On Feb. 24, Russia launched a large-scale invasion of Ukraine, sending shockwaves around the world. As the world waits with bated breath for a resolution, economies and industries are dealing with the resultant impact. In particular, the aviation sector is vulnerable to exogenous events such as the war in Ukraine, which can have a drastic effect on operations and passenger demand.

“The potential for loss is historically large and the future of the aerospace insurance marketplace will be heavily impacted based on how this or any other major conflicts around the world develop," says Brian Ackland, vice president and central region manager, aviation insurance, AXA XL.

The aviation industry was unprepared for the conflict that led to 500 western-built planes leased to Russia being seized by Vladimir Putin's government within days of the war commencing. The value of these aircraft is estimated at $12-$15 billion. And while the majority of these aircraft are owned by European companies, the U.S. aviation market could see the impact of the loss if they are unable to be recovered, which could propel the hardening of the market.

“The impact on the aviation insurance market is going to be driven by the reinsurance market where historically there's only a few carriers that play above the $1 billion mark—they had never been touched until the Boeing 737 Max losses, when $2.5 billion was reserved on the carrier side to cover the Lion Air crash in 2018 and the Ethiopian Airlines crash in 2019," says Shan Rogers, director national aviation practice, RT Specialty.

“So, once again, they're going to get tapped because it's definitely going to go above those limits and they're going to feel the pain, which means they're going to raise insurance rates for carriers and that will have a trickle-down effect for everyone," Rogers adds.

To date, AerCap, the largest aircraft lessor in the world, has filed a $3.5 billion insurance claim for over 100 of its jets stranded in Russia. The result: Lessors of commercial aircraft are already seeing significant rate hikes in the cost of renewing policies out of the London market, according to Reuters. The ultimate insurance and reinsurance industry loss from the ongoing war in Ukraine could rise above $23 billion—the largest political violence loss in history, according to analysis from data provider PCS, a Verisk company.

The concern for the people who own the grounded aircraft and insurers are any potential violations. “These aircraft may have been flying without the appropriate maintenance updates from the manufacturer or any sort of specific support on maintenance," Rogers says. “I'm sure there's not going to be any flight logs that have been properly documented, so even if the war was to stop tomorrow and everybody was to get their planes back, there will be significant concerns for both carriers and insureds."

Further, “I don't see anyone being able to make people take their aircraft back because there's no history on the aircraft and nobody knows what's been done to it," Rogers adds.

And any claims related to the Russia-Ukraine war are expected to stay open for many years, with a further impact on the market being that some of the jets stranded in Russia may never fly again, resulting in a total loss for the carriers involved.

While market conditions across all aviation segments have been relatively stable in the first half of 2022 as COVID-19 recedes, the current conflict will impact the market for years to come, with insurers expecting the recovery process to be long, aircraft insurance premiums to increase and aviation insurance costs to continue to increase in the future.

Olivia Overman is IA content editor.