EXECUTIVE SUMMARY Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and low cost carriers. Aviation accidents are serious accidents, especially those that happen while the plane is in flight. Aviation or plane accidents do not only mean pilot error. It could also be caused by malfunctioning gauges as a result of product liability or failure of maintenance. Also, aviation accidents do not only connote plane crashes or mishaps. Aviation insurance is different from other forms of insurance in that it is very subjective. Due to the vast array of aircraft types, uses and pilot experience, policies should always be specifically tailored to suit the unique requirements of each individual applicant. For this reason it is recommended that a broker, specialising in aviation insurance be engaged to arrange cover. The Indian aviation industry has witnessed remarkable growth in recent years, with key drivers being positive economic factors, including high GDP growth, good industrial performance, and corporate profitability and expansion. Other factors include higher disposable incomes, growth in consumer spending, and availability of low fares. Before the boom in the Indian aviation sector, the airline insurance market was dominated by the four state-owned general insurance companies: New India Assurance Company, Oriental Insurance Company, National Insurance Company and United India.
Aviation insurance business is a high severity loss business and in the future you could see a lot of Indian insurance companies joining hands to manage airline accounts. Aviation has come a long way the last 100 years. The industry is still developing. With growth comes a problem that must be solved before the industry can go to the next level.
HYPOTHESIS: ―Premium rates in aviation insurance are highly volatile.‖ An interview with the Sr. Deputy Manager of The New India Assurance Company Ltd, Mr. K.S.Kulkarni proves that premium rates can rise or fall sharply, apparently without rhyme or reason. However, he explains that this specialist market covers the enormous insurance risks of today’s airline operations, where a single major accident might cost billions. Aviation insurance is one of the most complex and specialized fields in the insurance industry. It is a much smaller portion of the industry than home, auto, life, health and other general commercial insurance sectors. In fact, in premium volume, aviation insurance makes up less than 1 percent of the entire insurance industry.
AN INTRODUCTION TO INSURANCE With the insurance sector in full bloom, today, it would not be wrong to say that in the present market scenario, there is an insurance available for just about anything and everything. With even a bourgeois family man opting for various insurance schemes, the question today is not whether you have insurance or not. Instead it is, whether you need a particular insurance or not? Insurance is no doubt an area of immense importance in regards to the financial and monetary sectors of every individual. The whole idea behind Insurance as a financial security tool was to design something which could secure the financial well-being of an individual as well as his/her dependents, in case he/she undergoes an unforeseen loss. These losses could be related to health, property, assets or life in general. Insurance helps people manage monetary risks and losses related to investments, liabilities for wrong financial actions, and risks for inability to earn income at any stage of life. Insurance generally covers all these risks. Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The risks, which can be insured against, include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is Insurance. How it works ―Insurance is a contract between two parties’ viz., the insurer and the insured, whereby the insurer agrees to compensate the insured in the event of any loss, in return for consideration (premium) from the insured‖. In short, the insurance company promises to make good the loss, in the event of occurrence of any incidence.
THE AVIATION SECTOR India is one of the fastest growing aviation markets in the world. The Airport Authority of India (AAI) manages a total of 127 airports in the country, which include 13 international airports, 7 custom airports, 80 domestic airports and 28 civil enclaves. There are over 450 airports and 1091 registered aircrafts in the country. The genesis of civil aviation in India goes back to December 1912 when the first domestic air route between Karachi and Delhi became operational. In the early fifties, all airlines operating in the country were merged into either Indian Airlines or Air India and, by virtue of the Air Corporations Act 1953, this monopoly continued for the next forty years. In 1990s, aviation industry in India saw some important changes. The Air Corporations Act was abolished to end the monopoly of the public sector and private airlines were reintroduced. With the liberalization of the Indian aviation sector, the industry has witnessed a transformation with the entry of the privately owned full service airlines and low cost carriers. In 2006, the private carriers accounted for around 75% share of the domestic aviation market. The sector has also seen a significant increase in the number of domestic air travel passengers. Some of the factors that have resulted in higher demand for air transport in India include the growing middle class and their purchasing power, low airfares offered by low cost carriers like Air Deccan, etc. Increasing liberalization and deregulation has led to an increase in the number of private players. The aviation industry comprises of three types of players:
Full cost carriers
Low cost carriers (LCC)
Other start-up airlines
REASONS FOR BOOM IN THE AVIATION INDUSTRY 1. Foreign equity allowed: Foreign equity up to 49 per cent and NRI (NonResident Indian) investment up to 100 per cent is permissible in domestic airlines without any government approval. However, the government policy bars foreign airlines from taking a stake in a domestic airline company.
