Space, drones, and war – sounds like Sci-Fi, but it’s just another day in aviation. The world of aviation has long reflected the innovative and interconnected nature of our global society. From the momentous events that shape our world to the technological advancements that propel us forward, the aviation industry stands as a testament to the triumphs and challenges of our time.
Over the past few decades, this industry has borne witness to huge historical events – the tragic events of 9/11, the unprecedented impact of the COVID-19 pandemic, and the geopolitical conflicts of the Ukraine war. Alongside these challenges, the growing imperative to tackle climate change has seen the industry face immense pressures to lower carbon emissions. These events have not only reshaped the way we travel but have highlighted the critical role that aviation insurance plays at the heart of these upheavals.
Join TEC as he talks to Mike Hansen, Head of Aerospace at Convex, about the state of aviation and the role of insurance in securing and empowering the growth of the industry. From safety innovations and risk assessment to sustainability challenges and underwriting solutions, explore how the aviation industry is embracing change.
In this episode:
The risks and rewards of aerospace
Market cycles and risk appetites
Aviation safety and sustainability
Insurance as an enabler of innovation
Data strategy in aviation underwriting
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Full episode transcript
[00:00:00] TEC: Hi, I'm Tom Chamberlain, VP of Customer Consulting at hyperexponential, and your host, otherwise known as TEC. I'm delighted to welcome you to the latest episode of Tech Talks. In this episode, we're talking to Mike Hansen, who's head of Aerospace at Convex, so let's get straight into it. Mike to kick us off, it'll be great to get into, well maybe take a little step back slightly and understand what it is we mean when we talk aviation insurance as it's not just everything that flies. Right. So would you mind just giving a brief overview of how we sort of view the different aviation classes and what they are.
[00:00:46] Mike Hansen: Sure. There's really four buckets we think about when we think about the aerospace industry from an insurance perspective. Some, which will be more familiar than others. So airline insurance is probably the most obvious because most people probably have been in an air on an airline on holiday or business.
So that would be scheduled or charter Airlines of pretty much any size anywhere in the world. And we cover them for physical damage. So the damage to the aircraft itself. And also we cover the liabilities the airlines have to the passengers and/or any third parties who may be injured. And property damage that may be damaged in an accident.
So that's the core airline, Holland liability coverages that, we talk about. Aside from that, it's become a much bigger issue in the last 15 or 16th months, is war insurance. And again, there is both physical damage war. So when an aircraft is damaged due to one of the perils that we provide the coverage for, or again, liability arising out of, say, a hijacking or terrorism incident.
And I guess there's been some notable and sort of well-known incidents, 9/11 obviously being the classic, where the aircraft were obviously hijacked and flown into the buildings. But subsequent to that, we've had a couple of other incidents that were covered under those coverages. So separate, tragically, there was a suicidal pilot on a German wings aircraft flying from Barcelona and the, again, the sort of tragic and accidental shooting down at the Ukrainian International air aircraft over Tehran just as it was leaving.
So those are the sort of exposures that we have on the war side and obviously anything that gets damaged – there was a recent incident in Sudan when some aircraft got damaged at the airport during militia fighting there. So it, it's a high risk, but generally quite high reward area of the business, and it's something that we have lent into since the invasion of Russia. The market contracted a bit. Coverage was quite restricted and, and rates went up. So it was a, it was a good opportunity we felt to engage there.
So that's all around the airline side of things in terms of sticking with aircraft. The other broader section, which is quite difficult to sort of put your arms around is general aviation, which as you know, covers a multitude of operations.
Everything literally from drones, balloons through to sort of single helicopters, and then up to the larger corporate jets and, and even the very large helicopter fleets that service the oil rigs, for instance. So that's a very, very broad spectrum of business. And yeah, there's certain markets, ourselves included who, who play in certain parts of that, but not all of it. Whereas on the airline side, typically you're either in or out of, that segment.
So that's the sort of aircraft side of things. And then from a liability perspective, we also cover the manufacturers, be they the OEMs, as we call 'em the original equipment manufacturers. So that could be a Boeing or an Airbus or one of the major engine manufacturers like General Electric or Roll Royce.
And we effectively covered them for their product liability. So obviously they manufacture these products and the airlines operate them and assume that they're safe. And generally the aviation industry is incredibly safe. But should there be a manufacturing floor that causes an accident and that's the important bit, that has to be an occurrence, then the manufacturer could be held liable and required to pay damages. And so we cover them for that.
And I guess the most recent and most famous loss in that regard was the 737 Max scenario where two aircrafts crashed, the aircraft was grounded, and Boeing have been subject to litigation and paying damages to the descendants of the passengers.
And within that sort of broader products world, we also cover service providers. So if you think about the infrastructure around aviation, so airports, they have a liability to passengers whilst they're on their premises – if they, slip and fall or get injured. The air traffic controllers buy insurance for the most parts of the world, other than the US really, and obviously there we're covering their liability should they cause an incident, that results in an occurrence under the policy. So they obviously have a very large liability policy.
