, rather than capital depletion, and we would not expect material ratings implications. There might be rare exceptions among specialised Lloyd’s carriers, where aviation losses in combination with other large claims could lead to modest capital depletion.
For comparison, the coronavirus pandemic has resulted in about USD30 billion of non-life insurance claims, and natural catastrophe claims in 2021 were over USD100 billion. Insurers’ and reinsurers’ credit profiles were resilient to both sets of claims, helped by very strong capital 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.
However, aviation insurance exposure is more concentrated among insurers than business-interruption and event-cancellation insurance, which account for most pandemic-related claims. It 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.
Multi-billion-dollar aviation insurance claims could have significant knock-on effects on the aviation insurance market. We would expect insurers and reinsurers to respond by increasing premiums, incorporating more exclusion clauses in their contracts, and cutting their exposure.