2. Low entry barriers: Nowadays, venture capital of $10 million or less is enough to launch an airline. Private airlines are known to hire foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines in senior management positions. Further, they outsource such functions as ground handling, check-in, reservation, aircraft maintenance, catering, training, revenue accounting, IT infrastructure, loyalty and programme management. Airlines are known to take on contract employees such as cabin crew, ticketing and check-in agents.
3. Attraction of foreign shores: Jet and Sahara have gone international by starting operations, first to SAARC countries, and then to South-East Asia, the UK, and the US. After five years of domestic operations, many domestic airlines too will be entitled to fly overseas by using unutilised bilateral entitlements to Indian carriers.
4. Rising income levels and demographic profile: Though India's GDP (per capita) at $3,100 is still very low as compared to the developed country standards, India is shining, at least in metro cities and urban centres, where IT and
BPO
industries
have
made
the
young
generation
prosperous.
Demographically, India has the highest percentage of people in age group of 2050 among its 50 million strong middle class, with high earning potential. All
this contributes for the boost in domestic air travel, particularly from a low base of 18 million passengers.
5. Untapped potential of India's tourism: Currently India attracts 3.2 million tourists every year, while China gets 10 times the number. Tourist arrivals in India are expected to grow exponentially, especially due to the open sky policy between India and the SAARC countries and the increase in bilateral entitlements with European countries, and US.
6. Glamour of the airlines: No industry other than film-making industry is as glamorous as the airlines. Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes, and Sir Richard Branson and Dr. Vijay Mallya today, have been idolized. Airlines have an aura of glamour around them, and high net worth individuals can always toy with the idea of owning an airline. All the above factors seem to have resulted in a "me too" rush to launch domestic airlines in India.
CHALLENGES FACED BY THE AVIATION INDUSTRY The growth in the aviation sector and capacity expansion by carriers has posed challenges to aviation industry on several fronts. These include shortage of workers and professionals, safety concerns, declining returns and the lack of accompanying capacity and infrastructure. Moreover, stiff competition and rising fuel costs are also negatively impacting the industry 1. Employee shortage: There is clearly a shortage of trained and skilled manpower in the aviation sector as a consequence of which there is cutthroat competition for employees which, in turn, is driving wages to unsustainable levels. Moreover, the industry is unable to retain talented employees. 2. Regional connectivity: One of the biggest challenges facing the aviation sector in India is to be able to provide regional connectivity. What is hampering the growth of regional connectivity is the lack of airports. 3. Rising fuel prices: As fuel prices have climbed, the inverse relationship between fuel prices and airline stock prices has been demonstrated. Moreover, the rising fuel prices have led to increase in the air fares. 4. Declining yields: LCCs and other entrants together now command a market share of around 46%. Legacy carriers are being forced to match LCC fares, during a time of escalating costs. Increasing growth prospects have attracted & are likely to attract more players, which will lead to more competition. All this has resulted in lower returns for all operators. 5. Gaps in infrastructure: Airport and air traffic control (ATC) infrastructure is inadequate to support growth. While a start has been made to upgrade the infrastructure, the results will be visible only after 2 - 3 years.
6. Trunk routes: It is also a matter of concern that the trunk routes, at present, are not fully exploited. One of the reasons for inability to realize the full potential of the trunk routes is the lack of genuine competition. The entry of new players would ensure that air fares are brought to realistic levels, as it will lead to better cost and revenue management, increased productivity and better services. This in turn would stimulate demand and lead to growth. 7. High input costs: Apart from the above-mentioned factors, the input costs are also high. Some of the reasons for high input costs are: Withholding tax on interest repayments on foreign currency loans for aircraft acquisition. Increasing manpower costs due to shortage of technical personnel.
HISTORY OF AVIATION INSURANCE Aviation Insurance was first introduced in the early years of the 20th Century. The first aviation insurance policy was written by Lloyd's of London in 1911. The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies. It is believed that the first aviation polices were underwritten by the Marine Insurance Underwriting community.
In 1929, the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today. By 1933, realising that there should be a specialist industry sector, the International Union of Marine Insurance (IUMI) set up an aviation committee, and by 1934 eight European aviation insurance companies and pools were formally established and the International Union of Aviation Insurers (IUAI) was born.
The London insurance market is still the largest single centre for aviation insurance. The market is made up of the traditional Lloyds of London syndicates and numerous other traditional insurance markets. US has a large percentage of the world's general aviation fleet and has a large established market.
