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How safety data affects airline insurance pricing

06/01/2021| 7:45:33 PM| 中文

With premiums rising across the airline insurance market, safety performance will become a key factor to mitigate increasing insurance costs.

With premiums rising across the airline insurance market, safety performance will become a key factor to mitigate increasing insurance costs, write John Rooley, CEO, and Simon Knechtli, Managing Director, Global Aerospace, Willis Towers Watson.

By any measure, 2020 was a bad year for aviation. IATA calculated airlines’ total losses reached $126 billion, with passenger demand having fallen almost 66% compared with 2019.

For the industry’s insurers, who have had to return substantial amounts of premium to the commercial airline operators whose fleets largely sat idle during the current pandemic, it wasn’t much better.

In 2021, insurers intend to again increase insurance rates. The degree of increase will depend on whether airlines can provide evidence of the kind of risk management that gives insurers the confidence to differentiate specific clients from the pack.

Insurers and their clients often talk about price differentiation come renewal season, but it is not often established. Why? Because, without evidence that documents elite safety practices, underwriters make fundamental assumptions based on intuition or common market perceptions. These assumptions can be misinformed and do not benefit airlines that invest in advanced quality and safety practices.

With insurers trying to raise the premium base across the board this year, it is becoming increasingly clear that airlines will have to give enquiring underwriters the evidence they require to show that individual carriers deserve to be considered ‘a better risk’ than their peers. This will inevitably require greater transparency into the detail of each client’s investment in safety, risk mitigation, and quality assurance programs.

The days of leveraging corporate size or the airline’s brand to drive home the best deal are gradually being replaced. Airlines must show the insurance market that the financial relationship between the buyer and insurer is a direct consequence of significant investments concerning safety and risk.

Any number of events faced by airlines during their day-to-day operations can increase the carrier’s risk, and/or result in claims. Common causes of claims from aircraft owners/operators include pilot error; damage from foreign objects; bird strikes; weather events; ground-handling incidents; and geopolitical instability. The list goes on.

With the cost of aircraft repairs on the rise—and global claims stubbornly exceeding historic premiums—any evidence that an airline understands those risks and has strategies in place to mitigate them will be critical to building insurer confidence and their appetite for risk. It is the key marker to differentiation.

At a foundational level, the standard indicators for safety performance come from programs, such as the IATA Operational Safety Audit (IOSA). But because these offer standard safety indicators, when insurers are considering which airlines merit discounts on market premiums, they look for evidence that their clients are driven to exceed higher-than-average performance standards.

Unveiling a safety culture

There is a saying among auditors in the management systems community that measurement is at the heart of management—that is, you cannot manage what you do not measure. The big data era has given the aviation sector the tools required to do both.

Though technology gave the airline industry the ability to capitalize on the vast amounts of data it generates, it is a strong safety culture that will ensure that lessons learned are put into action. Insurers are looking for evidence of extensive data capture that suggests a strong culture of hazard and event reporting, practices that also allow airlines to build understanding of their own risk environment.

Beyond data collection, brokers will warm to any evidence that the intelligence generated from the data was used to inform the company’s broader risk management strategy, highlighting the path from data collection to the adoption of advanced practices.

Revealing performance trends not only gives insurers the confidence to insure an airline’s risks, but also builds market appetite for an airline’s insurance business. This creates competition and expands the carrier’s options of potential underwriters across the insurance market.

Ultimately, a culture of data diligence and transparency gives the insurer the ability and incentive to positively differentiate the client from the pack when the time comes to renew the program and a degree of justification should a future accident bring into focus the insurer’s judgement.

An area where a culture of strong safety practices will make insurers pay attention is unstable approaches. These are relatively common causes of incidents and, as such, they are a concern for airlines and insurers alike. Insurers will expect to see a safety culture, supported by data and training, that encourages pilots to go around for another, safer attempt at landing. For example, any airline whose fuel-saving policy clashes with their weather-avoidance policy is clearly going to be of interest to an insurer.

Training for these events should emphasize that any decision to execute a go-around is not an indication of poor performance from the flight crew. It is prudent decision-making, as it errs on the side of safety.

Of equal importance is an open and just culture within an airline. Hierarchy in the cockpit (and within the organization) as well as a punitive culture are high on the list of threats to a safe operation.

The ability of each employee to report voluntarily and confidentially, without fear of reprisal, any act or omission that could jeopardize the safety of the airline is a critical element of an airline’s safety best practice. Technology can unveil what did go wrong, but, sometimes, only a human can report what could go wrong. The former is reactive and the latter predictive. This is a fundamental differentiator that insurers consider as they look to avoid potential claims or at least charge sufficient premiums to counter their effects.

Company-wide awareness of risks

Senior executives at airlines are well acquainted with the risks and opportunities within their area of operational responsibility. But the full theatre of risks can be less obvious. In fact, many companies do not measure total business risk.

Understanding corporate risks is often compartmentalized within divisional silos such as legal, operations, human resources, IT, finance, and management.

Come renewal season, insurers would look positively at any evidence that departmental risks are being shared across corporate divisions and are also understood and managed by upstream partners in the supply chain.

What tends to destroy the ability of the company to understand its risks—and how best to manage them—is a procurement-based strategy. Risk is not a commodity to be traded, so insurers give little discount consideration to those buyers who treat it as such.

Without evidence to the contrary, airlines can be held captive to common market preconceptions, especially if they operate in a more challenging region of the world. Misconceptions can be reversed by sharing safety performance indicators that support positive trends, demonstrate best practice, and reveal a company to be on a path to continuous improvement.

The dramatic change in an insured’s risk exposures, both negative and positive, caused by the coronavirus crisis has given insurers the opportunity to re-apportion their portfolio premium. Quality metrics and sharing evidence of safety leadership will be a critical foundation on which strong relationships with the insurance community increasingly will be built.

 

TAGS: airline insurance | airlines | data transparency | coronavirus
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