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willistowerswatson.com 2 willistowerswatson.com
Managing Risk & OpportunityCorona Virus & Insurance Trends
Aviation Africa 2020Addis Ababa, 4-5th March 2020
© 2019 Willis Towers Watson. All rights reserved.
Simon Knechtli | Executive Director
Willis Towers Watson | Aerospace
ሰላምታ
willistowerswatson.com
Growing in an Era of Expected Challenges & ComplexityFuture of the Airline Industry 2035 (IATA)
2
• Alternative Fuels & Energy Sources• Alternative Modes of Rapid Transit• New Aircraft Designs• Modes of Consumption• Geospatial Technology
• Global Population Growth (Africa/Asia)• Middle Class Growth (China/Asia)
• Geopolitical (in)stability• Terrorism• Anti-Competitive Decisions• Resource Nationalism• Strength & Volatility of Global Economy• Air Industry Supply Chain Integration
• Price of Oil• Personal Carbon Quotas• International Regulation of
Emissions/Pollution
• Internet of Things• Cybersecurity• Tensions between Data Privacy
& Surveillance
• Extreme Weather Events• Human-Controlled Weather• Rising Seal Levels/Reclaimed Land
• Infectious Disease & Pandemics
© 2019 Willis Towers Watson. All rights reserved.
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Non Aircraft Damage EventsSignificant Disruption & Cost
© 2019 Willis Towers Watson. All rights reserved. 3
Worst freezing weather since 2010 costs UK economy £1bn a day.
Volcanic ash-cloud costs an airline US$80m+
Airlines facing fuel rationing from oil depot fire.Extra stops on long-haul flights
Monsoon Floods cost Airline US$100m
Sources:AtwonlineTelegraphIATAThe Lancet
US$2.50bnAirline revenue lost due to 2015 terrorism events in Europe
Covid-19
20% of an African Airline’s Revenue
Summer Strikes & HK Disruption
Cancellations, Reputation Damage
Cost to an EU Airline €155m
Airlines Budgeting for Shocks?Public keen to travel when risk diminishes?
SARS cost one airline $340m
willistowerswatson.com
COVID-19
4
Impact on Aviation Industry
© 2019 Willis Towers Watson. All rights reserved.
IATA has warned that collective airline losses attributable to the global COVID-19 outbreak are likely to reach:
US$30 billion
If realised airlines would lose more than
x4as much revenue as they did during
2003 SARs epidemic$
$2003 SARs
COVID-19
World Wide:
-8.2%Revised contraction for
2020
4.8%Regional projected growth
2020
13%Year on Year fall in PAX
numbers
$30bnFall in revenues
$12.8bnChina’s Domestic Market
Asia Pacific Airlines:African Airlines:
$40mDecrease in Revenue
“Slashed passenger demand by
20%”
“A big shock”
Europe:
“Flybe: Coronavirus pushes airline to brink
of collapse”
“BA slashed more than 400 flights between
March 16 and March 28”
“Ryanair is reducing frequencies on some routes by up to 25%”
* Reuters, 04/03/2020 * FT, “Corona virus pushes aviation sector into ‘crisis zone’ 04/03/2020
willistowerswatson.com
COVID-19Insurance
§ The ultimate cost - in lives and dollars - remains unclear§ Risk & Insurance Managers may well be asked for their business continuity and indemnity
strategies to now perform?
© 2019 Willis Towers Watson. All rights reserved. 5
§ Basic insurance policies offering adequate cover?
Covered?
§ Vehicles used to transfer the risk of the inevitable loss of revenue?
Loss of Revenue?
willistowerswatson.com
§ Protects airlines against claims for bodily injury or property damage caused by an ‘occurrence’
Liability
Standard Hull & Liability policies are not designed to respond to financial losses.
For those, the aviation sector traditionally has turned to alternative markets.
COVID-19Insurance
§ The ultimate cost - in lives and dollars - remains unclear§ Risk & Insurance Managers may well be asked for their business continuity and indemnity
strategies to now perform?