No single insurer has the resources to retain a risk the size of a major airline, or even a substantial proportion of such a risk. Most airlines arrange "fleet policies" to cover all aircraft they own or operate.
THE RISKS COVERED UNDER AVIATION INSURANCE There are different types of risk which takes place in aviation insurance and those risks are covered in aviation insurance they are as follows:
The above diagram suggests that there are mainly two kinds of risks which an aviation insurance company will cover. These two risks are further divided into various parts which involve various risks and liabilities.
NORMAL RISKS These risks are those risks which every aviation company in this industry carries it on its back when it enters into the business. These risks may differ from time to time and situation to situation. These are
1. Hull Risks 2. Hull War Risks 3. Spares All Risks/ War Risks 4. Hull total Loss Only cover
These risks are those risks which takes place when these takes place when any of these factors comes into action. Because all the above risks mentioned above are unpredictable and may occur at any time
LIABILITIES A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Liabilities are those risks which may arise due to some consequences or some ―reasons‖ the company has to face. The main type of liability covered is: 1. Aircraft liability Passenger Third party baggage All the risks and liabilities are explained in detail below.
NORMAL RISKS 1. Hull All Risks – They are risks of physical loss or damage to the aircraft. They also are coverage for total loss of the aircraft or partial damages to the aircraft caused by all risks except the ―War Risks‖ and except also other risks mentioned in the Exclusion Section of the Policy. It covers:
Loss or Accidental Damage to Aircraft whilst flying or on ground.
Provides for replace or repair on account of loss or damage to Aircraft including disappearance.
Provides for reasonable recovery and emergency expenses incurred for immediate safety of aircraft consequent upon damage. Exclusions:
1. Wear, tear and gradual deterioration - in common with most non-marine policies these perils are thought to be a trading expense and not a peril to be insured. 2. Ingestion damage - caused by stones, grit, dust, sand, ice, etc., which result in progressive engine deterioration is also regarded as "wear and tear and gradual deterioration", and as such is excluded. Ingestion damage caused by a single recorded incident (such as ingestion of a flock of birds) where the engine or engines concerned have to shut down is not regarded as wear and tear and is covered subject to the applicable policy deductible. 3. Mechanical Breakdown - likewise is thought by aviation insurers to be an operating expense, but subsequent damage outside the unit concerned is usually covered. However, it is possible to obtain insurance coverage against mechanical breakdown of engines by way of a separate policy.
This coverage has a high degree of exposure and as a result is relatively expensive 2. Hull War Risks – It Provides cover for loss or damage to property (aircraft and spares) arising out of War and Allied Perils. These risks are excluded from the Hull All Risk policies and broadly include the following: War, Invasion, Hostilities, Civil War, Rebellion, Attempted Coups Strike, Riot, Civil Commotion or Labour Disturbances Sabotage Hijacking (Attempted or Otherwise) or Seizure of Control Acts for Political or Terrorist purposes Confiscation, Naturalization, Detention, etc., for the use of any Government or Public Authority Exclusions are as follows: 1. Confiscation etc. by the "state" of registration (this exclusion can often be deleted in respect of financial interests - albeit, in some instances at an additional premium charge); 2. Any debt, failure to provide bond or security or any other financial cause under court order or otherwise; 3. The repossession or attempted repossession of the Aircraft either by any title holder or arising out of any contractual agreement to which any Insured protected under the policy may be party;
4. Delay and loss of use. (Although there is often an extension to the policy for a limited amount for extra expenses necessarily incurred following confiscation or hijacking).
3. Spares – First of all we must identify what we mean by a "spare" or perhaps - "when is a spare not a spare" to which a simple answer is "when it is attached". Under most "Hull" policies the word "Aircraft" means Hulls, machinery, instruments and the entire equipment of the aircraft (including parts removed but not replaced). Once a part is replaced it is no longer, from an insurance viewpoint, part of the aircraft. Conversely once a spare part is attached to an aircraft as a part of that aircraft (not in the hold as cargo or on the wing as an extra pod) it is no longer a "spare". It Covers loss or damage to spares, tools, equipments and supplies owned by the insured or the property for which the insured is responsible whilst on ground or in transit by land, sea, air including in own aircraft or whilst on the premises of others for storage
4. Hull Total Loss Only Cover: - This is similar to Hull All Risks cover given above but will respond only to total losses of aircraft, whether actual, constructive or arranged. This is particularly given for old aircraft since the old aircraft are heavily depreciated and insured for low sums and premium on such low sums would result in low premium, which would be inadequate for the partial losses. The ratio of partial losses to total losses in such old aircraft is distorted.
