World Airnews editor Heidi Gibson asked SA’s longest-established specialist aviation insurance broking organisation Chief financial officer Graham Speller to provide a general outlook for the state of the aviation insurance sector in South Africa and the challenges presented by COVID 19 for all parties concerned.
WAN: The general aviation sector of the aviation insurance market has been hardest hit in the recent past and it is under huge strain. What are your comments?
GS: The aviation insurance market as a whole has been loss-making for the past three years, following a decade on the decline in premium income, which started in about 2003, shortly after 9/11. The four sectors of the market – General Aviation, Airline, Aerospace and Space – have each had their own issues to deal with, but rarely have all four been hammered simultaneously, which is what we’ve seen in the past 12-18 months.
In South Africa, the GA insurance market has been particularly badly affected by the increased cost of spares, virtually all of which are imported, due to the decline in the value of the SA Rand. This has resulted in significant claims cost escalations for even the simplest and most straightforward of losses. SA is also becoming known as a litigious society and Insurers are facing increased numbers of claims by passengers and other parties affected by aircraft accidents, and the average quantum of such claims is also increasing substantially.
Added to this, an ageing fleet of aircraft with relatively few new aircraft being injected into the system means that Insurers are facing increasing pressure to increase premium levels in order to survive. Naturally, brokers and their clients resist those increases, but the simple truth is that the aviation industry needs a healthy insurance sector to support it.
The airline insurance market has taken some huge hits in recent years, including well-publicised losses such as MH370, MH-17, Lion Air, Ethiopian Airlines and Ukraine International, to name just a few. Added to this, the current COVID-19 pandemic has seen 90% of global airline activity completely at a standstill, which will result in airline failures and reduced income which, notwithstanding the concomitant reduction in operational losses, will further deplete insurers’ reserves.
The Aerospace market includes manufacturers, maintenance, repair and overhaul organisations, airports, air traffic and navigation services, etc. This market has also suffered substantial losses in recent years, including the 737 MAX losses and subsequent worldwide grounding, which have led Boeing to present significant claims to the market insurance market. The Space market has been hit hard, too, with multiple satellite launch failures, resulting in substantial losses for underwriters. Finally, the General Aviation market has seen significant losses, particularly arising from commercial services in the tourism area, coupled with general attritional losses against historically low aviation insurance rates.
WAN: As the oldest aviation insurance brokers in the country could the COVID19 virus and its associated effects in any way are included in any agreement? And would there be any kind of relief for owners?
GS: Whilst insurers are mindful of the predicament faced by many commercial aviation enterprises, with an almost total shut down of all but the most essential aviation activity, there is a limit to the relief that can be offered to aircraft owners. Where individual insurance programmes make provision for “lay ups”, this will allow for coverage to be restricted to “ground risks” or “rotors not in motion” and for a premium adjustment (credit) to be calculated and paid at the expiry of the policy, subject to no claims having arisen. This provision is usually only available under policies covering fleets of aircraft. Where “loss of use” insurance is affected, coverage is only triggered by accidental damage to the aircraft and is limited to loss of income directly arising therefrom. A general grounding under the current circumstances, which arises from government decree, does not trigger this type of coverage.
Individual aircraft owners should discuss their specific situation with their insurance brokers, who will then be able to discuss available options with the Insurers concerned. In some cases, the Insurers may agree to reduce coverage or may simply note the circumstances and review the position at the end of the lockdown period, or the expiry of the policy, whichever is sooner.
Some commercial enterprises may carry business interruption insurance, but this is not available from the aviation insurance market and there is some doubt as to the extent to which Insurers will consider coverage to be triggered by communicable disease pandemics such as COVID-19, given the general requirement that the business interruption should be caused by property damage and, even where a non-damage extension for communicable diseases is included, this is usually limited to specified notifiable diseases where there is an outbreak at or near to the Insured’s premises, resulting in the premises being closed by order of a competent/public authority.
WAN: Would it ever be possible to insure against this type of phenomena? And if not what is the best course of action aviation owners should take in the current circumstances.
GS: There are no insurance products currently available, of which I am aware, that would provide benefits to aircraft owners arising from their inability to operate their aircraft during periods of a pandemic or other general health emergencies. As mentioned, coverage can be restricted to “ground/stored”, at a reduced premium. The best course of action would be to communicate with their insurance brokers and allow their brokers to advice on possible options and negotiate with Insurers on their behalf.
WAN: Can you describe the market that you find yourselves in, the challenges and the possible positive outcomes for the near and not so distant future?
GS: The immediate challenge facing the aviation insurance market worldwide is survival. Whilst insurance is considered an essential industry, most (if not all) business premises have been closed and staff are working from home during the lock-downs being experienced in most countries around the world, particularly US, Europe and the USA.
Currently, all aviation Insurers remain operational but there are significant concerns regarding the future, given the aviation insurance market’s reliance upon a viable aviation industry, whether General Aviation, Airline, Aerospace or, indeed, Space. Major aviation Insurers will often write insurance for each of these sectors and, to an extent, losses in one sector will be balanced by profits in others. At present, however, all four sectors have been virtually shut down with a concomitant loss of premium income for the aviation insurance market.
Many aviation businesses will likely be unable to recover once the pandemic has passed and this will create a permanent loss of income to aviation Insurers. All this will result in Insurers needing to review their business plans and it is quite likely that we will see a further contraction of the aviation insurance market as Insurers elect to withdraw from this class whilst they concentrate their efforts in other, more sustainable, classes.
Quite apart from the potential human loss to COVID-19, we are likely to see jobs being lost in the aviation insurance market, as Insurers, brokers and associated service providers are unable to survive, downsize their aviation activities or merge with others. The light at the end of the tunnel may be an approaching train. However, we will ultimately be left with a smaller but stronger industry as all but the fittest will likely be hit by the train.
WAN: What kind of new and innovative ways has the company employed to gain new business and sustain and solidify your organisation?
GS: The key element to grow and sustain our business has been the development and sustaining of both our relationships with insurers and equally the development of our staff. We see the relationship with insurers as a partnership, such that we are, to the best of our ability, able to obtain the right cover for our clients. With the substantial changes being experienced in the entire aviation insurance market, we consider this a key differentiator.
Equally so is the development of our staff. We are continually upskilling and training our staff and encouraging new entrants into the aviation insurance broking industry. This is mission-critical in maintaining our sustainability and ensuring we continually provide the best advice and cover to our aviation clients.
WAN: What makes DJA Aviation stand out from the others?
GS: DJA Aviation is SA’s longest-established specialist aviation insurance broking organisation, having been formed in 1976 by now-retired founder Dennis Jankelow. All the senior insurance specialists at DJA Aviation have been with the firm for in excess of 20 years. The company’s sole mission is to serve its clients and provide them with the peace of mind they require in order to achieve their aviation-related aims and objectives without suffering financially in the event of losses occurring.
DJA Aviation refers to its mission as The Right Approach and it is a philosophy to which the company and all its 35 directors, brokers and employees are fully committed.
DJA Aviation has been responsible for the development of several aviation insurance products that remain exclusive to this day and continues to develop new products and enhancements for the benefit of its clients. With strong Insurer-relationships throughout South Africa and international insurance markets, DJA Aviation aims to provide insurance programmes for its clients that reflect a perfect balance between Coverage, Cost, Security and Service.