© 2019 Willis Towers Watson. All rights reserved. 6
§ Responds to physical damage to the aircraft, spares & equipment
Hull
Standard Hull & Liability Policy
willistowerswatson.com
COVID-19Insurance
© 2019 Willis Towers Watson. All rights reserved. 7
§ International airline liability is predominantly regulated by the Montreal Convention 1999
Set standards for the required response to epidemics, which cover best practices such as:§ screening of passengers, § tracking customers who may have been exposed to any virus, § and minimum requirements for crew resources and training, etc.
§ When followed, an airline only would be liable to passengers and 3rd parties if the sickness were proven to be the result of an accident that happened onboard the aircraft or during embarking or disembarking.
§ There must be an external event that causes the person to contract the sickness, such as a failure to screen passengers when boarding
However:
§ It would be very difficult for a passenger to prove airline cause
willistowerswatson.com
COVID-19Could a policy holder make a claim against an airline?
© 2019 Willis Towers Watson. All rights reserved. 8
‘AVN60A’ – personal injury extension
§ Standard aviation liability contracts
§ A policy holder has liability cover for passenger claims made against them for claims of non-physical ‘injury’ stemming from:
§ the quarantine or detention of passengers
§ having been denied boarding.
§ Standard airline hull and liability cover is not designed to offer airlines protection for non-damage business interruption from global health
threats such as COVID-19
§ having been denied boarding.
§ This could come into play if an over-zealous employee at the gate refused boarding or detained someone purely based on their ethnicity, rather than in line with the mandated protocols for passenger screening.
willistowerswatson.com
Insurance CommunityNews & Opinion
© 2019 Willis Towers Watson. All rights reserved. 9Source: Insurance Insider | 4 March 2020
Standard Life & Health Insurance§ Infectious diseases are typically covered§ 3,200 Covid-19 deaths to date
- hundreds of thousands killed by Swine Flu in 2009§ Insurers will be bracing for losses
CFO, Swiss Re, 20 Feb 2020“Believes the coronavirus would not have a material impact on either Swiss Re or the wider property/casualty or life and health insurance industries.That could change but [the outbreak] needs to be put in perspective - observing that 290,000-650,000 people are killed by severe influenza each year.A more immediate concern is the effect on insurers’ investment portfolios, with stock market volatility.“We are taking a strong look at how we continue to invest our own money to make sure we are not caught off guard.”
Traditional Business’ Insurance § Infectious diseases are generally excluded§ Non-life insurance industry will side-step most of the
financial impact rippling through the global economy
Munich Re, 28 Feb 2020February 28, Munich Re revealed it writes around €500m ($555.7m) of reinsurance for event cancellation policies that include pandemics coverage.
04 March 2020Analysts predict the coronavirus outbreak is likely to trigger payouts of $132.50 million from the World Bank’s pandemic catastrophe bonds.
willistowerswatson.com
COVID-19Can you purchase indemnity for loss of revenue due to a pandemic?
© 2019 Willis Towers Watson. All rights reserved. 10
§ Relatively mature - specialist market - dedicated epidemic/pandemic solution
§ Predominantly targeted at the hospitality sector, this parametric solution offers cover for non-damage-related revenue
losses once pre-set triggers have been met
- Pre COVID-19, no airlines had ever bought this solution
- Since the outbreak, it is not being offered for Covid-19
- Challenge is buying sufficient limit
§ Parametric Solution option – contracts that feature a pre-agreed list of primary triggers, such as:
- Natural perils
- Terrorism
- Pandemics, etc.
