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27 April 2020 | 5-minute read
Check-ups are essential. Regular maintenance is critical. From aircraft and their pilots to drilling rigs and motor vehicle MOTs, confirmation of the peak performance of equipment and even bodies is something the insurance sector relies on when it sets rates and grants coverage. Unfortunately, the clear necessities of the COVID-19 crisis have caused some maintenance runs and medical and mechanical health checks to be pushed to the back burner. This could be storing up an insurance-market challenge for the future.
Consider the aviation sector. At the time of writing, global commercial flights numbered about 28,000 a day, down from about 112,000 daily flights in January. The drop of precisely 75% means roughly three in four of the world’s commercial aircraft are laid up in cold stack, and many pilots are not flying. This situation raises many very important questions:
- When do pilots’ flight certificates become invalid?
- How much time must pass before they can no longer fly without recertification?
- India and US have relaxed pilots’ health-certification requirements. How will insurers, or the general public, react to a health-related crash involving such a pilot?
- •What are the time-restrictions on the qualifications of aircraft engineers?
- What about the airworthiness of aircraft themselves?
- Do the various existing time and cycle limits to maintenance still apply?
- Will aircraft be rushed back into service for the sake of the economy?
- If so, will health checks and maintenance be complete and proper, or fast and inexpensive?
- How will insurers, or the general public, respond if a crashed aircraft is one reactivated after months of idleness?
- How far will a long-term stoppage deplete the sector’s human skills?
The threat extends beyond aviation. My family is using 150 fewer litres of petrol each week during the crisis, and we are not alone in staying parked. Fuel use is lower than ever. The price of West Texas Intermediate dropped below zero for the first time ever, as producers pay people to carry away their output. But oil production has largely been maintained so far, because production cannot simply be throttled with the throw of a switch. Doing so can permanently reduce a well’s yield. In some cases, restarting production might require re-drilling. In others a well restart may be possible, but insurers are concerned that shutting down wells and temporarily abandoning drilling platforms may make them difficult to reactivate, unless careful preparations were made during lay-up and shutdown.
Closures could deal a vicious blow to the US shale oil sector, at least until prices recover, and possibly beyond. They could also change dramatically the industry’s risk profile. The life of a fracking rig is about four years, and a significant portion of the fleet is approaching that age. Will cash-strapped producers be tempted to keep them going, even after that operational life-expectancy has been exceeded? Will end-of-life old rigs be restarted post-virus, when an oil-price increase makes resumed production too tempting to miss? Frack fires are already relatively regular, and less than a quarter of the fleet has significant fire protection. Will this exacerbate the danger, and upset the pricing for this carefully measured risk?
Other production facilities, from plastics and petrochemicals to mines and motor-manufacturing, cannot simply shut down without taking multiple precautionary steps. These measures may be much more complex when the lay-up is expected to be longer, which could create intractable problems if mandated shutdowns are extended multiple times. When restrictions are lifted, with facilities already being very expensive to restart, will there be greater cost and risk due to inadequate shut down procedures? In the interim, essential checks and ongoing maintenance may not have been adequately performed.
My car isn’t moving very much these days, but the government has granted me an MOT holiday. I hope my brakes still work. I am not sure how my insurer will react if they don’t, and hopefully there will be no issues with the airbags! Risk carriers in the Lloyd’s market and beyond probably have many more extremely urgent challenges to deal with than usual, but will benefit from finding time now to consider the post-lockdown impacts of missed health checks and maintenance.