AerCap – the world’s biggest aircraft leasing firm – has now filed a claim believed to be in the region of $3.5bn on its contingent all-risks policy, according to sources, as the lessor pursues another avenue to recoup losses as a result of stranded craft in Russia.
As previously revealed by this publication, AerCap also has $1.2bn of contingent war cover written in the London market which would typically respond to confiscation of aircraft (although whether Russia’s re-registration of planes constitutes a loss trigger is subject to market debate).
In pursuing an all-risks claim, AerCap opens a bigger pool of potential money to try to claw back its losses.
At the centre of the debate – which will undoubtedly evolve into a years-long legal dispute – is the theft wording present in all-risks policies, and underwriters are likely to argue that this is not designed to cover this type of loss event.
At this point, there is lots of conjecture in the market and no concrete assurances on how or where the aviation losses from the Ukraine crisis will fall.
Sources said many lessors have issued rights of reservation but are still in the process of assessing their ultimate exposures ahead of filing loss notifications.
However, the prospect of this situation spilling into the all-risks market underscores a very serious point around the systemic exposures in this aviation sector.
Unlike the aviation war market, which deploys annual aggregate caps, the aviation all-risks market works on an “each and every loss” basis, with unlimited aggregate.
At the moment, sources have suggested that most leasing companies appear to be pursuing claims on their war policies, as they deem their war aggregate is sufficient. And arguably, claiming on the all-risks policy under the theft wording is a high-risk strategy for AerCap given the way it is seeking to stretch the language.
However, AerCap’s move at the least raises the prospect of other lessors following suit.
Many media reports have put the value of stranded aircraft at around $10bn, but insurance market sources put them at more like $25bn-$30bn.
They are not fully insured, but insured exposures – assuming a war loss – would be in the region of $12bn-$15bn, sources have previously said. But under a scenario where the lessors pursue an all-risks claim, the available insured limits swell significantly – and could be close to that $25bn-$30bn top-end range.
There is also potential for this to be particularly painful for insurers – given that aviation reinsurance cover does not align perfectly with the underlying all-risks policy.
On this point, much will depend on event definition and how insurers are able to aggregate their losses.
A single event would undoubtedly see most insurers go through the top of their programmes. Cedants would likely make maximum recoveries if they were able to treat the loss of each lessor as an event, allowing them to claim a full limit, and then reinstatements. In aviation, sources said that cedants will sometimes buy two reinstatements, although this can vary.
A third scenario whereby each aircraft constitutes an event could potentially be most painful for insurers – as they run the risk of taking a series of retention losses.
Lloyd’s would be relatively less exposed if the claims came more heavily on all-risks policies, as all-risks is more weighted to the company market in comparison to the very Lloyd’s-centric war market. However, given that the all-risks market tends to be less heavily reinsured, and the greater levels of limit at risk, on a net basis Lloyd's could still find itself worse off in absolute terms.
Nevertheless, the size of the loss – wherever it lands – will send shockwaves through the whole aviation market (and potentially beyond). It has been suggested that there is around $6bn-$7bn of combined aviation premium globally, which is likely to fall far short of wherever losses eventually land.
At present, the reaction from the all-risks market does not appear to be particularly severe.
Some sources suggested that all-risks underwriters seem to largely have their “head in the sand” on the situation, while others said there had been some tightening in terms – such as the exclusion of Russian flights from policies.
It has been suggested that some underwriters are – whether wise or not – attempting to exclude theft from all-risks policies, a move which could lend weight to the idea that AerCap has some legitimacy in its claim.
The niche contingent war market is a different story – with brokers describing the market as paralysed by the situation. Very, very few markets are said to be quoting business, and when they are, rates increases are said to be in the 1000s of percent.
The scenario in the aviation market will play out in the courts for years to come, and at this stage, nothing is set in stone.
However, this should serve as a stark wake-up call to the all-risks market, which is running unlimited sideways exposure.
This is a “black swan” event – but as things stand, the all-risks market faces significant aggregation risk in other areas.
Aviation underwriters often point to risk from hail or earthquake, even though this eventuality has not come to fruition. Cyber cover is also often affirmatively written into all-risks policies, where aggregation risk is well known and discussed.
Until bounds are put around these – in the form of aggregate caps or otherwise – it will be impossible for underwriters to know their true aggregations.
We put a question to the specialty market last week about whether it truly understands and is accounting for the aggregations it is running. The situation in the aviation all-risks market underlines that question once more.
The AerCap claim may not be cut and dried, but it certainly raises the spectre of a doomsday scenario for this class.
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