Insurers May Face Record Claims From Aircraft Grounded in Russia

After Bermuda suspended all airworthiness certificates for Russian-operated aircraft on its registry to comply with sanctions against Russia, Putin signed a law to allow regional and national airlines that leased aircraft from foreign companies to list on Russia's registry and "to ensure the uninterrupted functioning of activities in the field of civil aviation."

It is hard to be sure about the intentions behind some of the moves. While they give Russia an advantage at the moment, they've had deleterious effects on the global aviation industry.

Along with airline lessors canceling their leases, this effectively nationalized the stranded fleet and made it difficult for lessors to regain their equipment, especially before the March 28 deadline. It became more confusing since the International Civil Aviation Organization (ICAO) mandates that "an aircraft cannot be validly registered in more than one state." Since there was no legal transfer of ownership from the lessors who outfitted Russian airlines' fleets, these airplanes will be operating illegally in Russia.

While this would allow the aircraft to operate regionally in Russia, that might not happen for quite some time since OEMs also suspended business in Russia, which means the aircraft wouldn't have access to new parts or services. They can fly until they break, and then that's it. So, in the short term, while the Russian state might consider this a conquest, at the same time, aviation in that country will not be the same—especially because of the disruption this is creating around the world for everyone. 

FLYING spoke with Bill Behan, CEO of Assured Partners Aerospace, for more insight into the matter. This fast-growing U.S. insurance broker has achieved more than $2 billion in revenue since beginning business in 2011.

Behan says while there may be good players in Russia, in terms of the airline operators, "they're caught in between a rock and a hard place." Unwittingly, Putin's move might undermine their long-term prospects.

Even if those airlines can continue their regional operations, Behan says the future is stark. 

"Those operators will never lease another aircraft outside of Russia again,” he said. “The airplanes will never be serviced outside of that country; they will never get components or an engine overhaul; therefore, they will fly their useful life and die."

But it's the disruption all of this creates for the broader world that requires keen attention. Because lessors might not be able to retrieve their equipment, their insurance policies give them the right to lean on their providers to refresh their fleet. In light of this, a recent report by Fitch Ratings, the American credit rating agency, indicates that "insurers and reinsurers could face claims as high as $10 billion in a worst-case scenario due to the grounding of planes in Russia."

To put this potential loss in perspective, since the beginning of the COVID-19 pandemic, non-life insurance claims have resulted in insurance companies paying out more than $30 billion, and claims from natural disasters in 2021 were more than $100 billion altogether. Still, the exposure lessors face isn't insignificant.

Behan said it would be "thoroughly devastating" because, as he estimates, the payout would be more than "two to three times the size of every insurance dollar paid to the insurance industry in the world for all of aviation."

"I mean, airlines, satellites, personal aircraft, corporate aircraft, drones, airports, Boeing, Airbus—every farthing paid to an insurance company in the world, times two or three, is what this loss could be," Behan reasoned.

As the report explains, this is because the stranded airplanes number more than 500, and all those were financed or owned by non-Russian lessors. What covers the lessors, in this case, is the presence of hull and liability insurance, as well as specific aviation war coverage that indemnifies them against the loss of their fleet.

Fitch estimates that if insurance companies were required to fulfill more than $10 billion in claims, it would "be by far the largest annual claims in the history of aviation insurance." Insurance companies with massive cash reserves would be able to outlast the exposure, but Fitch fears that some providers might have to dip into their rainy day reserve funds in some cases. This is where the entire aviation industry could feel the secondary effects as insurers and reinsurers might be forced later to shore up their losses, possibly by increasing premiums or building in more contract clauses. They could also cancel policies.

"From my experience in the industry, when you have such a massive loss like that, everyone in every facet of the industry and the aviation community feels its impact," Behan explained.