And then there’ll be the other service providers, so baggage handlers, refuellers, anyone who operates around an aircraft – catering companies etc. And then sort of aligned to that as well is the repair and overhaul operation. They range from very, very large companies, that service all the way up to full service on a major airline aircraft, down to a very small, almost ‘ma and pa shops’ as we call them, doing very small repair and overhaul. But obviously again, if you touch an aircraft and something subsequently happens, that was your fault, then you have a liability. So we provide them with coverage for that.
So those are the three core, I guess, what people consider within the aviation world. And, and certainly we do.
And then the fourth element, which again, is a more niche and restrictive market is space, which again, is a physical damage covered. There is some space liability coverage, but it's not really that significant. But we cover effectively the, the damage should anything happen either during the launch phase, which is, certainly the, probably the most hazardous part, of the whole operation. Yeah. So we sort of, we sort of hold our breath for about 30 seconds and hope everything's okay.
And we often joke it's the form of insurance where we actually deliberately set fire to the thing we're insuring. So, so once we've counted the 30 seconds and everything's going smoothly, it's probably a bit longer than that to be fair. We then cover typically an annual in orbit phase.
So whether, depending on what the satellite is intended to be, whether it's a telecommunications or whether it's for, you know, sky TV or whatever it might be, obviously they have an operating life and they're only useful up there, spinning around at thousands of kilometers an hour. If they're providing the service they're supposed to provide.
So you and you do get anomalies and as they get older, they have, you know, typically 12 to 15 years worth of fuel. And as they get older then you, you tend to get some anomalies. So we would cover their non-performance out of that. But it's, it's a very, very technical area of the business. and we actually employed a lead Space Underwriter and for that we employed a satellite engineer, actually, who used to build small satellites, because we really felt we needed that technical knowledge.
'Cause that goes way beyond the sort of enthusiastic amateurs we get in the rest of the aviation market and we think we know lots about how aircraft fly. So those are the four sort of main tenets of the aerospace business. I think most people would, would have those buckets as, as the way they, they sort of segment the business.
[00:06:48] TEC: Yeah, it, it's, it's fascinating. I've always, I've always found sort of aviation insurance out of, out of all the lines of business to be the, sort of the most varied, right? You've got stuff up in the sky stuff, repairing stuff on the ground, coordinating stuff in the sky, all, all matter of things and, and all the way to space. As you just said as well, it's, it's a big thing.
And, and each of those classes has very different risk profiles, very different claims. It all tends to be high severity, particularly on the airline side, as you're saying in space as well. It either goes bang or it, it doesn't, and that's the end of it.
So it's quite difficult as well to really understand and sort of price and, particularly on the, I would say more on the aerospace side, where you have complete variation in what your, what your actual products liability is. 'Cause you said, right, it's everything from real large aircraft manufacturers, which you go, okay, that, that makes a lot of sense. Down to a company who's gonna make a little tiny ball bearing that's gonna go somewhere in an aircraft. But if that ball bearing could cause an aircraft to go down, you need the liability insurance against it. I think there were actually claims in the market caused by ball bearings being found in places that they shouldn’t be which is, quite sort of, scary.
You touched on quite a few points as well around, what the market's sort of been happening over time. And my sort of experience goes back to 9/11 where I think at that point there was this a fairly seismic shift in rates in the aviation market. And, all, all of a sudden them, quite rightly as well, the rates became very high, but then we kind of saw following that sort of a very long, prolonged period of drop off. And I don't think anyone thought there was gonna be a hard market again. Now it went on for 15 plus years, but then, but then all of a sudden everything changed, five years ago now, probably 2017 ish.
[00:08:37] Mike Hansen: Yeah. 2017 I would think there was, there was a shift and I think, that was driven by a couple of things really. I mean, the basic one is the pure economics, you know, money in, money out. And, you know, from an insurer's perspective, the money out was more than the money in. So markets either withdrew their capacity from the class 'cause they just didn't see any prospect of an improving environment.
Some of the regulators put quite a bit of pressure on certain areas of the business as well, and unless they felt they could achieve the sort of rate increases, then they weren't gonna get the support from the capital providers or they would have other issues with the regulators.
So very belatedly, we started to see the rates go up from 2017, 18 and 19. So we had three good years of positive rate movement across most of the classes of business. It wasn't. It's not a hundred percent consistent because whilst there is a relatively small number of insurers for the class of business, some have more appetite for one of those buckets than others.
So it's not always a uniform movement in rates. And, and the different dynamics play a part in that. But it wasn't a violent reaction. So post 9/11, it was an immediate sort of very much a very short, sharp increase in rates. This was more gradual, which we felt was sensible because that's much more sustainable.
And the insured can, can live with that so that, you know, they appreciate that their costs needed to go up. And then of course, came covid, which sort of put a bit of a spanner in the works in early 2020 because the industry basically shut down. And whilst we've had shocks to the air aviation industry over the last 20 years, and, and it's proven to be incredibly resilient.
We never had anything quite as sort of traumatic as a complete shutdown, almost overnight. So, you know, we've had 9/11and obviously there was some concern whether the industry would come back from passenger confidence, et cetera. We had SARS in the nineties we also had other sort of respiratory diseases which have of course, problems, particularly in Asia.
