Munich Re, in collaboration with easyJet, has designed a comprehensive product that for the first time provides cover for airline flight cancellations. The policy provides financial protection against various large shock events that lead to business interruption losses in aviation. Examples of such events include volcanic ash clouds, severe winter storms, or the grounding of the fleet on safety grounds.

An issued statement said the innovative product allows an airline to partially reduce its liquidity reserve. It has been developed by Munich Re’s Special Enterprise Risks unit and specialists from its aviation underwriting team, working in conjunction with easyJet. The coverage plays an integral part in the airline’s capital management. The pricing is competitive with other sources of funding and allows the airline to free up cash that can be put to use in the business. The product demonstrates that insurance can be a valuable alternative to capital market instruments.

Flight cancellations are valued at a “pre-agreed” fixed amount to ensure a fast and effective pay-out.

Nobody has forgotten the business impact of the huge ash cloud from the Icelandic volcano Eyjafjallajökull in 2010, which – according to IATA estimates – led to the cancellation of more than 100,000 flights and caused airline losses exceeding US$ 1.8bn. The cover is structured to limit the balance sheet impact on airlines of such significant business interruption events.

Mike Hirst, Director of Treasury and Tax for easyJet, commented: “We have been very impressed with Munich Re’s creativeness, professionalism and project management throughout the development of this innovative product. The product itself complements the combination of cash and Revolving Credit Facility that already supports our liquidity buffer and diversifies further our counterparty credit risk into the insurance market and, specifically, to a very creditworthy long-term partner in Munich Re.”

Rolf Heintzeler, Head of Aviation Facultative, is pleased to have won easyJet as a new long-term client. “This deal is a real win-win for both parties: easyJet is the right partner for this kind of deal because, when it comes to safety and risk management, easyJet is top in class. As a diverse set of perils has to be covered, broad risk expertise is needed to develop such tailor-made solutions for the client.”