As RW Political Risk Newsletter readers may know, one of the practice areas robert wray PLLC has focused on for many years is aviation finance. An important and interesting facet of aircraft financing transactions is insurance, in particular, war insurance. Over a drink at the historic Jefferson Hotel in Washington, DC, Glen Brighton, Executive Director of Aviation Advisory Services at Willis Towers Watson, discussed with Geraldine Mataka, the firm’s managing member, the fascinating history of aviation war insurance and how the market’s responses to significant events in the 20th and 21st centuries have shaped the current aviation insurance market.
Geraldine Mataka (GRSM): Thanks again, Glen, for taking the time to sit down with us.
Glen Brighton (GB): Pleasure.
GRSM: Before we begin with specific questions about aviation war insurance, could you tell us a little bit about how you got started in this industry?
GB: Well, I guess the best answer to that is that no 17-year old ever dreams of going into the insurance market. You’ll find very few who had a plan at 14 to actually at some point become an aviation insurance advisor. So, I sort of wandered into it just by mistake, really, like probably most of my colleagues. It’s just one of those things where a friend of a friend…I was at college and I went out one night and was asked by this guy, “What are you doing for your career? What are you looking to achieve?” And I said, “I’m not really sure. I know that I need to get my exams done and once it’s all finished, I’ll be up and running, but I don’t know what to do.” And he said, “Well, why don’t you come to an interview on Monday with my company?” I said, “What do you do?” He said, “I’m a Lloyds underwriter.” And I said, “What’s that?” He literally said, “Come Monday and I’ll show you.” So I went from college, literally as a 17-year old—right in the middle of college—and on a Monday I had an interview with the Lloyds company and I was offered the job and a week later I was walking around Lloyds of London, bemused by where I was and what I was looking at, and the whole thing was so new to me. Of course, I think at that point in time I was just happy to have a job and a chance and I guess that’s exactly what it was: a chance for me to maybe at some point, you know, realize that the opportunity was there for me to have a career. It’s easy for me to say this, but 30 years later, I’m still working in the market, doing aviation insurance, which I’ve been doing literally since 1986. So, 30 years. That goes to say, nobody goes into it thinking they’re going to work in insurance…nobody does.
GRSM: So then you’re the perfect person to talk about the history of aviation insurance [laughter], even though it goes farther back than 1986…
GB: It does! And to be honest with you, I actually take great pride in and have found out lots about the historical context of aviation insurance. I set out a couple of years ago actually to see if I could find out exactly about how it all started, who started it, and how we’ve gotten to be where we are today with some of the clauses—who wrote the clauses, in what point in time, what events triggered those clauses.
GRSM: So how did aviation war insurance come about? Was there a specific event that triggered it?
GB: Probably by the end of the First World War and the beginning of the 1920s, when aircraft became more complicated and we’re starting to think more about the commercial reality of the aircraft, it’s only that point, really, when the aviation insurance market was formed. There were most probably three or four underwriters in Lloyds that were interested and they were talking to the engineers who were developing the aircraft and eventually, I think that with the first few aircraft that were lost, people realized that it cost them a lot of money to develop and to build and it was about time to form a market. I can only imagine that it took most probably a few years before there were some major events that really affected underwriters to the degree that they thought we might actually have to start excluding certain elements of war coverage. And when I say “war” I don’t clearly mean two countries fighting against each other; it’s just “war and allied perils” and the allied perils are more likely to happen than anything else. It could be an act of terrorism or—well, there’s quite a long definition of allied perils, but basically it’s third-party impacts in a war event. So it developed from there, but it took a long time, I think, before we get to see aircraft used, for instance, in the way we saw them used on 9/11. And there were instances in the 1950s: there were plenty of little—sort of major—events, losses in areas of the world where things were not as obviously a war loss until you started looking into them. We found a great loss in the 1950s, where a guy put a bomb onboard an aircraft and then bought his mum an insurance policy at the airport. Unfortunately for him, his timing was off and the aircraft crashed over land and they were able to work out what happened. He was arrested, he admitted to the crime, and was convicted. So those sorts of things did start happening in the 1950s, but the war market didn’t really start forming until the later 1960s and then it went spectacularly big.
GRSM: And what precipitated the creation of AVN 48, which is the war hijacking and other perils exclusion clause?