We had the Icelandic volcanic situation, which basically sort of rendered the North Atlantic unusable for about four or five days, but this was obviously something un unprecedented. So as a market, we, we try to be pragmatic in those situations, and we accepted that this wasn't really a sort of isolated incident. The entire industry was in the same boat.
So in fact, in 2020 the rates went up slightly higher because we just needed to maintain a premium base, and particularly on airlines, the premiums generated as a, as a rate on the values of the aircraft. And a premium per passenger to put it in its simplest terms.
And obviously there wasn't any flying going on and obviously no passengers flying. So where we had to find a way to maintain a certain level of premium. So, and it's taken sort of 18 months to two years and we're now sort of coming up to the big renewal season in Q4 for the airline business. And we're finally starting to see airlines at least at, if not slightly above pre covid levels of, of exposure.
So that's encouraging. Yeah. And I think what also happened, we've had a good run, to be fair in terms of major losses, touch wood, we still get what we call the sort of bumps and scrapes attrition, which tend to fall to insurers rather than impacting the reinsurance market. So it's been a good, good run of results and capacity has started to come back.
Appetite has started to return, so there's beena few new markets, I mean, ourselves being one, and Everest, coming into the market, but it's more some of the more traditional markets regaining their appetite as they've seen a much healthier pricing environment. So we are now seeing a bit of pressure on rates, but fortunately because of the way the business is rates, we're still seeing some freemium growth.
So we're still pretty positive going into going into Q4. But yeah, there's been some sort of seismic shocks, and I think actually the last four or five years apart from Covid, which obviously nobody could see coming, it's been a relatively stable period of time, from a pricing perspective, but there, there is still a lot of appetite around for the business.
[00:12:18] TEC: Does that include then still the impacts of the Russia and Ukraine War as well? Because it's a bit of a tricky one because it's planes effectively stranded and seized. So I dunno if anyone's really sure of what they're total exposure or even what the total claims will eventually be.
And is, is that just a case? It's not really being classed as a, we've allowed for the losses already or, or have you awards it? Some elements of it. Obviously you don't need to share exactly what comments are doing, but I'm not quite sure how the market's reacted to that. As a general overview.
[00:12:48] Mike Hansen: Yeah, I mean, I'll have to be quite generalistic here because, there is, as everybody's probably read, an enormous amount of litigation flying around between the insurers and the market in several jurisdictions. There was obviously an immediate reaction to the war portfolio and you can deduce your own views on what people's view on the losses from that perhaps.
So that, that was, both a very, very significant increase in war premiums and quite a tightening of coverage that the market was prepared to provide because I don't think anyone, in anyone's worst case scenario had dreamt up this situation where 500 aircraft was suddenly stranded overnight. So the war market definitely reacted.
Um, and I think at the moment it's, it's a bit of a sort of wait and see because there is uncertainty. Over coverage where that coverage might be, what the quantum might be, whether there's any other mitigating actions that the lessors are able to take. And again, I can only comment on what we've seen in the press, so it's gonna take a long time to unwind.
And obviously even the litigation always takes time and it's a bit frustrating for both the insureds and for us as insurers really, because this uncertain dark cloud that's sitting there is not good for building strong long-term relationships. So we are hoping that over the next 12 to 18 months, there might be some sort of form of resolution to some of these outstanding claims.
But it is complicated and I guess depending on whatever the quantum is of any sort of resolution to this, that could have an impact in the future. But at the moment, really, we've only seen it on the war prices and coverage at the moment.
[00:14:24] TEC: That makes sense. And you said you're, you're still confident going into Q four for, for the airline side, so, so that's good news. I did see a couple of German aviation Underwriters, yesterday, and they were slightly less optimistic, shall we say, about the markets. And it, it, it seems that that is, already now people have come back in and started to boost their lines and take on more exposures and there's basically talk that, that most of the sort of any sizable deal is now massively oversubscribed and rates are actually starting to go the other way.
So do you think that's just a general aviation thing that we're seeing this softening now already? Or is this gonna expand into the rest of the aviation market as well?
[00:15:05] Mike Hansen: Yeah, I think as we said earlier, although it's, you know, airlines and general aviation are both aircraft that we're insuring, the dynamics are quite different. And actually some of the players are quite different in the two markets. And, and again, the other big thing, of course is the limits. So typically an airline – physical damage of a new A350 or 787, you’re looking at $250 to $300 million just per aircraft, that's a very, very significant amount of money, and they buy liability limits of upwards of 2 billion or more.
So even with reinsurance, you know, really a, a very large line on an airline would be 10 to 15%. And so there's, there's a subscription market of 20 to 30 insurers that make up an airline placement just because of the size of the exposures. Whereas with general aviation, you're looking at much lower limits, typically much lower values and much lower limits, and therefore people are able to write larger lines.
And in fact, in some parts of the world, in the US for instance, it's quite common for one insurer to write a hundred percent of relatively large general aviation business. And when you've got seven or eight markets all wanting to write a hundred percent, again, we come back to basic economics, right? There's supply and demand.
In London, it's slightly different. There's less a hundred percent writers. But typically where a large line on an airline or even a major products account would be 10 to 15, it's again not uncommon to feed 25, 30, 50% lines. And so, yeah, the scramble for business is, is more intense there.
