Aviation war insurance market exposure from the Russian invasion of Ukraine

Numerous news publications have reported that there is the potential for a large loss to Lloyd’s aviation war insurers from the Russian invasion of Ukraine. The situation is extremely complex, both militarily and contractually. We would, however, like to provide a brief update on what we know and we currently do not know on the matter:

What we know:

• Approximately 500 aeroplanes belonging to non-Russian lease companies, worth approximately $10bn, are stranded in Russia following an export ban from the Russian government on 10th March.
• Over 400 of these aeroplanes are operated by Aeroflot and other Russian airlines. Most of the aeroplanes are registered with the Bermuda Civil Aviation Authority with the rest thought to be registered with the Irish equivalent.
• The airworthiness certificates of these aeroplanes have been suspended by the aviation authorities with whom the aeroplanes are registered.
• Vladimir Putin has subsequently signed a bill into Russian law that allows these aeroplanes to be added to the country’s own aviation register.
• The leasing companies have all risks and war policies with cover that provides for damage or seizures of their assets during a conflict.
• Underwriters gave notice on the war coverage and the coverage has now expired.
• Several of our supported syndicates, including Atrium 609, Tokio Marine Kiln 510 and Beazley 623 are leaders in the aviation war market.
• The average Alpha underwriting portfolio has an exposure to Marine War & Aviation War globally of c3.6% of average Premium Income Limit (PIL).

What we do not know:

• Most importantly: how, when and in what timeframe the conflict will be resolved.
• Whether the aeroplanes will be returned (a Russian export ban currently prohibits the aircraft from being returned).
• If the aeroplanes are returned, what the value of the aircraft would be. The value of an aeroplane can deteriorate significantly in a matter of months if not maintained properly.
• If the aeroplanes were to be returned, whether they will be usable by the leasing companies, given the suspension of the airworthiness certificates.
• Whether the re-registering of the aeroplanes to the Russian aviation authority might be considered ‘seizure’ or ‘damage’.
• Whether the cancellation of the policies will allow insurers to avoid claims, given the peril that may cause a loss (war) was in operation prior to the cancellation. For instance, if a building is on fire, an insurer cannot cancel that policy and avoid a claim for the damage caused by that fire.
• What Lloyd’s, and crucially, our supported syndicates’ net exposure to the leased aeroplanes might be.

Alpha comment

The potential exposure for insurers on this issue is very hard to estimate, given that it is unclear as to how and when the war will be resolved. There is a possibility that the loss could be very small, should the war end soon and the planes are returned well maintained and in full working condition. Alternatively, if the planes are not returned, destroyed or unable to be used once returned – and the insured parties’ policies are judged to cover this loss – then the claims could be in the billions of dollars. What is certain, is that any loss caused by this event will be very hard to settle and will be litigated in court over a number of years. We will continue to monitor this situation and once more is known we will, of course, provide an update. Aviation war coverage is bought for exactly this purpose and since 9/11 this class has been a profitable class for our syndicates. Given that aviation war represents a small portion of the average Alpha portfolio, we would be hope that the losses will be containable, particularly since we are in strong market conditions across almost all classes of business. There will inevitably be more implications for the insurance industry from this conflict and we will keep members informed of any other developments as soon as we possibly can.