Right now, the aviation sector needs to keep a weather eye on the insurance landscape. This is because it is changing.
Derek Smoker works in leading insurance broker Marsh's financial and professional liability division, FinPro, based in the UK. It's a specialist practice within Marsh dedicated to helping business leaders, including in the aviation sector, to anticipate, model and manage threats to their business.
These can be anything from data breaches and cyber risk to global and local jurisdictional challenges and damage to professional reputations. It also includes directors and officers (D&O) liability, an issue of growing concern to the aviation sector.
“Aviation is a very large aspect of the Irish market for us, and Ireland is the capital of Europe in terms of aviation leasing,” says Smoker.
Increasingly, the sector’s attention is turning to D&O insurance, which protects against allegations of wrongdoing on the part of the company. To date, the aviation sector has been “pretty much claims free”, he says.
The Boeing Air MAX crisis has changed the landscape significantly, not just in relation to the two crashes, but also in relation to the aviation companies whose aircraft are sitting in storage.
Recent months have also seen airlines such as Air Berlin go out of business. "Aviation is a very complex and finely tuned market that runs on low margins," says Smoker, who adds it doesn't take much to unsettle it. One knock-on effect is that some airlines are finding it increasingly difficult to secure products such as D&O cover.
‘More difficult to get cover’
“Limits are lower, know your customer [KYC] is more laborious and there are a lot more questions being asked about a company’s parent entity, about its finances, and about its exposure to different markets,” says John Kavanagh, senior vice-president at Marsh in Ireland. “The risks were always there but now it’s more difficult to get cover.”
The advantage of working with industry leader Marsh is that it has access to more markets and more ways of unlocking capacity with reinsurers. It also helps ensure aviation companies represent the risk to insurers in the best way possible.
That goes for public offering of securities insurance (POSI) too. Such policies offer bespoke cover for public offerings, including initial public offerings and debt or equity rights issues. It responds to the risks associated with the offering faced not only by directors, but by the organisation and any controlling or selling shareholders.
Most importantly, a POSI policy operates to ring-fence the transaction exposure away from the organisation’s conventional D&O programme, leaving the D&O programme to respond to ‘business-as-usual’ risks faced by the directors.
When undertaking a public offering, many organisations purchase a POSI policy alongside their existing D&O policy. Marsh’s POSI product, which has been developed exclusively for Marsh clients, is designed to fit within your existing D&O policy, without the need to make wholesale changes to the terms of the POSI policy.
Innovative approach
It’s an innovative approach that drastically reduces the risk of gaps occurring in cover between the POSI programme and the D&O programme, and enables the POSI programme to be placed quickly and efficiently.
“The D&O market has been quite soft until recently. It was a market that was underpriced for the last number of years. It has now hardened and all the aircraft companies know this. Some brokers are just extending their D&O cover for POSI, but it’s not the right thing to do. POSI needs to be ring-fenced, but a lot of brokers wouldn’t have the knowledge on this that we do,” says Kavanagh.
This is because of Marsh’s specialist financial team. “This is what we do all day every day in FinPro,” says Smoker, who adds early engagement is key.
“Talk to your risk adviser. It’s when companies come in at the eleventh hour that they find themselves in a cul de sac. From now on, renewals are going to be different so do it properly, spend time on it now, and be prepared to make a presentation to your insurer. The days of simply filling in a proposal form and sending it off are gone.”
