Safer skies

November 8 2019 by Nick Ferguson

Air travel is safer than ever. More people are flying every year. That should be a recipe for insurance profits, but instead insurers are facing the biggest aviation claim in history as a result of the grounding of the entire global fleet of Boeing 737 Max aircraft. And that is not their only problem.

The safety improvements that have made flying less risky for passengers have been achieved through much stricter standards and more sophisticated aircraft, as well as better air traffic control, weather monitoring and many other incremental improvements. But tougher regulations and more complex aircraft have also contributed to a growing number of insurance claims.

While fatal accidents are increasingly rare, less serious incidents such as hard landings, bird strikes and runway excursions are leading to more costly claims.

Analysis by Allianz of more than 50,000 aviation insurance industry claims worth more than US$16.3 billion during the past five years shows that collisions and crashes, which includes minor incidents, account for more than half the value of all claims, equivalent to US$9.3 billion.

This same period was also the safest five years in aviation history in terms of deadly accidents.

“Thankfully, fatal air accidents for western-built jets are now infrequent, but the number of dollars paid in claims in recent years outstrips total insurance premiums,” said Dave Warfel, North America head of aviation at Allianz Global Corporate & Specialty. “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.”

Bird strikes, for example, cost around US$75 million a year in total, with individual incidents resulting in claims that range from an average of US$360,000 up to one incident that cost an eye-watering US$16 million.

As aircraft become more sophisticated, it costs more to repair them. The newest generations of planes are built using composite materials such as carbon fibre that are much more expensive to make and to repair than traditional metal alloys. Airlines like them because they are lighter, and therefore reduce operating costs, but damage can be time-consuming and expensive to fix, leading to a trend of replacement rather than repair.

“We have had claims where manufacturers are not willing to sign off repairs to composite airframes due to liability concerns, or where repair protocols are just too burdensome,” said Dave Watkins, North America head of general aviation at AGCS. “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 US$10 million.”

Similar trends affect the latest generations of jet engines, which typically offer significant fuel savings and greater range than older models, but which can also take much longer to repair when things go wrong.

As planes become more sophisticated, there are also concerns that pilots are becoming de-trained due to over-reliance on the automated systems that, ironically, are largely responsible for the safety improvements of the past two decades. These systems have significantly reduced risks during take-off and landing, where most serious accidents occur, but some aviation specialists worry that pilots are losing core skills — a factor that has contributed to several crashes in recent years.

The 737 Max crisis is a culmination of many of these issues, sparked by the pressure to cut operating costs. To compete with rival Airbus’s A320neo, Boeing also wanted to offer customers a regional workhorse that featured the latest, most efficient engines, but after two fatal crashes, regulators in the US concluded that this new variant of the 737 needed serious changes, resulting in the grounding of 387 aircraft belonging to 59 airlines — and the suspension of deliveries of hundreds of new orders.

Eight months later, the entire fleet remains grounded. Boeing said in September that the Max could return to service this month.

That would be a relief for Asian airlines, which are among the biggest customers for the new plane. Indonesia’s Lion Air has more than 400 on order, India’s Jet Airways and SpiceJet are both waiting on more than 200 aircraft, Vietnam’s VietJet Air has an order for 200 and there are roughly 400 planes destined for various Chinese airlines.

“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,” said James Van Meter, North America aviation practice leader 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.”

With no sign of a slowdown in the demand for flights, insurers are likely to face a continuation of many of these trends — some of which will be made even worse by growing congestion in and around airports. Cyber risks are also growing, as evidenced by the problems at numerous airlines in recent years.

Just as pilots need to avoid complacency in the cockpit, so insurers need to make sure they keep their eye on the ball as aviation risks continue to evolve.

MORE FROM: Insights