§ When the trigger occurs, these respond based on a pre-agreed index, which, for airlines, could be a
drop in passenger numbers, for example
willistowerswatson.com
Historical Future
Parametric Insurance PrinciplesDemonstrate Pax Cost - Significant Data Exchange - Tailored - Always based on Indemnity
11
Upper Threshold
Lower Threshold
Event
Index
Index & triggersMeasure Pay-out
Limit LevelPassenger Numbers
0%
75%
100%
Projected Passenger numbers Actual Passenger numbers
willistowerswatson.com
Parametric InsuranceBusiness Interruption Events - In Future
12
Recent BI Events
Earthquakes
Volcano
Cyber
Pandemic
§ Airlines’ low interest in transferring non-traditional risks
§ For airlines, the challenge is always to design underlying indices and triggers that
address the primary risk-transfer needs of a specific carrier’s often complex global
business
§ Finding that formula takes time, a commitment to collaboration between the airline
and its insurers
§ Shift of focus to a broader strategy of enterprise-risk management
willistowerswatson.com
Inter-related Risks Require an Integrated ResponseUnderstand Potential Impact | Mitigate | Seize Opportunity
© 2019 Willis Towers Watson. All rights reserved. 13
Covid-19 through 6 lenses
People Risk (employees and families)
§ Health, safety and security issues
§ Loss of labour, absenteeism, reduced technical/management capacity & stranded employees
Investment and Return§ Exposure across multiple geographies means
diverse geopolitical drivers of risk
§ Business closure
§ Loss of consumer confidence
§ Supply chain shortages
§ Diversity of risk critically considered and appropriate risk management tools deployed
Business resilience and Value chain§ Importance of implemented business continuity practices
§ Understanding and mapping supply chain dynamics
§ Alternate supply chain agreements in place
Climate and Environmental§ Quantify environmental events and physical asset risks to
property and people
§ Tracking animal-person-person spread
willistowerswatson.com
Corporate Vigilance & PreparednessConcurrently emerging risks
© 2019 Willis Towers Watson. All rights reserved. 14
Reputation Risk§ Impacts on brand and reputation can affect a company’s ability to attract customers, recruit talent or even to gain
an operating license in a country§ Trust and the duty-of-care to customers § The tourism and hospitality have broad exposure§ Trust between nations, industry and consumers as citizens are repatriated and quarantined
Cyber Risk§ Ever-present geopolitically driven cyber risk§ Malicious actors have taken advantage of anxiety around Covid-19 to spread malware files in spoof documents§ Phishing attacks - fear of infection§ Hackers are always on the lookout for vulnerabilities to exploit
willistowerswatson.com
Understanding ‘Shock’ Risk and Cost Risk Appetite & Strategy for Risk Transfer
© 2019 Willis Towers Watson. All rights reserved. 15
§ Multi-line insurance partners
§ Capital market support
§ Provide execution strategy- Limited Pandemic capacity - Coinsurance | IntelCap- Appetite: non-pandemic
risks
Business Interruption
4
§ Understanding any regulatory requirements
§ Duty of Care to employees
§ Business continuity planning- Impact of absenteeism- Manager resource
Regulatory &
Duty of Care
2
§ Establishing your Risk Appetite
§ Identifying the most effective and cost efficient risk transfer
§ Can you sufficiently transfer the entire cost of risk
Risk Transfer 3
§ Understanding your risk exposures
§ Costing risk events
§ Highlighted and reviewed on your Risk Register
Risk Assessment1
2 1 11 5
1
-2
0
2
4
6
-4 1 6
Like
lihoo
d
Impact
willistowerswatson.com 2 willistowerswatson.com© 2019 Willis Towers Watson. All rights reserved.
2019-20 Airline Market Trends
willistowerswatson.com
Margin After Estimated CostsOps costs $300m – Illustration30% of 2017 premium income
+ $708 + $716Underwriting Result
Loss Ratio
The airline insurance market is driving changeOver a ten-year period, insurers reduced premium to a level that only covers attrition and hull claims.