GB: Well, AVN48 was actually born out of a couple of losses, really, but the one major loss was Dawson’s Field, where there were a number of aircraft that were flown to Dawson’s Field in Jordan and they were parked and it was the Palestine Liberation Organization (the PLO) who were asking for a number of their compatriots who had been jailed by the Israelis to be released or otherwise they were going to blow the aircraft up. And of course, what actually happened was…they blew the aircraft up when they weren’t released. As you can imagine, up until that point, insurers had never seen anything like it and they suddenly realized that war risks and the potential damage that can result from an incident, an occurrence on that scale could wipe them out, could really do a lot of damage. So at that point they decided that it was then time for them to work on AVN48 and a new clause was born.
GRSM: You had mentioned allied perils and acts of terrorism. What else would you consider to fall into that category?
GB: Any kind of third-party damage—malicious damage is most probably the best way of describing it—to an aircraft. Another great example was about—I’m not sure how long ago it was, long enough ago in my career for me to remember—15, maybe 20 years ago? It was at FedEx, where one of their guys had been fired—he was in his 40s, if I remember—and he wanted revenge. He got on board one of the FedEx aircraft and literally he smuggled himself onboard and the aircraft took off. He had a hammer and he took the hammer into the cockpit and hit the co-pilot, hit the pilot, and he had decided that he was going to take control of the aircraft and fly into the headquarters of the company that had fired him. Fortunately, the two pilots actually fought back and, despite huge amounts of damage to themselves, they managed to get control of both him and the aircraft and they landed safely and averted what would have been a potentially massive disaster. The pilots were actually brought to London and medals by Lloyds of London for averting a loss and obviously a massive, great claim. So they got a lovely shiny piece of silver on their mantelpiece whilst obviously insurers were most probably happy to have saved the $50 million. So it really is—when we say “allied perils,” it’s really all the events you could possibly think of that could do damage to the aircraft maliciously.
GRSM: So how does LSW555D, the aviation hull “war and allied perils” policy, fit into this picture?
GB: So once we had a war exclusion, there were a lot of people saying well, all of these things are actually excluded. How do we get comfortable if we finance or lease an aircraft to one of these airlines that’s got all of these exclusions and one of these events happen and, well, we’re uninsured. So what they did was they all came in together and matched—well, but of course the one thing that sits outside all of this and will most probably always sit outside all of this is the big nuclear bomb because you can’t insure nuclear risks in most forms of insurance and certainly not in the aviation insurance world because the potential for damage by a nuclear weapon is so large. And, to be quite brutally honest with you, if we ever got to the point where a nuclear weapon was let off purposefully, then I’m not sure any of us would be worrying about aviation insurance at that point anyway. So it really did get to that point where they decided that, apart from writing back the nuclear coverage, they would provide the coverage for all of the other perils that had been excluded by the policy. So now, they dovetail.
GRSM: Historically we have seen the aviation market responding soon after a major event, for example, during the First Gulf War, when Iraqi forces invaded Kuwait and Kuwait Airways had 15 aircraft on the ground and a large amount of spares and equipment at Kuwait International Airport. How did this event shape the market’s view of policy limits?
GB: There was a big debate about the level of coverage—a big debate that went through the courts and took about 10 years—about whether the event was one occurrence or a number of occurrences, because a number of the aircraft that were at the airport were taken by the Iraqi forces, flown back to Baghdad, painted green, and called Iraqi Airways. And, as you could imagine, the Kuwaitis were not keen on that and they made claims on their insurance policies and they were soon told well, actually there’s a limitation on the amount of coverage. You know, insurers are not out there to provide unlimited funds in any claim, really—there are limits on every policy. The Kuwaitis argued that every time they took one of these aircraft it was a separate event. Insurers eventually won out and the full aggregate policy limit was paid. That was a defining moment for most in the market because they did realize at that point the potential loss of millions of dollars’ worth of aircraft can happen in one incident and if that was to happen too many times, it would most probably bring down the market. So hull war aggregates after that time were reduced significantly to minimal amounts. In a historical context, it has taken a number of years for that to then grow back into a position where insurers are happy to provide not unlimited numbers, but billions of dollars’ worth of coverage. If you bring that up to today, then we had in 2014—in July, in Libya—the same kind of event happen, where you had a number of aircraft that were bombed on the runway and insurers are sitting there saying well, we can’t stop this so there’s a policy aggregate limit that will apply. And that’s exactly what happened.