I think we have seen even on the segment that we've engaged in, which is the sort of more the risk managed offshore helicopter business, which we view as quite similar to an airline operation and it's modern equipment – two pilots effectively flying from A to B. We're not really involved in the, in the broader general aviation segment, but we do see significant pressures on the rates there.
We're not seeing it on the manufacturer side yet. That seems to be holding up and still relatively stable. And again, you know, that's a very long tailed class for us. That's, that's the longest tail we have within, within aviation. And therefore I think the capacity there is more restricted than it might be in the general aviation sector. So we're seeing a lot more stability there in terms of pricing. And, and again, the limits that the manufacturers buy are equivalent to what the airlines buy, for the obvious reasons.
[00:17:11] TEC: And 'cause you, you mentioned a few of the big shocks to the system. 737 Max is obviously a big thing. And initially this was, it was Lion Air and Ethiopian those are the two airlines that had the problems with it. And this is, this is a, a kind of, again, of quirk of the, the aviation industry that you'll first get the claim on the airline and, and sometimes that's where it stays, but actually quite often then it moves into the aerospace side. Right. So 737 max issues are, are aerospace issues, not airline issues. The, the it's not necessarily a fault of the airline that does that. So is that also the sort of long nature of the claims? Because obviously you see the immediacy in the airline itself when unfortunately plane goes down, but then it takes many, many years for it to sort of filter back into it, into where the aerospace, where probably it should actually be.
[00:17:58] Mike Hansen: Yeah, I mean every, every incident is different. Obviously leaving aside the Max issues, 'cause obviously there's still litigation ongoing on that. But when we think about in, certainly when we think about a large loss, so a major fatalities, the large aircraft and what that cost of that loss could be in the round. It's rare in history that only one party has been responsible or held responsible when the claim is eventually settled. So you're right. Initially it would very much be the, the aircraft operator's policy, would pay first the physical damage to the aircraft and then they would have the immediate responsibility to work with the passenger's descendants.
But as the investigation goes on, and obviously being a very highly technological business, and very sadly, when there, there is a major loss, gathering all of the evidence to put together what's happened can be challenging because it could be spread over a, a very wide area, or it could have been significantly damaged in sort of post-crash fire.
So that takes time. But as the investigation continues, and that could be 1, 2, 3 years, then other factors may come into it. And it may well be that there's an element of responsibility for the manufacturer and not just the airframe. It could be an engine issue or it could have been one, one part of the avionics, 'cause obviously these effectively are flying computers these days.
So, yeah, we're talking about how the, the major loss is rarely down to one individual party. There's typically two or three, and that's what we've seen historically. And then, so the claim itself is whatever the amount is, and that gets app portioned between the various parties, dependent on their level of responsibility.
I mean, one of the upsides in terms of replaying what happened is a lot of the computer equipment on board and aircraft now, the data monitoring, the flight beta recorder that effectively can play back exactly what happened during the flight and, and it can look at what one of a thousand different components may have caused the issue.
So it's a lot easier actually to, to perform those investigations now 'cause you can effectively replay exactly what happened. But as you quite rightly said earlier, the physical damage, the aircraft destroyed, that's fairly easy. That would typically be paid in the sort of seven days. The liability element of that will take a lot longer.
And it's not uncommon for an airline claim to run five years and if there is manufacturing or component manufacturers involved, you know, and again, we look at sort of seven to 10 years as a, as a sort of average tail until you finally get to a point where you are, you're certain as to what the ultimate loss is.
So, and that's obviously a challenge in terms of holding the reserves for that period of time, et cetera from a company perspective.
[00:20:24] TEC: One thing I sort of noted about the industry as well, you sort of touched on it a little bit there is, is the safety aspect, right? You said it right at the start, but we're, we're, we're not trying to scare people here with, sort of, traumatic airplanes going down. Because 'cause occasionally they do, but it, it is occasional, the fact that we know about them is because they are big headline events and they're, yeah.
That, that's, that was always the way. If, if something goes down, then, then everyone's scrambling around to check whether who, who's on it and, and what's, and what's going on. But it does happen infrequently. And a lot of that is down to aviation safety and unlike some other industries, aviation are very good at sharing all of the data, everything that goes on, in the interests of making the entire industry better. And I think that's fairly unique. You know, not many people wanna necessarily be sharing all of their best practice stuff, but it makes a lot of sense and it does make everything safer.
[00:21:14] Mike Hansen: Absolutely. I mean, the investment in safety that really sort of took off if I can use that pun, was sort of after nine eleven and that's when we've seen the newer generation of aircraft and engines and, you know, engine failures are, are so rare these days. They really are incredibly rare. They're so reliable than new generation engines and obviously a lot more, more, more powerful.
And, we also have to think about the sustainability part of that. They're also significantly more efficient. So 50 to 60% more efficient than an engine from 20 years ago. And that's, that's massive, massive investment. So we have to applaud the industry as a whole for the investments they've made in safety.
And again, that's all around the infrastructure as well. So, and yeah, the maintenance. So it's, you know, they're safer aircraft, but also the whole infrastructure's become a lot safer. So yes, to your point I wouldn't want any listeners to be overly concerned. It is an incredibly safe form of frank sport and, you know, always hate to tempt fate.
