Willis Chief on Non-Traditional Risks Facing Airlines; Asia-Pacific Growth

Joe Plumeri, Willis Group Holdings Chairman and CEO, told attendees at the Willis Asia Pacific Aviation Insurance Conference in Hong Kong that air travel in Asia Pacific is set to significantly surpass that of North America and Europe in the next five years.

The growth in the sector will result in increasing the exposure of airlines operating in the region to potentially game-changing risks such as reputational risk.

Plumeri also cited loss of customers, talent and skills shortages, currency and price fluctuations and changing legislation among the emerging risks facing the global aviation industry. “In aviation, traditional forms of risk, once identified, can be engineered out with redundant systems, he stated, adding that “most accidents in this industry are now due to human error.”

Plumeri cited the following as examples of the new risks facing airlines:
• Loss of customers – The Icelandic ash cloud of 2010 cost airlines millions of dollars in extended business interruption, despite the fact that there was no physical damage to assets.
• Talent and skills shortages – “In next 20 years, airlines will need to hire and train 460,000 pilots and 650,000 maintenance technicians,” he said, as he pointed out that Asia is already experiencing delays due to pilot shortages.
• Currency and price fluctuation – “Fuel represents nearly 40 percent of an airline’s cost base and is purchased in dollars,” explained Plumeri ,adding that airlines could be at the mercy of unsustainable oil prices, should the political confrontation with Iran over UN and other sanctions escalate.
• Changing legislation – Plumeri cited the EU offsetting charges for CO2 emissions being imposed unilaterally on airlines not based in Europe.

In his speech, Plumeri focused particularly on reputational risk, noting that it is “the hardest risk for airlines to manage in a hyper-connected world where social media is ubiquitous.” He indicated that Willis’ research found that major firms suffer a significant reputational reversal every seven years, on average. “While a reputational crisis can destroy a company’s value, massively and almost instantly, they are virtually impossible to predict,” he added.

In order to prepare for these unpredictable risks, Plumeri urged airlines to focus on building resilience in their company rather than simply taking the traditional approach of trying to anticipate the risks to which an organization might be exposed.

He explained that by “having a risk management policy based solely on anticipation, a company will find that they are not fast or flexible enough to respond to a complex, interconnected and rapidly changing world. As much as any other industry, Aviation needs to anticipate the worst, but to build resilience. The resilience approach acknowledges that the future is unpredictable and responds dynamically by having the right expertise and processes in place to make decentralized decisions and adjustments in real time. This builds organizations more capable of bouncing back from adversity.”

Plumeri described insurance coverage as the “the bridge between anticipation and resilience;” adding that “the insurance industry has been anticipating known risks for decades, while at the same time helping business build resilience against the unknown.

“We as an industry own resilience,” Plumeri continued. “We’ve proven our own resilience over the years and our focus on extreme one in 200 year events has made us more resilient to catastrophe and shocks from Mother Nature and markets.”

He concluded his address with calls for a “closer partnership between aviation and insurance,” stating: “Our industry is continuously transforming the scale, depth and quality of insight about the risks facing our clients and how to manage and transfer them. We will use this insight to help airlines to build resilience and to prepare for and respond to new and emerging risks.”

Source: Willis Group Holdings

Topics Trends Europe Aviation