David Slevin, Product Line Head Aviation, Chubb
The COVID-19 pandemic has hit every business sector, although some have been impacted more severely than others. Aviation has been particularly badly affected by the crisis which has grounded the majority of commercial aircraft around the world for most of the last year.
When news of the coronavirus started to emerge from South-East Asia in the first few weeks of 2020 we recognised very quickly the likely implications could be severe and long lasting. To support our theory we developed a model to forecast what this might look like in reality.
The exercise took two months as we focused almost entirely on how COVID-19 was affecting and would continue to impact on our clients and the industry.
The changing needs of our clients was our primary focus at all times – and this continues to remain the case.
We had to quickly re-write our business plan and establish even stronger, more frequent communications with clients and brokers in order to assess the impact. We listened empathetically to our clients with the goal of retaining a premium base that was commercially viable as well as trying to give consideration to our clients’ changes in exposures. It became clear that each client had their own unique set of circumstances and we had to respond on a case by case basis.
We reforecast again in June, this time refining our predictions. At that point it seemed like we had become industry traffic and trend forecasters rather than underwriters.
During Q1 and Q2 we did not see a marked difference in loss frequency but that did change in Q3 and Q4 with many aircraft still grounded.
So what else did we see?
Another consequence of the pandemic has been business insolvencies. Aviation is no exception and we saw some interesting trends.
State airlines typically had the worst balance sheets but many were bailed out by their respective governments. Independent carriers generally had better balance sheets but burnt cash because they did not fly. We saw very few insolvencies against our predictions but as the problem extends over a number of years, we might see more as there is only a certain amount of money governments will continue to spend on bail outs.
End of an era
That is not the only change happening.
The pandemic has accelerated the demise of four-engined aircraft after dominating long-haul routes for almost 50 years with other fuel-efficient twin engine jets taking their place.
The most popular aircraft remains the narrowed bodied Airbus A320 and Boeing-737 both now operating with new engine variants that are far more fuel efficient. These are and will continue to be the workhorse aircraft of the world.
Pre COVID-19 more than 4.5 billon passengers flew in 2019. That went down sharply to 1.8 billion last year and numbers are forecast to rebound to only 2.8 billion this year.
Not all aspects of air travel have been impacted quite so severely. The private jet market has endured the COVID-19 crisis in better shape than the commercial airline market, showing greater resilience with more wealthy passengers opting to travel in smaller aircraft to minimise inconvenience and exposure to the virus.
And, although devoid of passengers, the cargo market is similarly doing well. Many of the dedicated cargo airlines have not been able to get hold of enough specialist cargo aircraft as demand for goods transported this way has increased.
What happens next?
The start of the vaccine rollout around the world means there is clearly light at the end the tunnel for most people and also for businesses, although specific industry sectors will rebound at different speeds. Aviation will likely recover more slowly than most.
Pre COVID-19, the aviation industry was growing at 6% per year. It was incredibly dynamic and it will return because people will always want to travel whenever they can. But it is likely the sector will take this opportunity to evolve with increased demand for smaller more fuel-efficient aircraft and less for larger inefficient planes.
And again, on a much more positive note, one very recent development in early 2021 has been the huge number of potential start-up airlines around the world. This may seem counter intuitive, however with a surplus of pilots and aircraft, there is a great opportunity to begin with none of the incumbent legacy issues that an established airline might have.
Before that though, the process of getting planes back into the sky again after what might be many months of being grounded, must begin. A return to service for aircraft, pilots and airports is perhaps the biggest challenge for the industry in 2021. When it happens - who is going to do it well and who will not – because there are significant risks with this process, particularly after mothballing planes and aircrew on such an enormous scale.
In terms of safety, we have even more unknowns. How have the aircraft been stored? Have the aircraft been maintained properly? Have the pilots been retrained properly to return to flight? What are the pilots’ mental states? How do we regulate and measure this?
During 2021 we will continue to collect as much data as possible around attritional and large loss trends in order to hopefully see the beneficial impact of the much reduced flying, while balancing this against the potential increase in claims from aircraft, airports and manufacturers returning to a much more normalised level of operations.
Communication is also incredibly important. As insurers, we have to be clear as to how we intend to assess and price the risks we are taking on and to establish and articulate what minimum premiums are needed to cover those risks. One facet of 2020 that sticks in my mind was the need to treat each insured on a case by case basis. Some clients wanted certainty on costs as early as possible, some repurposed their businesses towards cargo carriage, some decided to almost shut their businesses and just wait for the storm to pass.
Our view is that communication is a two-way process and listening to clients lies at the heart of this. We need to collectively understand how we create a sustainable future together so we can weather the storms that we may face over the next few years.
We have all shown great resilience and adaptability so far and as we go further into 2021 we are beginning to see the storm clouds clear and look forward to much sunnier and calmer times ahead.
David Slevin is Product Line Head Aviation, Chubb