As part of the IFoA's Covid-19 Action Task Force, a group of General Insurance actuaries have been studying the impact of Covid-19 and pandemic-induced lockdowns on GI claims inflation and development. This blog discusses the changes in exposure and claims experience in Marine and Aviation insurance.
Covid-19 has had significant effects on the marine and aviation industries, from decreased demand and delayed shipments to increased risks for crew and passengers. This blog discusses the knock-on impacts on marine and aviation insurance.
The shipping industry is grappling with the sharpest decline in 35 years in the face of the Covid-19 crisis. There was already a slight downturn in 2019 because of rising political tensions and hence reduced trade between the US and China and the pandemic has exacerbated this. According to a report in July by the International Union of Marine Insurance, this is the equivalent of a loss of 1 billion tonnes of trade. WTO estimates suggest that the dip in global trade would be anywhere between 13% - 32% in 2020, and shipping represents 90% of this global trade. However, since port activities have resumed in China, the world’s biggest shipping market, expectations are that 2020 will end on a brighter note.
In the aviation industry, the International Air Transport Association data shows that for 2020, there has been a 2.2 billion reduction in air passengers resulting in a 252 billion USD revenue loss. Early in March, most airlines halted operations of commercial passenger and private aircraft, but did continue operating cargo flights (nearly 39,000 repatriation and 46,400 cargo flights have been operated). IATA estimates that demand for air travel is unlikely to return to pre-Covid-19 levels until 2024, but we understand there has been an uplift in the number of cargo related aircraft movements.
Several of the challenges the shipping industry is facing such as reduced demand, delayed deliveries, accumulations in ports, quarantine costs, challenges in crew changeovers and a smaller workforce have translated to challenges for marine insurers as well.
The demand for new shipping vessels has considerably reduced consequently reducing the demand for marine hull and building risks insurance. With people locked down in homes and the news of the virus spreading on cruise ships, there are concerns of long-term lower demand for cruises. Demand for cruise vessels has fallen more than that for container and cargo ships. Global economic downturn, closed factories, reduced workforce and border closures/restrictions have led to a decreased demand for marine cargo cover but a significant increase in stock related cover. While transit cover may see a reduction, there would be an increase in demand for policies that offer storage cover.
Exposure patterns have changed significantly since most vessels have covered or are covering less distance than anticipated. It has also meant a large number of vessels have been moored at various ports around the world, leading to significant accumulation. Loss frequency for marine hull is likely to reduce while claims are likely to be larger because vessels are immobile. It is also worth considering the effect on hull losses, and cargo losses, due to older vessels having less maintenance on them because of a lack of funds coming into the shipowners’ pockets.
Cargo volumes had been declining world over since the virus struck. Although ports have now reopened and shipping plays a vital role in transporting food, medicines and essential supplies, there has still been an impact on accumulations at ports because of reduced workforces and restricted inland mobility. Cargo insurance generally excludes delays. Perishables may have cover for spoilage due to some natural peril or accident but not for deterioration in quality due to delay. However, in some markets, extensions are available that take out the delay exclusion in standard policy wordings. Another consideration could be if the cargo policy has an accumulation clause which allows a higher limit for the value of accumulated goods in transit, at a port, or a warehouse exceeding the accumulation limit allowed under the standard insurance contract.
Other possible risks are demurrage and legal defence expenses for not being able to fulfil contractual obligations, discharging cargo short of the agreed destination and diversion expenses such as cargo claims due to port congestion, unscheduled offloading of containerised cargo and unexpectedly long delays. However, recent pandemic exclusion clauses have been introduced which limit the downside to underwriters.
Marine liability claims could arise due to the spread of infectious diseases – illness or death of seamen and passengers, repatriation and substitute expenses and quarantine expenses. Usually, people/crew-related claims account for 30% of claims in P&I clubs, this is likely to further increase because travel restrictions and border closures are making it harder for crew changeovers and this has a detrimental impact on the health and wellbeing of seamen.
Similarly, to the case of marine hull and cargo, the aviation industry and its insurers face challenges from decreased demand and changing exposures.
Revenues have plummeted causing major liquidity crunches for airlines, in some cases aircraft returning to lessors and a heightened risk of insolvency. Most insured aircraft are still grounded but incur parking costs and ongoing maintenance costs. For insurance contracts with adjustable premiums, there has been downward adjustment of liability premium depending on the reduction in number of passengers and also in hull premium for grounded aircraft.
The nature of exposures has changed considerably since the outbreak began earlier this year. Since aircraft are flying less or not at all, the risk of accidents or crashes is reduced. However, there are a variety of other risks that these grounded airplanes are exposed to such as accumulations, damages during shunting, wildlife and weather-related threats for example humidity/excess rainfall and flooding. Where flights do continue, airlines could be held liable for inflight virus spread.
All aviation claims have seen a significant dip in frequency. The sharpest decline has been in the most common “slip and trip” accidents in airports because of reduced footfall. There have been some liability claims where passengers have sued airlines for cancellations/disruptions with some class actions in the US seeking refunds. Human error and equipment failure are some of the main causes of air accidents and there is a worry that the risk of accidents will increase when operations resume at normal levels with pilots, ground and aircrew, and aircraft out of action for months.
There is yet no clear trend visible in claims severity but aircraft hull could generate large claims as could liability, especially if airlines are found negligent insofar as infection control measures are concerned.
The marine and aviation industries have taken a severe beating as far as revenues from commercial operations are concerned. However, they have been the lifeline in maintaining some semblance of order in global supply chains. Freight operations have continued despite all the obstacles and challenges. Food, medicines, protective gear and essential commodities have been ferried across the world. Some airlines have operated several flights to repatriate stranded citizens from countries where the virus was raging. There is a lot of speculation and interest around how airlines can help distribute the Covid-19 vaccine when it is ready and how the freight can be insured since pharmaceuticals are always considered challenging cargo. It is possible that governments may need to be involved in insuring this when it happens!