But, you know, effectively there's, there hasn't been a fatal accident, for instance, in the US since 2009. So, and then, in fact, in one year, I think it was 2017, Someone would probably correct me on this. It was 2017, there was actually no fatalities in a calendar year for the first time ever. So yeah, it, it has got, exponentially safer as the exposures have grown.
So actually it's quite interesting when, when we're thinking about it from an insurance perspective, 'cause it's completely counterintuitive to almost every other line of business. You know, if you, there's, there's almost always, and you are an act, so you'll, you'll know this, but there's almost always a correlation between increasing exposure and increasing claims.
And it's actually been the opposite in aerospace. So I think we do have to applaud the industry for the, all the efforts they've made to improve the safety. And this is billions and billions of dollars that have been invested, which obviously is good for us from an insurer. But it's good for me as a passenger as well, I feel in Incre.
Yeah. And I feel very safe flying. Yeah. I feel very safe flying.
[00:22:58] TEC: There was some interesting stats, and I can't, I can't remember where I was reading them, but following 9/11 where people just were really not keen on flying, particularly in the US there was a basically a massive drop off in, in people who wanted to fly, but then there was a huge increase in frequency of motor vehicle accidents and deaths, mainly because people were like traveling much longer distances than they would've normally driving when they probably would've taken a plane before.
And actually consequently, a lot more bad stuff happened. And that again, is just down to the fact that it is so much safer to, to fly, right? You've got much more chance of being in an accident on the way to the airport than for the remaining flight. But it never quite works like that in people's heads. 'cause stats, stats doesn't do that necessarily to you.
[00:23:43] Mike Hansen: Well, I remember when I first started in the industry, I mean, it was, it was common for there to be 20 to 25 fatal accidents, aircraft accidents with fatalities in an annual, in a calendar year. And that's going back, unfortunately, 40 years, but in the last 10 to 15 years, it's, it's much more like single digits and some years low single digit fatal excellence from western built airline equipment.
So that is a, is a massive change. And you're absolutely right. And it's quite interesting you talk about the US because it's a very different dynamic to, to other parts of the world in that the, the volume of passengers, in the US is about 40 to 50% of all passenger traffic is in the US alone.
And again, slightly uniquely for the major US carriers, international traffic is only about 20% of their total operations. The vast majority of it is domestic. And so actually they recovered very quickly post covid 'cause people were quite happy to fly domestically. But obviously a lot of the international routes weren't open.
And whilst that was affecting all of the major carriers in Europe and Asia who rely on the long haul, the US domestic traffic was actually back above covid levels quite quickly. So if you take all of that, that passenger traffic out and put it on the roads, you can absolutely see. Why that would, cause potentially an uptick in accidents there.
So, but, and, and in, in the US for, for many people, I mean, you've been through US airports. I mean, if you've ever been through one when it's not busy, it's, it's incredible the volume of people traveling and for a lot it's, it's almost like a bus service. We would consider the bus or a train, in the US because of the size they fly.
[00:25:11] TEC: do that. Yeah. I, I absolutely am never flying by Miami ever again. I've had horrible experiences of their seven hour queues, gives me the shivers. You mentioned there, a really important word is around sustainability, right? The, the. Aircraft have become much more sustainable. And said massive improvements in efficiencies, but there's still some way to go. Right? It's still a very high emission area. I think there was just recently in France, they've, they've banned some regional flights where you can take the train or some like two hour, if it's a two hour journey, that there should not be a regional flight. And obviously there's, there is a sort of move to try and find more sustainable efforts.
I mean, how likely is it that we're, we're gonna be able to replace like a, a, a lot of this technology because, You know, electric cars are coming. We we're seeing ev to stuff going on, and for short, little, short journeys that perhaps makes sense, but how on earth and is it even, is it even in the realms of possibility that, that we move to a stage where wider aviation becomes really sustainable?
[00:26:11] Mike Hansen: Yeah, I think that there's, there's a number of topics and it's something we are very engaged in with the industry. To the extent that we've, we've been on panels, industry panels on a, on a couple of occasions talking about how we see the, the sustainability of the business. And, and for us it's very much an educational exercise because we are learning, you know, almost at the same pace as the industry.
But I think we touched on it earlier. I think we have to take a step back. The investment that, that the aerospace industry has made in safety, has had actually had a sort of unexpected knock on effect on the improvement in, in emissions because the engines are so much more efficient and. not greener than they were 25 years ago.
But that doesn't change the fact that clearly it is a high emission industry, albeit it represents around 2% of, of all, of all global emissions. Currently, the challenge for the industry as, as other industries get more efficient and, and create less emissions, the potential for aerospace's percentage of that is to go up.
Is, is obviously the risk unless they can move at the same pace, as other, and it's a lot easier to, you know, electric cars are much easier than building an electric aircraft. So I think it is conceivable, there's, there's a couple of obstacles. So sustainable aviation fuel, which is made from sort of agricultural byproducts, food products, et cetera, is absolutely, it is being used already today.
