The strange case of the specialty exposure that became a cat risk

“Insurers also need to look at whether the new peaks in exposure are within appetite. Are they going to affect other things they’ve written?” Suki Basi, chief executive officer of Russell Group.

· Value exposures at 10 most affected airports up $54.8 billion
· Aircraft worth $20 billion at just two Tokyo airports as typhoon season approaches
· Knowledge of how exposures have shifted vital as the world eases lockdown
· Issue for insurers reaches beyond aviation, with oil and shipping also critical

Lockdowns enacted by countries around the world almost brought air travel to a standstill. But with the majority of planes grounded, the subsequent inactivity has revealed fresh exposures for insurers to manage.

The grounding of commercial aircraft as the global COVID-19 pandemic hit has revealed a “strange phenomenon” which, analysts say, shines a light on a previously neglected insurance gap.

As COVID-19 forced countries into lockdown, demand for flights flatlined, operational activity dropped and planes were parked. But insurance exposure didn’t drop.

Data specialists at risk management company Russell Group spotted that exposures had increased at 10 of the world’s busiest airports in May 2020—by $54.8 billion in total.

“Exposures moved away from the traditional national hubs such as Beijing, London Heathrow, Paris Charles De Gaulle and Los Angeles International to city state hubs such as Singapore, Hong Kong, Doha and Dubai, or to other maintenance or storage facilities such as Toulouse for Airbus, Boeing Field in Seattle, and Tulsa for American Airlines, as well as boneyards such as Roswell,” says Suki Basi, chief executive officer of Russell Group.

“It is the same trillion-dollar exposure, but it’s moved to other locations as we prepare to unlock from the pandemic lockdown.”

It may be the same dollar exposure but the change in location and concentration of high value property marks a crucial shift for insurers. A greater concentration of exposures in a location increases the size of a potential insurance event.

“We’re talking more about severity rather than frequency. But some of these places where aircraft are currently located are in natural peril locations,” says Basi.

“When the planes are worth a few hundred million dollars each it doesn’t take a lot for it to hit the billion.”

Parked exposures

Data collated by Russell Group show that in May 2020 the value exposures at the 10 highest value exposed airports had jumped to $136 billion, up by $54.8 billion from the pre-COVID-19 figure of $81.2 billion recorded in December 2019.
Singapore Changi Airport led the rankings with $18.9 billion of exposure in May 2020, representing a dramatic increase from $8.6 billion in December 2019.

At Qatar’s Doha Airport the value of aircraft parked or stored there jumped to $17 billion in May from $11 billion pre-pandemic. Aircraft value at Dubai International airport rose from $15 billion to $16.6 billion and Hong Kong International Airport experienced an increase from $10 billion to $16 billion.

Also included in the top 10 airports for exposure value are Dubai Al Maktoum International, Seoul Incheon International, Tokyo International (Haneda), Abu Dhabi International, Toulouse, and Tokyo Narita International.

Basi says insured values at the big US airports have dropped but that the difference has been spread around to other places.

“It’s probably more acute when you see Frankfurt, Charles De Gaulle, Amsterdam and Heathrow all dropping because they’re international hubs. A lot of Asian, US and Middle East carrier traffic is in and out of those airports and that just isn’t there at the moment.”

The exposure had relocated to wherever the airlines are from. The “big dollar values” for exposure are coming from some of the Asian airlines and Gulf operators, he explains.

For example, airlines such as Emirates, Etihad, Singapore and Cathay Pacific have very expensive aircraft.

“When they’re all located in one place their numbers really show up in the data,” Basi says.

“Tokyo has around $20 billion worth of aircraft alone in its two airports, and it happens to be at the time the typhoon season in that part of the world gets under way.”

When Russell Group published the figures on June 3, 2020, Basi commented: “We are publishing these figures to inform aviation re/insurers that whenever the so-called ‘return to flight’ commences, they will find themselves with larger exposure in locations that they hadn’t expected.”

Risk in transition

As countries begin to ease their lockdowns, the transition from storing aircraft to operational running may leave insurers more vulnerable than they realise.

Basi says airlines have been doing two things in lockdown: trying to get rid of older aircraft by retiring them; and maintaining the ones that they want to keep by moving them around.

As lockdowns lift and airlines scramble to get operational, insurers are going to face significant exposure from grounded aircraft that are not being maintained and which are left in these locations.

“This has highlighted a slight hole or a gap of coverage in aviation insurance products that probably hasn’t been adequately priced for in the past,” says Basi.

“You can see this strange phenomenon where airlines are operational and allegedly exposures are down but from an event perspective it gives insurers high exposure on the ground.

“It’s turned a specialty class exposure into a cat risk exposure.”

It’s not just aviation that is affected by this issue, says Basi, pointing to oil and marine shipping insurance. The crash in oil prices in the northern spring raised concerns about oil storage capacity. There are planes, ships and oil facilities “basically overrun with assets”, Basi explains.

“More exposure has been added into a pot that’s already growing, so when you start adding in cargo that is stranded in ports, and oil that’s still in facilities, there’s a lot of other exposure even before you start adding in property.”

Some of those are constant concerns, so this new situation “highlights the need to understand data in a more granular way than has been done in the past”, he adds.

“There has been a fixation on the storm, what is the intensity of the storm, where is it going, and it seems that the knock-on dollar amount isn’t focused on as much. We need to understand where the assets are and where the dollar values are, and then drive the events through them to understand them better.”

During the period of transition out of lockdown aggregation is going to be key for insurers, Basi says.

“They have to understand aggregates and where the exposures are. If they are changing, how are they changing?

“Insurers also need to look at whether the new peaks in exposure are within appetite. Are they going to affect other things they’ve written? That’s the correlating connected effect,” he adds.

He re-emphasises that exposures haven’t dropped—activity has dropped, but exposures have become concentrated. “Are those concentrated exposures within appetite, are there any surprises there?”

In the current hardening market, one approach insurers could take is to start from “a higher point” in terms of pricing for the concentrated exposure, then discount for the activity, Basi says. “Otherwise you get chased down [on price] by the activity.”

It’s a complicated picture, but big data, real-time telemetry and artificial intelligence can make a significant difference in getting the most accurate view, says Basi.

The COVID-19 pandemic highlights that this “strange phenomenon” —where activity is down but exposures are not—isn’t going away any time soon.

“This starts to become not just a short-term issue, it’s a short to medium-term issue, and we’re going to have to understand this.

“It’s not just in the aviation class. We have to understand activity, the relationship between business activity and exposure—it’s no longer static, it’s moving around.”