GRSM: We’re heading to a discussion of what is perhaps one of the most important events in aviation history or history in general for that matter. I’m sure the market responded in a number of ways after 9/11, but what was the most significant response?
GB: The initial response was to stop, because we didn’t understand at that point what was happening next. I remember us being in quite a few smoky rooms with colleagues discussing how we were going to get the markets to continue providing coverage. Because at that point, the whole world had changed, including a massive market who saw what they thought were aircraft one day turn into missiles the next day. Aircraft used as weapons. This was the first time this really had happened in any meaningful way. So I think that we had to persuade insurers not to give notices of cancellation across the board. If they had done that—and the war policy provides for seven days’ notice of cancellation—we would have most probably seen the world’s airline fleet grounded. I think that, to its credit, the market understood that. And I don’t know what the political ramifications would have been if they had done that. On top of what was going on in the world, I think when you consider what the aviation insurance market provided in the next few weeks and months and eventually years, it was a great service to the world. Because if they had, and financiers would have said there’s no coverage, I think banks would have most probably grounded aircraft because they wouldn’t have been prepared to take the risk. So the insurance market rallied around, came up with solutions, they provided a limited amount of coverage—and it was very limited, but it was a start—and then we had governments who stepped in, in most places in the world, to provide some additional coverage that meant that the people who owned the aircraft, financed the aircraft, would be comfortable. And that’s how it all panned out. The United States’ whole position was, you know, that this was an act against the state, it wasn’t an act against the airlines that were involved and they wanted to keep the world running, so they provided assistance and up until only two years ago had provided the coverage. At the time, it was difficult because there were lots of conversations that had to be had and I think we had to get people comfortable with the future and potential risks that were going on and there were certain markets that stepped up and to be quite honest with you, there were some very big decisions made by groups that had never been in the aviation market before to get involved in aviation war insurance and war liability insurance who then went on to make a huge amount of profit out of the whole industry. But then in those early days, we all thought they were taking a huge risk. We didn’t think that 9/11 was just a one-off event; we didn’t know if it was going to be happening on a weekly basis. So they came in and they offered their capacity and they provided the coverage and they were very, very well paid for doing it and eventually…they made a great profit on it and eventually got out of it. Mr. Buffet is a very, very clever man, I will tell you that.
GRSM: There was a relatively quiet period from an aviation war insurance perspective after 9/11, that is until 2014, when in March of that year, Malaysian Airlines Flight 370 disappeared mid-flight. Can you describe for us what the claims process was like for that particular aircraft?
GB: Well, it was very dynamic, when I think about it. The aircraft was lost—I’m pretty sure it was lost on either a Thursday or Friday night and I know that because I was actually in Singapore. I was on an airplane at the same time as Malaysian Airlines Flight 370 went missing. I went from Singapore back to London at pretty much the same time of night as Malaysian Airlines was taking off and flying to its doom. I got home that morning and remember the taxi driver telling me that there’s been news of an aircraft going missing and then, like always, I contact my colleagues and have a little chat, work out it’s Malaysian Airlines, which is a Willis client, and then we have to work out what we’re going to do. Our initial reaction was let’s start collecting a claim. So we go to the market—the hull all risks market—and we say, “Well, the airplane has gone missing, it’s been missing for more than 48 hours”—there was a “missing 48 hours” clause in the policy, so once it’s gone missing for more than 48 hours, its declared a total loss, so that had been triggered. And once that process had started, we were going out to the markets which insured the aircraft and we told them what the agreed value of the loss was and we started collecting the claim. And that process went on for the next six days. Then we got to the next Saturday morning, when we all woke up and put the news on and there was the Prime Minister of Malaysia telling everybody that actually, events weren’t what we thought they were and that there was an investigation looking at the pilot and some of the things that he had done and he was raising suspicion that this wasn’t a mechanical failure, that maybe this was an outside influence, a war loss potentially. So on the Monday morning, we have to go back to all the insurers who had provided us with the funds to pay the claim and say, “Well actually, we think that this is a debatable loss now and we’re not sure which policy should respond.” So we then go to the hull war market and we say to them, “Well actually, guys, this is now potentially a war loss so we’re going to invoke the 50/50 clause.” The 50/50 clause is all about insurers cooperating with each other and paying a loss knowing that of the two policies out there—hull all risk policy and the hull war risk policy—that one of those policies would respond and once the information and the aircraft could be found and we’d worked out exactly what had happened to the aircraft that one set of underwriters would reimburse the other set and in the meantime, the financiers have been paid within the specified agreed time that’s most probably in the financial lease agreement, so the financiers would be happy, the airline would be happy, and of course the insurers would wait until the aircraft is found. But now, what we’ve actually found, coming up on two and a half years later, there’s still no real evidence of what’s happened to the aircraft. I mean, I know that they’ve found some pieces and I’m sure that experts have looked at that and I’m reading some stories that they’re thinking that there is some kind of damage that they’re going to be able to tell what’s going on, but that’s not absolutely agreed and my understanding is that there’s now going to be, at some point, a conversation between the two sets of insurers to work out what they’re going to do next. So it’s an interesting time to see the 50/50 clause worked, as far as financiers are concerned, but does it provide everything that most probably insurers want out of it? Because one of them has paid half of a loss that they didn’t have to, and so trying to work out the next part of the scenario is actually quite difficult.