So, most aircraft are flying with some level of SAF as it's called in the industry within the, in the mix of the fuel. So that is perfectly conceivable. It doesn't have an issue with the propulsion systems 'cause they obviously were built to, to run on, standard fuel. So that's proven. The issue is producing it at scale and at a cost that is, is feasible.
And at the moment there is about enough SAF in the world being produced at the moment to serve as about 3% of the world's flight. So, and it may take another 10 years to get up to 20 or 30%. And so that's the challenge, is how can they trade enough saf, whether it's from on a synthetic basis or whether it's from agricultural byproducts.
And you obviously, you can't ignore. In any manufacturing process, you're creating emission. So, you know, it's, it's never, the zero is always a big challenge, so that that's conceivable. And I think the, the airlines are pushing it hard and regulators are now starting to impose greater requirements for SAF within the mix.
So that's, that's definitely feasible. A number of the manufacturers also looking into hydrogen, which again would be as, yeah, as clean as you can get, but again, That would take a lot more change to the actual industry in the way that the aircraft are built and are powered. So that's a longer term concept, but Airbus in particular are very sort of vocal about their, their mission to, to move in that direction, which, I think is great.
And then as you said, in on the smaller scale, you'd have the electric aircraft or EV which could and should sort of restart replacing a lot of the, the short journeys. And actually, if you also think about drones for instance, I mean, Amazon have been talking about this for a while. You know how much traffic on the road these days is delivery vans, right?
Because we've all got so used to ordering everything online and you know, that can easily be replaced over time. You can certainly see a world where a lot of more of that delivery, even between, even if it's between Amazon Depots, could be done by the larger drones, for instance. I mean, there's a lot of challenges around the actual concept of building the aircraft.
I don't think that's a challenge, that's happening. There's lots of manufacturers out there. They're starting to get certificated by the authorities. So that is more than a dream. I think that's a reality probably two to three years away before we start seeing sort of meaningful activity. The challenge is gonna be the regulation around that, and where they can operate.
'cause we can all have this sort of science sci-fi image of these little electric taxis buzzing around all over the place. But even, even on the road, there's rules, right? That where you can and can't go, which side of the road you have to drive on, et cetera. So they're gonna have to create that infrastructure that sits below the current airspace infrastructure.
And as you know around, so London, it's one of the busiest airspace in the world. And so logistically that's a challenge to, to manage that. So then you throw in, EV tolls operating at sort of, obviously at lower level that needs to be considered. But we know the FAA in the states, the CAA in the UK, YASA, they're all working very closely together.
And I think what we're seeing there, actually, and it go back to your point about the sharing of safety data. Again, this is a good example of the whole industry working together. 'cause they know that this is a, this is a great opportunity and has been something like 20 billion invested in the industry already, and aircraft won't be flying for another two or three years.
So that's, that's the sort of investment the industry's making. But we can definitely see a world where that's, that's gonna happen. But yeah, and I think the industry's demonstrated over time that there's some incredibly clever people in it, and the, the investment they make in, in these technologies will pay off.
It's just gonna, unfortunately, will be longer haul perhaps than, than anybody would like. And from our perspective is, you know, for us it's about supporting the transition, but we don't have all the answers, you know, and the, the insurance product sits alongside it. But we wanna help with that transition. So definitely we would encourage anybody who's, any of the airlines and.
Uh, manufacturers who are sort of moving that direction. And our expectation is that, you know, all of our stakeholders be they, our employees, our investors, our reinsurers regulators are gonna be looking much closer at the business that an insurer writes from a sustainability perspective. So it's, it's almost gonna be, become as important, as our security rating.
So it's something we are very, very engaged in at convex overall, and certainly within those industries that are certainly more in the spotlight and aerospace definitely being one. we wanna work with the industry to see how we can, how we can assist with that transition.
[00:31:33] TEC: Absolutely. This is, this is a good example of insurance as an enabler, you know, where regulation takes a while to catch up and, and insurance is, is there to help plug some risk gaps. And obviously, quite rightly, you know, regulation does take a while, but for a very good reason. And that goes back to the safety side of things.
You know, they, they wanna make sure that everything is, is working. But I, I'm, I'm. I, I think it's gonna be a while before we see sort of, drone taxi buzzing around London and stuff. But there's plenty of use cases where actually it is in sort of better areas, you know, rig to rig transports and shorter to rig transports.
There's no reason why you need helicopters for that, right? The, those sort of level of journeys are perfectly doable now with, with, well not just passenger Jones et al, whatever it might be. And you could imagine sort of corridors being set up so that to allow for that type of thing. Drone deliveries again, yes.
We're not gonna see Amazon drone things going above like, but they, but they've, they've got it, right. They know they can do it. They, they've done some test cases, I think over in Asia where they were doing some deliveries to very remote locations. I know there's, there's sort of medical supplies being delivered, across Africa using, using drones.
So again, where the airspace is, Less used and, and, and, it's, it's definitely less busy and, and basically the most important thing not over connotations then, then it's, then it's already there. But I do look forward to the time when I can land at JFK and hop in a drone and, be in the city in a couple of minutes. That would be, that would be quite wonderful.
