Moody Rating Agency has said that global insurers and reinsurers face potential claims of $9-11 billion as a result of new Russian legislation which will lead Russian airlines to effectively impound aircraft leased from foreign lessors. The exact size of the ultimate insured loss remains unclear, and will likely become known only after lengthy legal proceedings. We do not expect the Russian aircraft law to affect the capital of global diversified players. However, the impact may vary widely by company, and could be more severe for specialised players. Reinsurers will share some of this loss as we estimate that primary insurers typically cede 20%-30% of their marine, aviation and transport premiums to the reinsurance sector
According to Moody “New Russian law will inflict losses on aircraft lessors and insurers. As part of the sanctions triggered by Russia’s invasion of Ukraine, several countries have banned aircraft lessors from leasing to Russian airlines. Furthermore regulators in Bermuda, a global centre for the registration of corporate and private aircraft, have suspended certification of all Russian-operated planes. As a response to these sanctions, the Russian government adopted a law allowing Russian airlines to register the planes already leased from foreign lessors in Russia. By registering these planes in Russia, local airlines will be able to continue using them for domestic flights but not for international travel. This law will effectively prevent foreign lessors from repossessing their aircraft, potentially forcing them to impair some of the value of the planes. Lessors are usually insured for this risk, and are now turning to insurers to recover these losses. We estimate the global (re)insurance industry’s total exposure at $9-11 billion.
“It is unclear at this stage whether insurers will have to pay all these claims. Firstly, the amount and timing of impairment charges to be taken by lessors is subject to a number of variables as well as negotiations with airlines, and this will affect assumptions regarding future recoverable value. Secondly, we understand that many insurers withdrew their coverage before the new Russian law took effect. However, they may not have provided sufficient notice to exonerate themselves from their liabilities. The definition of the event triggering the claim, which will affect the outcome for insurers, will also be subject to legal proceedings.2 Ambiguous language in insurance policies frequently leads to courts deciding in favour of policyholders. We believe lessors are ready to start legal proceedings against insurers if necessary. Insurers and reinsurers will share losses, but individual exposures unknown at this stage
The aviation insurance market is global, and is dominated by large very well diversified insurers, including for example AXA (A2 senior debt, under review for upgrade), Allianz SE (Aa3 senior debt, stable outlook) and American International Group, Inc. (Baa2 senior debt, stable outlook), whose proportional exposure to aviation is small. Specialised players, including for example some Lloyd’s syndicates and Lancashire Holdings Ltd. (Baa2 issuer rating, stable outlook), are also active in the market. However, many insurers have not disclosed exposures to this specific risk, and are still in the process of measuring their potential liability. “In addition, this event only affects a sub-segment of the aviation insurance market. If claims materialise, they will therefore not be distributed among aviation insurers according to their market share.
Aviation insurance is also heavily reinsured, through proportional and non proportional reinsurance. Solvency and Financial Condition Reports published by global insurance groups suggest that insurers cede 20%-30% of their marine, aviation and transport premiums to reinsurers, and that reinsurers pay an even higher proportion of claims. Hence reinsurers are likely to bear a large proportion of the potential loss. However, given the complexity of this event, disputes between insurers and reinsurers are also likely, further delaying the settlement of claims. The claims bill from the Russian aircraft leasing legislation is generally considered moderate for the insurance industry and could be on par with natural catastrophes such as winter storm Udi ($15 billion3) which struck the US last year, or the floods that hit western Europe in July 2021 ($13 billion4). The industry is able to easily absorb events of this size from earnings, with its capital remaining intact. We therefore do not expect the Russian aircraft law to affect the capital of global diversified players. However, the impact may vary widely by company, and could be more severe for specialised players. Losses may creep higher in other insurance lines
“If it materialised, the expected aviation loss would be the largest direct claims event stemming from Russia’s invasion of Ukraine to date. However, the military conflict could lead to an increase in claims in other lines of insurance business, including political risk, trade credit, cyber risk or even property (through “silent cyber” business interruption guarantees). We estimate that trade credit insurers’ exposure to Russia is relatively limited, amounting to no more than 1% to 2% of their total exposures and insurers can cancel some of these exposures. We understand that Russian cross-border exposures (those related to trades between non-Russian sellers and Russian buyers) are going down as export transactions with Russia slow down, while domestic exposures (related to trades between Russian buyers and Russian sellers) have also declined because of currency depreciation. Credit insurers can also cover political risk, and typically share risks with reinsurers through proportional and non-proportional treaties”
