Despite international aviation and airliners becoming safer and more reliable, the increasing sophistication of modern aircraft is contributing to more expensive claims to insurers. Growing passenger numbers also lead to more claims and higher costs, a report by Allianz Global Corporate & Specialty (AGCS) and Florida’s Embry-Riddle University concludes this week.

The two produced a report “Aviation Risk 2020 – The state of the nation” that analyses the industry’s and insurance risks in recent years and looks ahead to new trends and risks.

While 2019 will be remembered for that one aviation disaster that continues to have a profound effect on the industry in 2020 (the Ethiopian Boeing MAX 8-crash on March 8 with 157 casualties), the year’s record has been positive. It fits the trend of improved safety, with 2018 (15 fatal accidents and 556 casualties) the third safest year ever by the number of fatal accidents. Between 2008-2017, 2.199 people lost their lives in 37 air accidents. Passengers do have a risk of dying in an air crash of 1 to 188.364.

A major contributing factor to this according to AGCS is the maturity of the fly-by-wire airliner over the last 15 years, although the MAX with its flawed MCAS will be seen differently by many. Engine has also gone up, not withstanding frequent issues with some models like the Rolls-Royce Trent 1000 or Pratt & Whitney Geared Turbofan. Also improved are air traffic control systems with Enhanced Ground Proximity Warning Systems reducing controlled flight into terrain by 50 compared to the 1990s.

Yet, AGCS and Embry-Riddle University see an increase in aviation related claims. Over the last five years, the insurance industry recorded 51.867 claims worth EUR 14.8 billion. While collisions and crashes form 27 percent of all claims (13.638) their combined value is 57 percent or EUR8.4 billion. These not only include hull losses from crashes but also damage from bird strikes, foreign object damage, hard landings, and runway incursions and excursions (470 between July 2013 and December 2018). The average claim is EUR1.7 million with a bird costing some EUR327.000 on average to repair or $1.2 billion worldwide.

Driving up repair costs is the complexity and sophistication of modern airliner and engine technology. Composites make airliners lighter and more efficient, saving airliners millions in operating costs. But composites are also more expensive to repair, leading to replacement by new, even more, expensive parts and long claims. The report cites the claim of a damaged composite wing that eventually was replaced by a new one, costing $10 million. Ramp incidents can cost airlines even $10 billion a year in direct and non-direct costs, so ground handlers should do better to reduce the number of incidents (some 27.000 each year worldwide).

“A concern is that the headline improvements in could lull the airline industry into a false sense of security. Thankfully, fatal air accidents for western-built jets are now infrequent, but the number of dollars paid in claims in recent years outstrips total insurance premiums”, AGCS’ Regional Head Aviation North America, David Warfel says in the report. “Last year, for example, a fire during caused a $20mn loss, yet the incident would have gone largely unnoticed by the industry.
”The number of claims is in line with the growth in passenger traffic, says Warfel: “Each year more people are flying and we see a correlation between passenger numbers and claims, such as slips and falls in airports and damage to aircraft from ground operators.” With liability costs per passenger having increased as well, a fatal crash could result in liability costs of over $1 billion.

AGCS says the effects of grounding the MAX-fleet top insurers is still mostly unknown. Boeing will certainly claim a huge sum with its insurers, but the report says the financial impact to airlines is largely uninsured.

Pilot shortage impacts risks
Allianz identifies another risk that might have a huge impact on insurance claims: pilot shortage and pilot experience. With expected to double within the next two decades and many pilots retiring right in the next decade, there is a worldwide demand for 500.000-600.000 new cockpit crew. Many airlines train new pilots themselves, but AGCS sees a trend in which airlines are hiring less experienced pilots to compensate for a shortage.
“The concern is that we will see more pilots flying with less experience and reduced frequency of training in order to meet demand,” says David Warfel. Literally paying the price for this are flying schools, with higher insured values as accidents are more likely to happen as cadets learn the trade.
Over-stressed pilots are also more prone to fatigue, mistakes, and incidents or accidents. The report claims 15-20 percent of fatal crashes is caused by pilot fatigue. An example of this was published recently with the final report on the flydubai fatal accident in Rostov on Don in 2016, in which fatigue of the Captain seems to have played a major role.

Other factors that worry insurers: drones. A single drone to an aircraft can cause $10 million in damage. These are the small ones. The advance of Manned and Unmanned Aerial Vehicles calls for a whole new approach. The report calls for more analysis and measures to fight of potential threats. The same applies to cyber crime and IT failures, which have moved into the top spot of top risks for the 2019 aviation sector. AGCS is worried that not all companies have assessed the level of cyber risks, despite some high-profile incidents at Cathay Pacific and British Airways in the last two years.

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