FAA's Order to Temporarily Halt Domestic Flights Will Add to Travel Insurers' Challenges Following Massive Disruptions in 2022

DBRS Morningstar released a commentary analyzing the credit implication for travel insurance providers of the temporary flights suspension ordered by the U.S. Federal Aviation Administration (FAA) due to the outage of the NOTAM system during the morning of January 11, 2023.

Key highlights include the following:

-FAA’s recent order to temporarily halt all domestic flights in the United States for several hours resulted in 100% increase in flight delays and a 600% increase in flight cancellations.

-The large increase in flight delays and cancellations will negatively affect the profitability of the travel insurance business in the first quarter of the year.

-The outlook for the travel insurance business remains negative following unprecedented travel disruption in 2022 as a consequence of staffing shortages, fleet reductions, operational challenges derived from pandemic-related measures, and extreme weather events.

-We expect that the upward trend in the pricing of travel insurance products will continue in 2023 as travel insurers try to recoup some of the losses experienced in the last three years.

“In our view, the large number of flight delays and cancellations during January 11 will have a negative impact on the profitability of the travel insurance market, which already suffered from above-average losses in 2022 as airports and airlines faced bottlenecks when air travel began to recover following the peak of the COVID-19 pandemic,” said Marcos Alvarez, Global Head of Insurance. “Although we anticipate that the FAA order to temporarily halt U.S. domestic departures will likely result in above average travel insurance claims in January, losses should remain manageable given insurance companies’ high degree of diversification across different business lines.”