Brexit consequences for Lufthansa Group

This article is was first published as part of the Ferma/Airmic joint Brexit newsletter

Martin Gary (pictured) is managing director of Albatros (Lufthansa Group in-house broker) in Cologne, Germany. He has been working as risk manager of Austrian Airlines, Vienna for 15 years before taking over his current position in Albatros in 2018. Prior to that he was working in various other positions in Aviation including Legal and Aeropolitical functions.

His priority is to understand the level of preparedness of insurance carriers in case of a hard Brexit without agreement between the EU and the UK. It is the intention of Albatros to mitigate this exposure without disruption to existing business relationships but at the same time to ensure that all contractual arrangements are Brexit-proof.

Transferring insurance contracts from one jurisdiction to another is indeed a technical challenge, even if it is only between entities in the same insurance group. A close look was also necessary to monitor how the subsidiaries of UK insurers were prepared to take on “continental” risks (European Economic Area). Albatros is also checking the plans and implementation status of UK (re)insurers about how they will ensure that they remain able to insure EU risks post-Brexit – including handling of run-off losses on expiring policies.

With the initial date of 29 March 2019 for Britain’s departure, the transfer of contracts has proven more difficult than a Brexit date at the end of a policy year when renewal discussions take place. Transferring a policy half-way through a year means that some portions of the risks will move to a new entity while the rest remains within the “historic” carrier. It is certainly technically feasible but far more complex.

Now that Brexit is scheduled for 31 October and policies managed by Albatros ending mid-November, some administrative work could still be required to cover for the first two weeks of November. To facilitate this process, specific Brexit clauses were already included during the last renewals to allow for a partial shift during the policy year.

The stakes are very high for Lufthansa because aviation insurance is compulsory for operators and strictly regulated by EU and national laws. It is, therefore, crucial that following Brexit, European continental aviation risks are fully covered by EU licensed carriers.

Delvag, the Lufthansa captive insurance company, has been proving highly useful as part of the risk management toolbox. Although it carries only a small portion of the risks of the whole group, it remains fully licensed to operate in the EU and will continue to be part of the panel of insurers. Besides, Delvag and Albatros are also prepared for continuing business for their UK clients under the temporary permission regime established by the UK authorities.

Management

A working group within the Delvag Group reports directly to the management board. It is composed of representatives of all departments with UK exposures (client relationship, business partner, insurers, reinsurers or brokers) including risk managers and the legal department.

Many other aspects of Brexit are handled within a working group at Lufthansa Group level as well, with a broader mission to investigate Brexit exposure in all lines of business. The overall objective is to maintain all operations whatever the outcomes of the UK departure from the EU.

According to Martin, Albatros and its business partners are quite advanced in terms of preparing and securing compliance with insurance legal requirements. The chances of an airline being grounded because of Brexit political developments must be avoided, and insurance coverages must be safeguarded under all circumstances. A hard Brexit would certainly cause a lot of administrative burdens and a few weeks to adjust but Martin is convinced that the situation is manageable.