GRSM: How long did it take for the claim payment to be made?
GB: I reckon it was, from start to finish, about four weeks.
GRSM: That’s pretty good, isn’t it?
GB: It’s pretty good, considering the loss. But you’ve got to remember we work in a market that’s actually very, very good and active at paying claims. They know what their responsibilities are and they know that it means a lot to get this done as quickly as possible, so they’re very happy to work from that basis. This is not a bunch of insurers who are not looking to pay claims. They are very responsive and have always been responsive and it would probably be very difficult to find anybody out there that would talk badly about the aviation insurance market when it comes to paying claims.
GRSM: There were a couple of other events in 2014. One you mentioned: the attack on the Tripoli International Airport in July and then there was also the shooting down of Malaysian Airlines Flight 17 over Ukrainian airspace. How did these events in 2014 affect pricing?
GB: Well, I guess we were all sitting there—the brokers—talking about this in the meeting room, thinking this may have a huge impact on pricing, but in reality, the market is driven by capacity and the more capacity, the harder it is for the market to react. The problem is when you’ve got so much over capacity, if you’re an insurer and you want to put the price up in the hundreds of percentage points, there’s always going to be another market that didn’t write the risk, that doesn’t think the risk is as bad as you might now, and the loyalty of maybe the airlines is there to the markets that’ve always supported them as long as they don’t get too much of a swing in price issues. So the reality is the market reacted in a rather strange…it was nearly like it had never happened. I mean, that sounds strange, but the reality was: can you think of it as a one-off event? Can you go back to Malaysian Airlines and say, “Actually, guys, we’re going to really punish you. Not only did you have a loss in aircraft with your crew and your passengers and what that’s going to do to your business, but actually the double whammy is that we’re going to charge you three times as much next year,” for an event that, really, none of us actually thought was their fault—they were just in the wrong place at the wrong time. I think that the market was most probably fair with Malaysian Airlines. I’m sure that there was an increase in premium, but it wasn’t dramatic enough—the event—to turn the market.
GRSM: Do you see the pricing now holding steady? I guess it’s part of a bigger question about what you see for the foreseeable future.
GB: I actually think the whole market has been expecting prices to stabilize at some point. I do think this may well be the year—and we’re in the fourth quarter of 2016, so most of the market is now beginning to renew their policies—I think that we’re managing expectations with maybe not big reductions, but maybe not…there’s no increases. I think it’ll be stable, is how we can see it.
GRSM: Based on this interview and the number of years that we’ve worked with you, we know, and our readers may be able to glean from this interview, that you’re very passionate about your job. So our last question to you is what do you consider the most enjoyable part of your job?
GB: That’s a good question! I guess I get to see so many different things at so many different times from so many different places. I get to work on transactions from all over the world and the reaction on a transaction in India can be very different from the one that I might get on a transaction in Western Europe. I have fun answering the questions and explaining to people about the cultural differences of what we do—and it really is a cultural difference overall. And you never know what you’re going to go into and how people are going to react. I guess that’s the part that I really enjoy the most, explaining to people that I’ve done a deal in that part of the world and it’s very different from another part of the world. I enjoy that bit.
GRSM: Great. Thank you so much, Glen.