Why are aviation claim costs on the rise?
The costs associated with aviation claims rose about 20% between 2019 and 2022. Here's why...
Attritional claims costs in aviation have been on the rise for some time, with the post-pandemic recovery of global air traffic sharpening the industry’s focus on this issue.
Analysis of aviation hull claims indicates an average cost increase of more than 20% between 2019 and 2022.
What’s behind this trend? And what does it mean from an insurance perspective?
Related: Crashes, collisions dominate aviation insurance claims
Varied impact
The rising costs vary depending on the type of aircraft or component involved. For instance, one recent discussion on repairing a 12-year-old widebody aircraft revealed that similar repairs on a composite airframe of the same size were nearly four times more expensive than on a metallic one.
Additionally, in recent years, there has been a more than 40% increase in repair costs for propeller strikes on some light aircraft.
Engine repair costs have also surged. Since 2019, the costs for engine fan blades, which are the first line of defense against ingested items, have risen by 27.5%. If the engine core requires repair, typical cost increases are around 13% or more.
Modernizing fleets and technological advancements
In response to the pandemic, airlines have fast-tracked the retirement of older fleets, opting for more fuel-efficient aircraft. The return of the Boeing 737 MAX and the rising deliveries of the latest Airbus fleet underscore this trend. Additionally, with oil price fluctuation and broader economic headwinds, the global fleet is increasingly adopting new technology aircraft with advanced composite construction and modern turbofan engines.
However, these technological advancements present challenges. Cutting-edge planes often require specific manufacturer support and specialized skills for repairs, driving up costs. Significant damage to advanced airframes leads to skyrocketing repair expenses compared to older models. Certain aircraft components, traditionally made from composite materials, are now less repairable, prompting manufacturers to opt for expensive component replacements instead.
Engine challenges
Foreign Object Debris (FOD) damage to airliner engines is a major cause of attritional claims. While some FOD damage can be amended “on-wing,” many engines must be sent to repair shops, incurring costs in the millions. The latest engine designs, though offering improved FOD resilience, come with expensive parts often discarded rather than repaired. Limited market competition further exacerbates these high costs.
Global economic pressures
Global inflation and disruptions in the supply of raw materials have contributed to rising costs for new parts. While older aircraft can rely on a thriving market of competitively priced used parts from decommissioned planes, the costs associated with new-generation airframes and engines continue to climb.
Maintenance, repair and replacement
Historically, airline services and maintenance were provided by unified operations. Recently, these services have split into separate legal entities, resulting in increased invoicing costs and reduced flexibility. This separation affects insurers, leading to more frequent requests to consider manufacturers for repairs. With the greater adoption of composite structures, investment in independent, skilled repair teams is likely to decrease, further driving up costs.
Maintenance, repair, and replacement of parts have become increasingly profitable for manufacturers. Comprehensive aircraft and maintenance packages offered at purchase provide budgetary relief but often include seldom-used contingency costs. While metallic repairs are generally predictable, composite repairs by original equipment manufacturers (OEMs) are often overestimated, leading to higher costs.
Risk reduction efforts
In these turbulent times, risk reduction is paramount. Leading airlines and international bodies like the International Air Transport Association (IATA) employ programs such as the Operational Safety Audit (IOSA) to minimize risks. However, the interplay of human operations and stretched resources post-pandemic continues to produce potential loss scenarios. Aviation insurers are turning to organizations like McLarens for comprehensive risk assessments, which are crucial if actionable recommendations are implemented.
A collaborative response
The future of aircraft operations depends on forging robust, long-term alliances among brokers, insurers, and other stakeholders. Major repairs demand cooperation from all parties involved. Fixed-price quotes offer some budgetary relief but often include rarely-utilized contingency costs. Adjusting firms must stay abreast of evolving industry technologies and cost pressures, understand emerging repair needs, and assess the cost-efficiency of available options.
While the aviation industry’s adoption of cutting-edge technology offers operational efficiencies, it also introduces complexities for insurers and brokers. The rising claim costs necessitate a collaborative, informed, and agile approach. Aviation adjusters play a crucial role in navigating these challenges, ensuring that policyholders and insurers can approach repairs in the most cost-efficient manner possible, despite the economic forces driving the provision of repairs.
Bill Garcia is regional manager, USA, with McLarens Aviation. This article is published with permission and may not be reproduced.
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