Sky’s the limit with a tactical nuke

The potential response to the use of a tactical nuclear weapon was a risk flying under the re/insurance radar until broker Gallagher noticed that an age-old clause in aviation policies was not fit for purpose in the modern military world.

The broker has developed an aviation market-wide industry solution to airlines having to ground their fleets immediately after the hostile detonation of a nuclear device.

In an interview with Insurance Day, Nigel Weyman, Gallagher Specialty’s global executive for aerospace, explains how the threat of such an event in the Russia-Ukraine conflict spooked the market.

“It’s the tactical nuclear weapons that we were specifically worried about because, when the wording was originally written, which is standard across all airline insurance policies, the industry thought a nuclear event would be Armageddon. Since then, very small nuclear devices have been developed to use as a tactical weapon on the battlefield,” Weyman says.

“What concerned us was the wording didn’t differentiate between ‘tactical’ and ‘massive’, meaning we would have aircraft all around the world grounded unnecessarily. The risk is an aircraft being shot down by a conventional weapon in response to an attack using a nuclear device,” he explains.

The ideal solution would be to quickly reinstate cover – effectively cancelling the cancellation – but with aviation policies typically involving many different insurers, there was no guarantee they would all agree to do so. If they did, even then the process could take months which, given the hundreds of thousands of policies in play at one time, could mean the paperwork would be endless. Even worse, passengers would be grounded for an indeterminate length of time.

When Dmitry Medvedev, deputy chairman of the Russian Security Council, started making threats about using tactical nuclear weapons in Ukraine, there was a “collective gasp” in the insurance industry, Weyman says.

“We rushed to the clause book, but no one was comfortable putting a definition for a strike with a tactical nuclear weapon. They go from very small bombs that are not much bigger than the conventional bomb to the Armageddon size. And there’s also a massive difference if it has exploded high up in the air or on the ground,” he adds.

A definition of “tactical” in this context is irrelevant for the special facility, he notes, as the key is the “hostile detonation of a nuclear device”. “Even a tiny one would trigger the automatic cancellation,” he says.

He continues: “We’ve come up with an innovation that has solved a problem we forgot existed until this rather nasty dialogue started.”

Even if peace breaks out between Russia and Ukraine, the threat of a tactical nuclear weapon remains a risk for re/insurers to manage, he notes, not least because of the nuclear capabilities of other nations in Russia’s sphere of influence, such as North Korea and Iran.

Billion-dollar facility

Gallagher created a standalone, billion-dollar policy that covers both passenger legal liability war and third-party legal liability war. The broker found 17 specialist aviation insurers, led by La Réunion Aérienne & Spatiale, willing to come on board, by replacing the cover that would be automatically cancelled.

The broker would call a meeting of all these insurers – virtually or physically – within four hours of a tactical nuclear weapon being used anywhere in the world. They would follow government and airline security advice on how safe it is for aircraft to be allowed to fly again.

Weyman explains: “If the attack was in Ukraine, for example, then the first countries we would look at would be New Zealand and Australia. They would be the furthest away from the incident and so why not give them cover within minutes? Then we would gradually walk the coverage question back towards where the event happened. We think we could probably get 90% of the aircraft flying again.”

This “simple” solution took 18 months of hard negotiation, however, not only with direct insurers, but with their reinsurers and retrocessionaires. 

“Eventually we got a positive consensus,” Weyman says, “and we put together this scheme which can be accessed by all airlines around the world, through us or their own brokers.”

Gallagher and members of the facility have agreed a nominal price for the cover, which Weyman declines to reveal to avoid the antitrust concerns such a disclosure would create. “It isn’t a huge amount to get people moving again and the elements have already been agreed as acceptable,” he says. “The pricing is settled and so we can talk about safety as a collective legally,” he adds.

The broker anonymised the process as much as possible, so that “branding doesn’t get in the way” of an airline’s decision to join the scheme. About 110 airlines have signed up since its launch in September 2023, but there are many more that have not.

Weyman says the main reason for that lack of enthusiasm is the assumption that governments will step in and provide the coverage, just as the US administration did following 9/11. Had that terrorist attack happened in another country, Weyman argues, there might not have been such a government response.

“In the UK, the government was making noises that they might provide coverage, but they dragged their heels, and we had to reinstate the cover after 9/11. That’s different circumstances, it wasn't a nuclear weapon, but all insurance coverages were being cancelled,” he notes.

He continues: “I can’t tell you their names but the vast majority of airlines in Europe have bought the cover. There are some very significant ones that have not, although we have presented it to them. Either they think it will be all right on the night, or that there’ll be government indemnity because it will be such a terrible situation – the social horror story of a 100 million passengers being stranded – that governments can’t turn their back on.”

Gallagher has also achieved agreement among signatories to its scheme that aircraft could continue to fly for 48 hours before automatic cancellation of coverage kicks in.

“They realised that the likelihood of an accident would go off the scale if you forced aircraft to ground immediately,” Weyman says, adding that the Covid pandemic had shown what turning a runway into a parking lot for aircraft looked like.

He continues: “Anyone who has been at an airport when all the flights have been cancelled knows that it’s an absolute disaster. For example, passengers not having enough medication with them who can’t risk being stranded for a number of days. Another example is passengers who don’t have enough formula milk or nappies for their babies. It’s a nightmare and it could go on for weeks.”

‘If a wording anomaly, which is what this is, stranded tens of millions of passengers, then I wouldn't ever admit that I was in the aviation insurance industry at dinner parties again’

The pressure on aviation insurers to make an instant decision has been made easier, therefore, by having a 48-hour window, “as we would be able to step in and hopefully provide the cover”, he says.

To help design the facility, Gallagher enlisted the guidance of Osprey, the specialist security company that many airlines use on a daily basis to assess the safety of aircraft around the world. “There are other companies like Osprey, but it’s the one we’re contracted with, and we know insurers trust its judgement,” Weyman says.

Osprey has been part of the “dress rehearsals” for the cover, which included resources like maps of where the “nuclear drift” would go. “It was a very professional, very positive approach and everyone who participated felt it was well handled,” he adds.

Gallagher’s clients have said they would put their security departments in touch with the broker directly. “They have a lot of intel, and they deal directly with their governments, and so we are quite confident we’d get input from them,” Weyman says.

He points to the disruption at London airports in July as a mini example of the potential impact of cancellation of insurance cover for airlines worldwide. The air-traffic control outage was caused by an unspecified radar-related issue and resulted in the cancellation of 84 departing flights and 71 arrivals across the UK, with Heathrow having the most disruptions.

“We saw the impact of Heathrow shutting down due to an IT glitch, but the issue of cancelled cover would impact every airport in the world. If we multiplied that incident 1,000 times, then it really is untenable,” he says.

He concludes: “If a wording anomaly, which is what this is, stranded tens of millions of passengers, then I wouldn't ever admit that I was in the aviation insurance industry at dinner parties again. I mean, you’d be a pariah because, surely, it’s so simple just to reword policies. This special facility has the answer to 99% of the issues that can be thrown up.”