6 aviation claims trends to watch

Despite the recent Boeing 737 crashes in Indonesia and Ethiopia, the global airline industry has had a solid safety record in recent years, particularly considering there are more than one million people in the air at any one time. The number of aviation-related insurance claims, however, shows no sign of abating. Human error, rising repair costs from composite materials and higher value engines, an increase in ground incidents at more congested airports, and a growing reliance on automation are just some of the main factors influencing loss activity.

Aviation claims by the numbers

AGCS analyzed more than 470,000 insurance industry claims over the past five years and found aviation collision and crash incidents are the second top cause of insured losses globally overall behind fire and explosion incidents. Aviation claims from this data set show collision/crash incidents account over half the value of all claims (59%) and more than a quarter by number (27%).  Such incidents do not just include major crashes; they also incorporate events like hard landings, bird strikes and runway incidents such as incursions and excursions (the average claim for which is now almost $1.6 million).

Here are six trends we identified for the global aviation industry from the claims analysis:

1.Safety milestones and losses continue.

With more reliable engines and technology and following significant improvements in airline risk management, there are far fewer serious accidents. According to the International Air Transport Association (IATA), there was just one major accident for every 8.7 million flights in 2017 — over four billion travelers flew safely on 41.8 million flights.

We have already seen a fatal crash in 2019, and 2018 had a total of 15 fatal airliner accidents, resulting in 556 fatalities. Even with these incidents, 2018 was the third safest year on record by the number of fatal accidents and the ninth safest in terms of fatalities, according to the Aviation Safety Network.

2. Human error is a major loss factor.

Technological advancements and improved quality control of aviation manufacturing and maintenance have significantly reduced the number of accidents caused by mechanical or structural failure. Consequently, human error has become a more significant cause of loss.

Pilot error is a major factor behind many aviation accidents. It has been estimated that as many as 95% of airline accidents involve human error in some capacity. Aircraft are now very safe but most accidents involve errors of judgment, such as taking off in bad weather or the way in which a pilot reacts in adverse conditions.

3. Increasing claims frequency and aircraft values.

While catastrophic air crashes are now far less frequent, the overall frequency of aviation claims is slightly up, due to factors such as higher repair costs, increased values at risk and the relatively low deductibles maintained by airlines in what has become a highly competitive aviation insurance market. The average deductible at $1 million today is around the same as it was in 1982, yet aircraft values have increased three-fold.

Despite few major losses and no fatalities in 2017, the aviation insurance market barely broke even — a reflection of market conditions and attritional losses, while 2018 represented the sixth consecutive year where airlines claims exceeded premiums according to broker JLT.

Claims frequency is up, but this is not the only factor. The size of loss has increased and deductibles have not kept pace with technology and values. A $5 million loss today would probably have cost just $1 million five years ago and been within the deductible.

4. Costly composite materials & engine repairs.

The use of composite materials in aircraft manufacturing really took off around a decade ago, and today the majority of the world’s commercial airline fleet now relies on such materials. Composites — such as carbon fiber layers bonded with resin — are strong, but also light, therefore reducing weight and increasing fuel efficiency. Such materials are now used extensively in modern aircraft — some 50% of Boeing’s 787 Dreamliner is made of composite materials by weight.

The claims experience has revealed a higher repair cost associated with composite materials which are generally more expensive to manufacture than traditional metal alloys, more labor intensive to repair and often require a larger repair area. For example, a claim involving a fire under the front landing gear of a 787 cost $13 million to repair. The same incident for an older generation metal alloy aircraft would have cost somewhere between $3-4 million.

While safer and more reliable, aircraft engines are also now much more expensive to repair or replace. Top-of-the-range engines used on the Airbus A350 can easily cost more than $40 million each — just under the value of a whole 737 a decade ago. The drive for fuel efficiency has resulted in lighter engines that fly longer distances. However, technical advances such as the use of new materials and thinner, lighter turbine blades have reduced the tolerances at which engine components operate while the cost of spare parts has also increased.

5. Congested airports bring more ground incidents.

In addition to increased repair costs, insurers are seeing more attritional claims. The rapid growth in air travel — the number of air passengers is expected to double to 7.8 billion by 2036 — has resulted in more congested skies and airports.

In many cases, airport infrastructure has not kept pace with the rapid growth in passenger and aircraft numbers. With more aircraft on the ground, servicing areas and aprons have become more congested and this is resulting in an increase in the number of collisions with other aircraft or ground handlers.

Analysis of 523 loss events at 14 German airports last year by AGCS shows that damage to vehicles on the tarmac is the leading cause of insured losses. More than half of these events are due to collisions with pushback tractors, baggage trolleys, aerial work platforms or washing systems.

For example, the introduction of a new form of tow-truck (that wraps-around an aircraft’s front landing gear) has resulted in several large claims. A number of tow-trucks have caught fire while in operation, damaging aircraft — one resulted in the total loss of a Boeing 777.

6. New loss drivers: Cyber and reliance on technology.

Aircraft and airlines are increasingly reliant on technology — from aircraft to ticketing. An A350 aircraft today sends some 400,000 computer messages to ground controllers during a six-hour flight, 60% more than the older A380.

The technology for crew-less commercial passenger aircraft already exists, but the reality is many decades away. However, aircraft are likely to become increasingly automated, driven by the desire to reduce costs and because of the predicted shortage of pilots — Boeing has said over 600,000 pilots will need to enter the industry over the next 20 years. Flights with just one crew member on the flight deck, with ground support, would have implications for crew skills and training, as well as how they deal with adverse conditions.

Then there is the threat to the sector posed by technology or cyber-related losses, such as physical damage to aircraft or business interruption from issues like an IT system outage. Cyber risk ranks as the number one concern for the aviation sector for 2019, according to the eighth annual Allianz Risk Barometer, which surveys industry risk experts. To date, there have not been any major aviation claims triggered by a cyber incident, although insurers have paid out on some indirect cyber claims.

While crewless passenger aircraft are some way off, autonomous flight is an emerging area for aviation insurance claims. And, as drone use broadens into different areas, claims will become more relevant.

Kevin Smith, Global Head of Aviation Claims at Allianz Global Corporate & Specialty (AGCS). Contact him at kevin.smith@allianz.com.

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