The Aircraft Market in the Context of the Ukraine-Russia War

By Juliana Souza and Juliana Oliveira

After nearly two years of pandemic-related stress and billion-dollar losses in the insurance industry, the second half of 2021 suggested a recovery for the global aviation market. However, Russian President Vladimir Putin’s decision to invade Ukraine and the subsequent geopolitical turbulence created a renewed sense of uncertainty, casting doubt on any optimism about a potential rebound.

Subsequently, the sanctions and restrictive measures imposed on Russia brought significant logistical and financial challenges for airlines, as well as lessors. This situation posed a series of new challenges and occurred at a time when clients, brokers, and insurers are still debating the impacts surrounding the legacy of the pandemic: before the war, airlines had most of their flights grounded, passenger flow significantly reduced, and had to deal with high crew absenteeism due to Covid-19 contamination.

In response to the sanctions and restrictive measures imposed on them, Russia implemented a new law on March 14, 2022, allowing the state to seize aircraft owned by foreign leasing companies. Moody’s estimates that insurers operating in the aviation sector may have between $9 billion to $11 billion in claims, with 20% to 30% expected to be passed on to reinsurers. Fitch Ratings reported that claims in a worst-case scenario could reach $10 billion, and in a more pragmatic situation, it would be between $5 billion and $6 billion in total losses.

Furthermore, there is speculation that War Hull underwriters may have issued coverage cancellation notices shortly after the start of the Russia invasion and before the imposition of sanctions. Despite the significant numbers, it is crucial to emphasize that this scenario is still uncertain as it will be widely discussed legally on the applied coverages, and it will take years for estimates to be determined.

Juliana Souza, Executive Director of Latin Re and responsible for facultative reinsurance, comments:

“From a placement perspective, the reinsurance programs for airlines mostly occur after August, and there is a long learning curve until then to accurately predict how renewals will actually occur. However, it is expected that the market will have calmed down by then, and the reserves for estimated losses will be more precise, allowing for a more assertive position. Latin Re’s commitment to our clients will be to highlight the resilience of airlines in overcoming daily challenges in such an uncertain scenario and having managed to thrive in terms of a significant increase in passenger flow compared to 2021.”

The significant changes we anticipate will be how lessors will demand insurance in the near future.

Regarding executive aviation, Latin Re has been successful in renewing clients who have not had claims, making it possible to maintain flat rates for Hull, Liability, and Hull Deductible coverages. We have noticed slight rate variations for specific risks and a considerable increase in the cost of war hull coverage.

Juliana Oliveira, Director of Structured Solutions, adds:

In the renewal of reinsurance contracts in Brazil, we are noticing reinsurers questioning risks domiciled or with exposure to Russia or Ukraine; whether the issued policies have embargo and sanctions clauses, and how ceding companies analyze their policyholders regarding adherence to international sanctions.

Renewals in 2022 are expected to present another complex period, with the continued trend of rate increases, especially in War Hull business.

There is still no clear direction for the market and how all variables will unfold, but if these losses materialize, there will be contamination across the entire industry and all sectors.

The only certainty we have today is that recent events will be disruptive for the market, given the potential losses for insurers and reinsurers. We are closely monitoring this scenario to provide full support to our clients!