© 2020 Willis Towers Watson. All rights reserved. 17
1,9602,100 2,050
1,8251,600 1,650
1,3001,100 1,100
1,325
1,725
0
500
1,000
1,500
2,000
2,500
Written Premium (in US$ Millions)
2,263 2,123
1,3421,109
1,774 1,848 1,7421,596
1,191
1,615
2,000
1,9602,100 2,050
1,8251,600 1,650
1,3001,100 1,100
1,325
1,725
0
500
1,000
1,500
2,000
2,500
Total Claims (in US$ Millions)
Written Premium (in US$ Millions)
Underwriting Profit
Underwriting Loss
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
115%101%
65% 61%
111% 112%134% 145%
108%122% 116%
- $303 - $23 - $174 - $198 - $442 - $496 - $91 - $290 - $275
-24%-13%
25% 30%
-23% -23%-36% -42%
-26% -31% -25%-60%-40%-20%
0%20%40%
Underwriting Result10 Years
Cumulative Underwriting Profit
USD1,424 Mln
Cumulative Underwriting Loss
USD2,292 Mln
Cumulative ResultNETT LOSSUSD868 Mln
Source: Willis Towers Watson
willistowerswatson.com
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
750
800
850
900
950
1,000
1,050
1,100
1,150
1,200
AFV in US$ (Billions)
3,000
3,500
4,000
4,250
3,750
3,250
Passengers (Millions)
Net Premium US$(Billions)
2.00
1.50
1.00
1.75
1.25
Global Airline PerformancePremium/Rate & Exposures
Rates (Cost per Unit)
����
����
����
Exposures
Premium
Significant Reduction in Insurance CostsIndustry Growth Absorbed at No CostExtra Coverage Added at No Cost
Global Airline Industry
Source: Willis Towers Watson
© 2020 Willis Towers Watson. All rights reserved.
willistowerswatson.com
CapacityTheoretical
Exiting
Consolidation
New
UW Restrictions
Working Capacity
Evolution of the Airline Market’s Insurers Radically reduced capacity through M&A and market exits
19
Lines
lips
(2014-2018)
(2010-2018)
(2006-2018)
15%
10%
5%
0%
(2014-2018)
Convex
Helveti
aAIG
Starr
XL Catl
inAllia
nz
Chubb
GAUMLR
A
Munich
Re
Swiss R
e
USAIG ARPAXA
Elseco GIC
MS AmlinTalb
ot
Interh
anno
ver
ACR
Farada
y
StarSton
e
Beazle
y
Partne
r Re
Aspen Brit
Chauc
er
Hiscox
Sirius
Sompo
Travele
rsApo
lloAtriu
m IRB
MAPFRE
New In
dia NOAPIC
C
Pritcha
rd
TM Kiln
Antares
ADNIC
Genera
li
Libert
y Mutu
al
Nation
al (N
IG)
Korean
Re
Cathed
ral
FAIR Av
Aviabe
lAXIS Misr
Oman
Tokio
Marine
Fidelis
-15%
-5%-4%
-2.5% -2% -1.5%-3% -3% -3%
MergerMerger
Merger Merger
Berkley
Exited Aviation Insurance
+10%
+5%+3%
188% to 242%
-15%
-5%
-2.5%
+10%+15%+18%
-5%
-5%
-4%
-1%
130% to 140%
-20%-24%-27%-30%-33%-35.5%
-15%-10%-14%
-7.5%-15%-17.5%-22.5%-24.5%
-2%
-37.5%-39.5%-41%
© 2019 Willis Towers Watson. All rights reserved.
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Poor 2019 Aviation Market Performance2019 & Factors Influencing 2020
© 2019 Willis Towers Watson. All rights reserved. 20
Factors Influencing Rise in Risk Pricing§ Insurers withdrawing from aviation risk classes
§ Reduction in capacity & competition
§ Underwriting discipline on risk quality evaluation and technical pricing
§ Frequency of major hull claims & hull war risk events
§ Aircraft repair & liability award inflation
§ Airline catastrophe claims
- JT610 & ET302 & related Boeing claims§ Manufacturer grounding & liability claims
- Boeing (B737Max), R-R, P&W Engines, Airbus helicopter
grounding
§ Increased cost of treaty reinsurance protection
Plus ET DHC8, Ethiopia
willistowerswatson.com21
Visit us at Exhibition Stand 18Willis Towers Watson
© 2019 Willis Towers Watson. All rights reserved.
Simon Knechtli Executive DirectorAerospace, UK
M +44 7771 892 [email protected]
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