[00:32:58] Mike Hansen: Well, and the other thing that drones have been used for, which is again, I think a, a good example of insurance being an enabler is, in loss adjustments. So, particularly in the US or other parts of the world where they have, you know, catastrophic floods following storms. It's obviously not possible to get adjusters into those areas because it's not safe or it's inaccessible very quickly, and until the adjusters can get in there, then obviously the claims can't be settled.
So we've seen over the last four or five years, drones being used really extensively to go and actually sort of map the area that's been affected, and then they've got the data in real time. The justice can make their assessment of the damage and the claims could be paid much quicker. So I think that's a real step in the right direction, and that's another area where perhaps people hadn't considered.
Where drones could be of use. And we all, we also see them doing a lot of work. And you touched on the helicopter thing with, we see drones doing a lot of work. The helicopters used to do so. If you think about, particularly, you know, in, in parts of Canada where I used to live, you know, a lot of the mining and seismic work they used to do by helicopter flying up and down in a straight line to sort of, that can all be done by a drone, which is a more efficient and obviously much more sustainable.
[00:34:02] TEC: Absolutely. Wind turbine, wind turbine inspections. They've been doing it on rigs as well to look at the underside of the rigs, and rather than sending a poor chap underneath with, like attached to some mine. You can send that under and then actually send the people when you need them. And same for wind turbine scenes, which again, were done with helicopters before.
[00:34:20] Mike Hansen: Yeah. Well, and you're getting the data in real time as well. That's, that's the idea. You're getting absolutely real time data.
[00:34:25] TEC: Yeah. No, that's really cool. It's good to see how the aviation industry is, is, is helping out across the board, across insurance. And, I'll do one, one more, one more kind of topic, slightly off while we've been, talking about, more on the actual writing of insurance as well.
I wanna bring this up 'cause it's, it's, it's, it's really cool what, what, what, what you've done over in, in convex and, changing the way we actually write insurance in this area, right? Where aviation was, was always, has been a very much a broker. Running about London with huge slip cases, knocking on doors, going and visiting clients and, and, and, and good have face-to-face contact, but still paper and pen and an old fashioned walkin about the city.
But that's definitely not sustainable. I mean, COVID sort of sorted that out a little bit, but you've got a really good setup now in terms of how you write the insurance. Right. Do you wanna do, can you just explain a little bit about how that works? Because I'm always super impressed when I hear this.
[00:35:19] Mike Hansen: Yeah, so there's, there's a couple things really. I think the, the, the face-to-face or on the phone, the negotiation. I. Between the broker and the underwriter. I don't think that would ever, nobody really wants that to go away at all, because I think that is, you know, a key tenant. Particularly what makes London special and as what has sustained London of the market over, over many years.
And that's not just aviation insurance, that's across all lines of insurance. I don't think that part of the negotiation should go away. And, you know, the client needs to have, its their advocate and the broker is their advocate, and the insurers need to have their, their part in that negotiation. But what.
What we're trying to do is eliminate as much of the, what we call the sort of background noise that goes on around it, the process, so the, the transmission of data from the clients, the broker to us, what we do with that data, and then how we communicate back the actual core parts of, of the, the offering.
And to us, that is something we can take the human out of that whole chain. And even at Convex when we started, 'cause we didn't have any systems set up, it was, it was very, entrepreneurial. We were actually in a WeWork office, so we were sort of surrounded by software gurus and then we were a boring old insurance company and we didn't have any systems at all.
So at the time we realized at best we were touching the same data point about five or six times. And in the Utopia, we want that to get that down to zero. So what we've been able to do, and, and thanks to, you know, commitment from a couple of our major brokers, actually, we now absorb 70% of our airline data via robot, effectively.
So one uses one of their online portals, another one is currently using an email that, that, that's gonna move on to an online portal as well. So, effectively, as long as that data is in a structured format, and it works really well for airlines because the data on an airline is the same every time. It's, you know, it's the fleet, it's the passengers, it's the departures, et cetera.
So we, we, we built a, a structured template, which they now use and then, We use, RPA, so they can then scope three or four times a day. It finds something that fits the model and it, sucks it into our system and then lets us know that the data's there. And then we're sort of working quite closely with another couple of brokers on how we can sort of automate some of the actual underwriting process behind the scenes.
Um, and actually this week within Convex, we've just launched a, a, a second phase of our sort of data acquisition, mission where we can now have a sort of a piece of software or read. A slip and extract the key points of data and basically populate our submission system automatically. So again, we are, we're sort of removing so much more of that data and like the advantages of that of course are one time is, is hugely saved.
Accuracy obviously goes up massively and it then allows us to spend the time they know the intellectual power that we have to actually think about the risk and have those negotiate meaningful negotiations with the progress. And there, there's sort of a tenet that sort of goes around the company that we will have to always think about is if it doesn't need human knowledge or expertise, then you either automate it, you outsource it, or you don't do it.
So, and that's very much, you know, when we, we are thinking about all of our processes, that's the thing that's sitting behind it is like, how can we get away from touching that data unless it needs that sort of human expertise. It's really exciting actually. And obviously having a company with a clean sheet of paper.
But also from the top down, you know, from a, you know, Paul brand, the group c e o, having the vision to say no, this, and, and the discipline to say, this is what we're going to do. 'cause when you get busy and we've gone from zero to 4 billion in four years, that's, there's quite a lot going on. You know, it's very easy to fall back on the, the old way to do things 'cause that's easy and comfortable.
