Impact of Covid-19 on the aviation insurance industry

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Jesús Escudero

Torres, Plaz & Araujo, Caracas

jescudero@tpa.com.ve

Andrea Cruz

Torres, Plaz & Araujo, Caracas

acruz@tpa.com.ve

In March 2020, the World Health Organization declared the outbreak of Covid-19a pandemic. Since then, almost all states worldwide have declared a state of emergency in their territories and, consequently, have taken economic and social measures in order to avoid, or at least mitigate, the spread of the virus.

In this context, the aviation industry has directly suffered the negative impact of such measures, especially due to the total or partial airspace closure in several countries and consequent cancellation of most scheduled flights. Beyond this, other industries (related to the aviation industry), such as the aviation insurance market, are also facing new and challenging scenarios that affect their businesses.

In the case of the aviation insurance industry, several changes to the factual conditions of daily aviation activity have changed the circumstances around the aviation insurance policies. In the first place, there have been changes to the uses of insured aircrafts. Since most commercial and private flights have been cancelled while, by contrast, cargo flights continue to fly regularly, some airlines have adapted their commercial aircraft in order to operate cargo flights and, there by slightly reducing the income losses caused by the measures taken on the occasion of the pandemic. Of course, ‘any changes to uses and operations will need to be clearly communicated to insurers to ensure that such changes are not excluded’^[1] of the coverage, although, in any case, a detailed analysis of every policy is essential to provide clients with clear and helpful advice.

On the other hand, given that most commercial and private flights have been cancelled, most insured aircraft are still grounded. GroundedAircraft bring ‘new operational logistics through lack of parking, ongoing maintenance, storage preparations, protection of aircraft from terrorist threats, wildlife hazards and climate considerations such as humidity, or adverse seasonal weather conditions’^[2].

Besides the increase of costs related to the parking and maintenance of grounded aircrafts, such a radical change in aircraft status has brought a decrease in some risks related to flights, but also an increase in other risks related to the fact that the aircraft is grounded. Thus, there has been a clear change to the risk profile of airlines during the pandemic.

Moreover, aviation insurers must now consider that there may be new scenarios where some of those insured(ie, airlines)could be liable for virus contagion during flights, if appropriate biosecurity measures were not taken.

 Aviation insurers are also likely to face new challenges arising from the Covid-19pandemic. The overall financial situation for the aviation industry will determine whether insured parties working in the aviation sector will recover financially or will, at least, be stable enough to continue the irregular work and pay the premiums needed to renew their aviation insurance policies. One point to consider is that, at least currently, not all insurers are willing to offer coverage for risks related to aviation activity during the pandemic and, moreover, as reported by Gallagher, ‘where insurers are offering cover, they are seeking rate increases of at least 20-25 per cent’^[3].

Of course, challenging scenarios could also be an opportunity for insurers and reinsurers to develop and offer new, tailored products that satisfy both the needs of insured parties and the financial objectives of the aviation insurance market. Taking into account the repercussions of the pandemic for the aviation industry will allow aviation insurers to create policies with clear and appropriate wording for the parties to an aviation insurance contract. As stated by John Rooley, the ‘use of risk analytic tools to quantify exposures and support client decision making’^[4] will be key to ensure correct analysis of the insured risk under these circumstances.

Finally, timely and correct legal advice, given by qualified attorneys and considering the local regulations and particular circumstances in each case, will help insured parties, insurers and reinsurers to better handle the policy renewal and claims arising from losses that have occurred during the pandemic.

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