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Aviation war risk coverage presents challenges

In 2023, aviation insurance buyers across segments and geographies generally are faced with increased costs and reduced capacity for war risk coverage. Understanding the coverage and its cost drivers can help insureds navigate the challenging market.

Airplanes are parking at maintenance area.

In 2023, aviation insurance buyers across segments and geographies generally are faced with increased costs and reduced capacity for war risk coverage. Understanding the coverage and its cost drivers can help insureds navigate the challenging market.

What is aviation war risk coverage?

All aviation policies include some form of the war, hijacking, and other perils exclusion clause — clause AVN48B — which excludes coverage for war perils. In the context of aviation coverage, war perils are not limited to armed hostilities between nations, but typically are broadly defined to include many types of conflict, including strikes, terrorism, rebellion, pilot suicide, and malicious acts. This exclusion applies to physical damage, or hull, coverage and third-party liability coverage, but not to passenger liability.

When aviation insurance buyers purchase war risk coverage, they are generally adding back coverage for all of the perils excluded under the endorsement, with the exception of coverage for the use of nuclear/radioactive weapons. There is no commercial insurance coverage available for claims arising from the detonation of atomic or nuclear weapons.

Typically, the write-backs are included within the “all-risks” aviation policy, with separate costs for hull war and third-party war liability. For airlines, large manufacturers, and other major aviation risks, war risk coverage is generally written back via standalone hull war and excess third-party war liability policies.

The war risk pricing and coverage available in the current market varies significantly between aviation market segments and clients. That said, it is anticipated that the cost of aviation war coverage in 2023 will increase, barring unforeseen changes in conditions. Changes to coverage and limits are also anticipated in the current market.

Why is the cost of aviation war risk coverage increasing?

The aviation war marketplace is often discussed as two separate markets: the hull war market and the excess third-party war liability market. Combined, we estimate that the two represent several hundred million dollars in annual premium globally. These niche markets typically are subject to more volatility than the broader aviation market; the hull war market in particular has been challenged recently by potentially large loss activity.

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The hull war market relates to insurance coverage for physical loss to the aircraft/asset for any cause listed in AVN48B, with the exception of item b, related to nuclear/radiation events. 

The hull war market has a history of inconsistent profitability for insurers. The relatively small premium base means that it takes only a few significant hull losses each year to erode the entire market premium. A few examples of hull war losses in the last decade include: the Germanwings loss as a result of deliberate collision with the ground in 2015; Malaysian Airlines flight 17, which was shot down over Ukraine in 2014; Malaysian Airlines flight 370, which disappeared during its journey in 2014; and Ukraine International Airlines flight 752, which was shot down shortly after takeoff from Tehran, Iran in 2020.

In 2022, the Russia-Ukraine conflict prompted an unprecedented loss event for the aviation insurance market. Sanctions imposed by Western nations caused lessors in those countries to terminate lease agreements on approximately 500 aircraft and assets in Russia. When Russian operators failed to return those assets, lessors filed claims under their aviation policies for the lost aircraft. Many claimants allege these are hull war losses because the aircraft have been “nationalized” or “confiscated” by the Russian operators. These claims remain unpaid due to unresolved coverage and sanctions issues, but have the potential to result in over US$10 billion in losses to a market with an annual premium that is less than 3% of that amount.

Since 2022, hull war insurers have grappled with how to continue trading following a “black swan” loss in a small market. The result has been significant increases in rates, and, in many cases, meaningful reductions in coverage, particularly for aggregate limits and for confiscation events. 

Excess third party war liability refers to insurance coverage for third-party bodily injury or property damage loss(es) caused by any item listed in AVN48B, with the exception of items related to nuclear/radiation events.

Unlike the hull war market, there has never been a claim in the aviation excess war liability market. Prior to 2019, this market saw substantial rate and premium reductions for over 10 consecutive years, leading underwriters to reassess the risk versus return of this class. Many determined that the premiums had reached a “minimum premium” level relative to the significant limits.

Despite the profitability of the excess third party war liability market, losses in the hull war market and rising geopolitical uncertainty from the Russia-Ukraine conflict have led to increased scrutiny on all aviation war risk coverage. Since 2022, reinsurers have imposed significant increases along with capacity restrictions for war liability (AVN52E) coverage.

Several insurers have left the standalone third party war liability market entirely, and others have reduced their capacity substantially. Total capacity in the excess war marketplace has fallen to approximately US$1.4 billion in 2023 compared to approximately US$2 billion in 2021. The limits purchased by many major operators and manufacturers — often more than US$1 billion each — now approach or exceed the total available capacity in the excess war market, which means full market participation may be required to cover the risk.

How can aviation insurance buyers prepare to mitigate war risk cost increases and coverage changes?

Aviation insurance buyers can better prepare to mitigate war risk cost increases and coverage changes by fully understanding their war risk exposure. Questions that may arise during underwriting include:

  • To what extent does your company operate outside of the US?
    • Assuming there are international operations, what is your company’s exposure to perceived high-risk regions? 
    • Do you keep aircraft or spare parts in any of these locations?
    • When operating in a new country or region, how does your company evaluate local security risks?
  • Does your company have a mental health monitoring program for flight crews or any other aviation staff?
  • What security measures does your company have in place? 

Lineslip facilities offer potential benefits in challenging market

For major clients that purchase standalone aviation war policies, facilities remain an effective way to manage the challenging war markets. Aggregating high quality risks and high premium volume may be compelling to many insurers. Marsh places one of the largest portfolios of Hull War premium to market and has the scalability to maximise outcomes of renewal strategies through our placement facilities.

It’s important to talk to your insurance broker about the issues that are most relevant to your organization, and how to present underwriters with information that will differentiate your risk in the market. And remember that in a challenging market, it is more important than ever to begin the renewal process early, leaving sufficient time to educate insurers about your risk and, if necessary, to obtain competing quotes or alternate limit options.

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Clause AVN48B

This Policy does not cover claims caused by:

  1. War, invasion, acts of foreign enemies hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power.
  2. Any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.
  3. Strikes, riots, civil commotions or labor disturbances.
  4. Any act of one or more persons, whether or not agents of a Sovereign Power, for political or terrorists purposes and whether the loss or damage resulting therefrom is accidental or intentional.
  5. Any malicious act or act or sabotage.
  6. Confiscation, nationalization, seizure, restraints, detention, appropriation, requisition for title or use by or under the order of any Government (whether civil, military or de facto) or public or local authority.
  7. Hi-jacking or any unlawful seizure or wrongful exercise or control of the Aircraft or crew in flight (including any attempt at such seizure or control) made by any person or persons on board the Aircraft acting without the consent of the Insured.

Furthermore this policy does not cover claims arising while the Aircraft is outside the control of the Insured by reason of any of the above perils. The Aircraft shall be deemed to have been restored to the control of the Insured on the safe return of the Aircraft to the Insured at an airfield not excluded by the geographical limits of this Policy, and entirely suitable for the operation of the Aircraft (such safe return shall require that the Aircraft be parked with engines shut down and under no duress).