And everybody here is, is really focused on challenging that and not letting themselves drift back into the old ways of doing it. And sometimes it's difficult because you're busy and you just want things done. But we can, we're starting to see real benefits now, four years of investment and time and money, in the concept.
And yeah, these things were even four years ago, I wouldn't have been able to assume we could do this. You know, I've shown you briefly just on the laptop, a quick example, and we know from talking to some of our other partners and the brokers that we, we appear to be quite a long way ahead of our competitors, but we don't want to stop there.
We wanna keep thinking of ways that we can continuously improve that. Because we feel the value is, is not in the data itself. The data is, is data, right? It's stuff, as someone described it to me, it's what you do with it. That's the clever bit. That's the competitive advantage. So the data should exist for everybody.
What each individual insurance company does with that data or broker, that's the competitive advantage. We shouldn't be spending time and expensive salaries on sort of wrestling with that and actually just creating friction in the whole process. So that's, that's very much a strong vision of, of convex as you know.
Um, and we're starting to see real benefits to that and that actually real output. So once people start seeing that progress and their lives becoming easier, then you get even more buy-in and engagement. And I think we're seeing that very much now, across the business.
[00:40:00] TEC: As you said it, it gives you, it gives you that edge. And that kind of neatly brings me onto my sort of last question, really, which you've kind of answered it a little bit, but, maybe we touched on one or two the points again, but obviously a soft market is, is inevitable. sadly, although some people have saw it's not inevitable.
We should, we should hope that it's not, but it, it kind of is. And we were already seeing on the sort of GA side and, hopefully airlines and aerospace will take a little bit longer before they start heading that direction, but, What's the kind of main thing that you would sort of be saying to companies saying, well, what's, how should you be preparing for this?
Right. We, we know it's coming. What's gonna be the sort of most useful thing you can do, to set yourself up for this inevitability.
[00:40:40] Mike Hansen: Yeah, I mean, the market operates in cycles, right? And it's a very, it's an incredibly efficient market because it, it, it just follows supply and demand. And yeah, we've lived through longer soft markets and hard markets. They tend to be, tend to be longer and more sustained, and hard markets tend to be shorter and less sustainable.
One of the key is being as efficient as possible as a, as a company. And, and obviously one of, again, the big things there is that the expense ratio, maintaining that as low as possible. So that, you know, obviously that's, that's a big cost for us. You know, salaries are a big cost for us, but if we can, if we can manage those costs that we can directly control, then you know, our biggest cost is claims.
So that, that is inevitable. And, you know, if the premium base is shrinking, clearly that is gonna have an impact on our margins. But, you know, if we can control what we can can control, we can hopefully trade through the, the softer parts of the market more effectively. and again, I think it then comes down to the underwriting discipline.
I mean, we all have to know, nobody likes to say no and decline business, but there is a point where things become uneconomic. And what we, we try to do is think about, certainly in our aerospace portfolio, we're try to think about it as a, as a portfolio over a cycle and not sort of get hung up on too much on individual risks and where they sit in the, in the sort of pricing spectrum, because you know that that's probably too granular.
I mean, each individual should contribute something towards the, the positive result. But we do have to think about it as a portfolio. Within that we have what we call core and sort of more opportunistic business. And so inevitably we'd expect the more opportunistic business to be the ones that we probably would decline if, if the pricing isn't as sufficient level.
And we will try and support our core clients 'cause that's what we sold is our long-term commitment. Now, obviously not at any price, but, but frankly, if it. If the business becomes that uneconomical, then everybody's gonna have the same problem and, you know, you'd actually get an uptick. So, and again, the, the key there is, you know, how do we, how do we differentiate ourselves in those scenarios is again, the service levels, which we try to, to deliver and maintain, making ourselves more useful to our clients so that in the, the tougher times they wanna be stickier with convex.
And that might be working with 'em on other lines of business. But just generally being a, a sort of strong, long-term supporter of them. And hopefully that will stand us in good stead. But as you say, yeah, we can't, we can't push back the tide if it's a soft market. It's a soft market. We just have to find a way to navigate through that with, with good underwriting discipline and, and sort of maintaining an efficient process.
[00:43:03] TEC: I couldn't agree more with that. Makes absolute sense. Yeah. Mike, that's been brilliant. I'm very much looking forward to seeing where the aviation industry heads. I hope we. And put anyone off going, flying it, it is definitely the safest, mode of transport. And I do look, I do look forward to the day that I can take my passenger drone to work.
But, may, may maybe, maybe two or three years or plus a little bit more, before that happens. But yeah. Thank you very much.
[00:43:26] Mike Hansen: No. Appreciate it. Thanks for the time.
[00:43:30] TEC: That concludes another episode of TEC Talks. If you enjoyed today's show and want to find out more about the topics discussed, head over to hyperexponential.com to gain access to a range of resources relating to this episode. The link is in the description, and of course, wherever you're listening to the podcast, make sure you like, subscribe, and leave us a comment or review.
Thanks so much for joining us and see you next time. Bye.