Aviation claims developments

“An airline may not have experienced a large loss, but that does not mean that the industry is completely safe,” says Warfel. “There are still risks. For every airline incident that makes the headlines, there are probably 10 or 20 that don’t make it into the news, but are equally as challenging from a claims handling perspective and that are very expensive. Last year, for example, a fire during maintenance caused a $20mn loss, yet the incident would have gone largely unnoticed by the industry.”

Overall, aviation insurance claims are increasing in frequency and severity, a reflection of higher values, increased repair costs and rising liability awards. The volume of claims is also a reflection of growth in air transport, with increased passenger numbers and more congested airports, as well as growing demands on airlines, manufacturers and ground services.

“The frequency of claims has been rising, keeping pace with the global increase in air traffic. 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,” says Warfel.

Headline improvements in safety have helped drive down the cost of insurance for airlines and manufacturers, but given the ongoing frequency of attritional claims, and rising severity, this means the industry’s annual claims total outstrips its annual premium.

The increasing sophistication of new generation aircraft is leading to more expensive aviation insurance claims. In particular, more complex engines and new materials can be costly and more time-consuming to repair, driving up the cost of repairs and groundings.

Aircraft values have increased significantly in recent years, a reflection of more  sophisticated engines and the growing use of composite materials in airframes. “A  modern Boeing 777  or 787 can cost many millions of dollars and can be very expensive to repair,” says Warfel. The value of these types of aircraft can easily exceed $100mn.

Repair costs for new generation aircraft are now much higher than their predecessors. Modern engines, in particular, are increasing in value. “We recently handled a claim where a rental engine was required while the aircraft’s engine was repaired. The value of the rental engine was more than the entire aircraft, including its original remaining engine,” explains Dave Watkins, Regional Head of General Aviation, North America at AGCS.

Composite materials – such as carbon fiber layers bonded with resin – are strong and light, and therefore help improve fuel efficiency. However, the claims experience has revealed a higher repair cost associated with composite materials, which are generally more expensive to manufacture than traditional metal alloys, more labor intensive to repair and often require a larger repair area.

“More and more aircraft are using composite materials. Minor damage to composite aircraft can be easier to repair and is not expensive, but larger damage is more expensive to repair in composite materials than traditional metal alloy,” says Cadillat. Changes in manufacturers’ business models, as well as technical and regulatory considerations, are also affecting the cost of repairing engine and aircraft damage. As a result, insurers are seeing a trend towards replacement, rather than repair, of damaged aircraft components. Manufacturers have shifted their focus away from repairs in favor of selling new parts and components, while repair and inspection protocols have become increasingly burdensome, according to Watkins.

“We have had claims where manufacturers are not willing to signoff repairs to composite airframes due to liability concerns, or where repair protocols are just too burdensome. We recently had a claim where an aircraft wing was damaged during maintenance. However, the manufacturer’s repair and inspection protocols meant repair was not cost-effective. The result was a new wing, costing $10mn,” says Watkins.

Increased complexity and changes to manufacturers’ business models are also leading to longer repair times. “Some engines types are almost impossible to replace,” says Warfel. Manufacturers can also take much longer to inform insurers whether damage can be repaired and what is required than in the past.

“The time it takes to get an aircraft back into service has increased significantly. This has implications for insurers, but it has a massive impact on the airline that needs to find an alternative engine or aircraft,” says Warfel. "When an engine needs to be repaired, it may have to go back to the original manufacturer  or an authorized repair facility, which creates a bottleneck and drives up cost. An airline may have to wait six months just to get in the line for repair.”

“While technology has helped drive big improvements in airline safety, the increased complexity of aircraft design and manufacturing has also led to an increase in costly grounding claims for insurers,” explains Axel von Frowein, Global Product Leader Aerospace at AGCS.

For example, the introduction of new aircraft and technology can lead to unexpected problems, grounding entire fleets. When the Boeing 787 Dreamliner was launched in 2013, a number of aircraft suffered from electrical system problems stemming from the lithium-ion batteries, causing the Federal Aviation Administration (FAA) in the US and airlines to ground the aircraft.

“Civil aviation and airline safety certification authorities have grown increasingly cautious. While the principle of precaution is welcomed from a safety perspective, it is likely to result in more, and longer, groundings of aircraft. Increasingly, we see aviation authorities are more demanding and careful, which they should be, and will continue to be,” says Saillard.

The redesigned Boeing 737 Max was grounded in March 2019 after two of the newly delivered aircraft crashed within five months. Investigations into the Lion Air and Ethiopian Airlines accidents are ongoing, but they have highlighted potential risk considerations for technical innovation in the industry. While the causes of the two 737 Max crashes are not fully known at the time of writing, attention has focused on the interaction of the pilots with the aircrafts’ autopilot systems. In a bid to increase efficiency, Boeing changed the engines on the 737 Max, putting larger engines on an old aircraft design, requiring a software workaround, known as the Maneuvering Characteristics Augmentation System (MCAS). The pilots were reportedly unable to regain control of the aircraft after the MCAS repeatedly forced the aircraft to descend.

The grounding of the Boeing 737 Max, one of the fastest selling aircraft of all time, is likely to lead to one of the biggest airline manufacturers claims to date. The grounding has resulted in a large financial loss for the aircraft’s manufacturer and airlines. It has been reported that Boeing has put aside almost $5bn to compensate airlines [1], a number of which have announced plans to cut routes and staff in response to the grounding and delays  to aircraft on order.

“Such incidents highlight the challenge in finding technical solutions to complex problems, which increases the time it takes to get grounded aircraft back into operation,” says James Van Meter, Aviation Practice Leader, North America at AGCS. “Even after a fix is developed and certified, the task of retrofitting a fleet will take a considerable amount of time. Grounded aircraft also require a tremendous amount of maintenance and upkeep to ensure they remain in an airworthy condition.”

Although, the grounding of the 737 Max is likely to result in a large claim for aircraft manufacturers’ insurers, the financial impact for airlines is largely uninsured. “Loss-of-use insurance cover has become increasingly relevant with the increased value of aircraft, and more importantly the revenue they represent to airlines,” says Warfel. “Yet loss of revenues for grounding aircraft is largely uninsured by the airlines, which do not typically buy grounding cover.”

Liability claims per passenger have soared as US plaintiff attorneys aggressively seek higher awards from a wider range of incidents. Liability awards have risen dramatically. The rule of thumb for general aviation operators was $1mn to $3mn per passenger seat 10 years ago. Today, in certain circumstances, the numbers can be much higher than that. “With fewer major airline losses, plaintiff attorneys are fighting over a much smaller pool and are putting more resources into fewer claims, pushing more aggressively for higher awards and looking for more areas in which to seek compensation,” says Watkins.

Southwest Airlines, together with aircraft and engine manufacturers, are currently facing litigation following an incident last year in which a woman was tragically killed when an engine blowout shattered a window on a Boeing 737. The family of the deceased passenger started legal proceedings against the airline, while a number of passengers on the flight sought damages. The compensation pay-out from such events can easily be in the multi-millions of dollars.

Increased liability awards are a particular challenge at a time of growing passenger numbers and a trend towards larger aircraft. In a drive for efficiency, airlines are flying more passengers, but on fewer flights. According to the Bureau of Transportation Statistics, the average number of US passengers per flight jumped from 69 to 91 between 2007 and 2017.

The new generation of aircraft carry hundreds of passengers at one time – the Boeing Dreamliner can carry 250 to 300 passengers while an Airbus A380 has capacity for around 600. With liability awards per passenger in the millions, a major aviation loss could easily result in a liability loss of $1bn.