When Malaysia Airlines Flight 370 disappeared over the Southern Indian Ocean in March, aviation insurance experts weren’t too worried. The major capital and relative stability of the industry would protect the market from any major upset, they said, and brokers needn’t be anxious about relaying rising premiums and other costs to clients.
Now, everything has changed.
In just a matter of months, Malaysia Airlines suffered another devastating loss as flight MH17 was shot down near the Russian-Ukrainian border. The fallout was such that the ill-fated airline is now considering changing its name.
Additionally, fighting at the Tripoli airport in Libya damaged nearly two dozen planes, and two more crashes in Mali and Taiwan made international headlines.
All told, aviation insurers are now preparing for a year with losses exceeding $2 billion, including liability and hull losses expected to amount to several hundred million dollars. That’s the biggest bill carriers have had to foot since the September 11, 2001 terrorist attacks.
While experts still believe the necessary capital is there, it’s already hurting premiums.
In fact, a Financial Times report suggests some insurance underwriters are asking for premium increases of 300% for war risk insurance policies. Other insurers want exact details of all flight paths, and are considering exclusions for all flights that cover so-called “hot spots” in the Middle East and parts of Africa.
The more general “all-risk” policies purchased by airlines are also expected to increase, though marginally.
Economist and Insurance Information Institute President Robert Hartwig believes these moves are warranted, though still maintaining that instability in the market is unlikely.
“The risk profile of international aviation has shifted, becoming riskier and justifying a response in terms of underwriting and pricing,” Hartwig said. “I also expect that airlines will seek to mitigate risk, perhaps lessening the impact of higher insurance costs, by temporarily avoiding some conflict zones such as eastern Ukraine.”
If these premium increases go forward, it would mean a sharp turnaround from the relatively low insurance costs airlines have been enjoying for the past five years.
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