4 Critical COVID-19 Risks to the Aviation Sector

Aviation is faring better than other sectors from a claims-made perspective, but risks from the pandemic still linger.

By: Courtney DuChene | November 11, 2020

COVID-19 devastated revenues and the balance sheets of commercial airlines with quarterly losses for some running from the hundreds of millions into the billions. But from a claims-made perspective, of the sectors affected by the COVID-19 pandemic, aviation is faring pretty well.

The sector has seen few claims directly related to the pandemic and Allianz Global Corporate & Specialty report found that slip and fall accidents, one common source of aviation claims, fell by 94% when compared to April of last year.

“Generally speaking, the risks associated with COVID are not unique to aviation, it just happens to be somewhat of a unique environment when you consider aircraft operations, ” said Brad Meinhardt, managing director of Gallagher’s aerospace practice.

Still, COVID-19 has introduced a variety of new risks that, while not necessarily unique to the sector, are something aviation companies have to grapple with. Here are four that you should be watching.

1) Grounded Aircraft

From people cancelling their vacations to business travelers transitioning their meetings to Zoom, COVID-19 has caused air travel in the U.S. to decline 95% compared to last year, causing many airlines to simply have to park their aircrafts and wait indefinitely — something underwriters were unprepared for when they priced risk.

“One of the risks that airline underwriters hadn’t really contemplated before was the aggregation and accumulation risk of grounded aircraft,” said Garrett Hanrahan, global head of aviation for Marsh JLT Specialty.

Currently, more than 16,000 commercial aircrafts have been grounded worldwide. Grounded planes are subject to a myriad of high-dollar exposures, including damage from Nat CATS like hurricanes, tornadoes or hailstorms.

“The ground exposures seen now are at an unprecedented level, with very substantial numbers of aircraft parked which could lead to unprecedented hull claims which, whilst they don’t escalate, do have a short time lag between incident and payment,” Tracy Toro, managing director of Aon’s Aviation Practice, said.

Outside of the potential for catastrophic claims, grounded aircraft are running up costs in maintenance and storage costs as well.

2) Deep Cleaning and Social Distancing

Outside of grounded aircraft, the airline industry hasn’t experienced many COVID-19 related risks that are unique to their sector. Rather, risks found across sectors, like virus spread, uniquely manifest themselves in the confined space of an airplane cabin.

“You are in a cabin environment where infectious diseases can spread. This is not new to the airline industry, it’s enhanced, but there have always been risks of confined spaces, and it’s not unique to aviation,” Meinhardt said.

Contagion isn’t the only risk airlines face when it comes to deep cleaning and social distancing measures, however.

The UV-light tools sometimes used to clear airplanes during the pandemic, can cause damage to operators if not used properly, and airlines face some reputational risk if passengers determine that they aren’t doing enough for public health.

Delta and American Airlines have already been attacked on Twitter for slacking when it comes to enforcing mask policies and for filling aircraft to capacity, which could lead to reduced profits if passengers abandon them when booking future travel.

3) COVID-19 Workers’ Comp Presumptions

Deep cleaning isn’t just about keeping passengers safe. An airlines employees might be eligible for workers’ compensation if they contract the virus while on the job.

“If you’re an airline you not only have employees that are working in a confined space and are exposed to people coming back on the aircraft and getting off the aircraft in small narrow walkways, you have exposure to the passengers potentially,” Meinhardt said.

Many states are passing presumptions for COVID-19, which may offer protection to airlines workers, further complicating things.

“Initially there was an expectation that clear lines would be drawn between compensability presumptions for essential and non-essential employees. It’s possible state workers’ compensation courts may now adopt a more liberal approach toward compensability for all employees, with some states shifting the burden of proof from the employee to the employer,” Toro said.

Added to the possibility of more employees filing workers’ compensation claims is the risk of catastrophic or long-COVID claims. Workers’ who experience the most catastrophic effects of COVID-19 might experience strokes and organ failure.

Those with long-COVID, may not experience the virus’s most dangerous effects, but they could experience symptoms like exhaustion, muscle aches and other symptoms that could delay their ability to return-to-work.

“The ultimate financial impact of COVID-19, in the workers’ compensation marketplace, likely won’t be known for years,” Toro said.

4) Financial Losses and D&O Exposures

Unlike other lines, like transportation, aviation insurance isn’t experiencing a hard market, but Hanrahan did note that while there is enough capacity to insure the risks aircrafts face, rates are increasing. “We’re not in a hardening market. We’re in a firming market,” he said.

Even so, some lines of insurance that aviation companies need to purchase will be tighter than others.

In particular, the financial losses that airlines are experiencing as a result of COVID-19 could lead to an increase in D&O exposures where events-based litigation and class-action lawsuits have driven up rates in recent years.

“The financial pressures on airlines are impacting some insurance elements more dramatically than others within an airline’s total portfolio.  Much has been made of D&O in the current climate,” Toro said.

With coronavirus-related lawsuits coming up against cruise ship lines from their employees, boards of directors at airline companies should expect scrutiny from shareholders on how they’ve handled the COVID-19 pandemic.

If shareholders find any missteps, they might sue board members, especially since many airlines are already facing massive financial losses due to the pandemic leading to D&O losses that wouldn’t have occurred without the virus.

Even if they avoid lawsuits, aviation companies can expect scrutiny on how they handled the pandemic when they go in for D&O renewals.

Silver Linings

Despite the pandemic, the sector still has some areas where they’ve seen growth.

“You can’t necessarily say the industry has been impacted equally across all lines,” Meinhardt said. “Aviation and aerospace is so diverse that you have severe impacts on some business and you have silver linings on others.”

One area is in private charter flights, which has rebounded as stay-at-home orders have lifted. Flights were down 67% in April, but last month Part 135 charters were down just 9%.

“There’s a massive new market to try to attract people that can afford to fly privately that perhaps don’t want to get on an airline because they may feel intimidated by getting in a cabin with a lot of people,” Meinhardt said. “I think it’s got a real heartbeat.”

Additionally, shipping and cargo segments of the sector are poised for growth this year as consumers increasingly order products from online retailers to avoid interacting with other people in a traditional, brick and mortar shop.

“The cargo industry was really buoyed by the growth in e-commerce,” Meinhardt said.

In their 10-Q, Amazon, one of the largest online retailers, reported having more than $27 billion in cash and cash equivalents for the three months ending June 30. Last year, they reported having $23 billion in cash and cash equivalents for the same time period. &

Courtney DuChene is a freelance journalist based in Philadelphia. She can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.