LIABILITIES 1. Aircraft Here in aircraft liability there are many other liabilities involved which are further divided into three parts. They are: a) Passenger b) Third party c) Baggage
a) Passenger Coverage for aircraft operators in the event a passenger is injured, killed or disabled during an accident while aboard an insured aircraft. Aviation policies divided liability coverage into two parts--general liability (excluding passengers), and passenger liability. A Passenger Liability policy covers incidents resulting from the transportation of passengers by land, sea or air and can often be included as part of a aviation insurance policy. However care must be taken to check that the motor policy wording does not exclude fare-paying passengers, which is often the case. It is unlikely that an underwriter will be prepared to cancel or amend the wording of a standard motor vehicle policy. For this reason Daily Cover policies are specifically for to cater for farepaying passenger liability.
b) Third party This program offers 3rd Party Liability insurance coverage for non-commercial operations only. Pilot and passenger injuries and aircraft physical damage are not covered. This member benefit program is designed to allow non-commercial pilots the benefits that insurance coverage can offer. While pilot and passenger injuries and damage to the aircraft itself are not covered under a Third Party program, financial responsibilities, bodily injury or property damage caused by the aircraft for which the pilot is found to be legally liable to pay to others is covered. Additional insured parties such as landowners, municipalities and airports, can also be covered under this type of policy. Additionally, access to airports, flight parks, and flying events often require liability coverage. Many states require insurance of this nature just to operate an airplane of any description. Third party liability coverage is also less expensive than full coverage, and therefore allows the members (insurance holders) the opportunity to enjoy the thrill of aviation without the worry of liability concerns or the expense of highpriced insurance. The people can be only eligible who are a registered, certificated or licensed pilot are eligible. Sport Pilot Students who are endorsed to solo are also eligible. Pilot registration can be with any recognized organization.
c) Baggage This kind of liability may include various reasons in the happening. They are as follows: Delays If your bags are delayed, try not to panic. The airlines typically have ways to track them, and about 98 percent of all misplaced luggage is returned eventually. If your bags are on the next flight, you could have them within a few hours. Make sure to file your claim immediately at the airport and give contact details. Additionally, the airlines will reimburse any unexpected expenses caused by the loss or delay on producing your receipts. However, the airline sometimes has the option to deduct any reimbursement or stipend from any subsequent awards.
Lost Baggage If the airline loses your bags, a written claim for damages should be made. This may require a different form than the original "missing luggage" form. This can be done at the airport or by mail. You may need to produce receipts to prove the value of items you had in your suitcase.
The airlines typically have a long list of items for which they will not be held responsible; these include jewelry, money, heirlooms and other valuables. These sorts of items should always be packed in your carry-on bag.
Stolen Baggage: Head directly to the baggage carousel when you get off your flight. Many airlines scan bags when they're loaded into the baggage claim area and keep records, especially at larger airports. Once you've left the baggage claim area, your claim is no longer with the airline, but with the police.
Damaged Baggage Once you've gotten your bags off the carousel, immediately check them for damage or other signs of tampering or mishandling. Report any damage before leaving the airport; airline customer service will often want to inspect the bag. Keep in mind that most airlines won't cover minor wear and tear.
BUYING AN AVIATION INSURANCE CONTRACT As with many specialized service or commodity purchasing, the use of an experienced intermediary or middleman is usually prudent for the transaction process. Although this middleman may not be required in all facets or industries for successful purchases, in the Aviation Insurance Industry, with only one exception, it is required. The middleman we are discussing is often referred to as a Broker; it is quite frankly the only way to accomplish this need. All the Aviation Insurance companies or groups require the use of a Broker to secure insurance on behalf of the consumer. So what is this Aviation Insurance Broker we need to utilize and access most of the companies providing insurance? Well, the term broker refers to an independent insurance person who is licensed by the State to represent and work for the consumer in the insurance purchasing and service process. Unlike an insurance agent who represents an insurance company and represents that insurance Company’s interest, a broker is independent of the insurance company and represents the needs and interest of the client. This independence allows the broker the freedom and opportunity to deal with multiple aviation insurance companies and is considered to be working the client. The broker’s compensation is paid by a percentage of premiums, which comes from the consumer. This commission structure keeps the broker’s attention to represent the best interest of the client/consumer and places a responsibility that the broker provides a continuous service and handling of the insurance needs or requirements.
SELECTION OF A BROKER: The selection process of a broker should be more involving for the consumer, than which insurance company to buy the coverage from. That is a process consumer and the broker decides upon. The selection of a broker should take several considerations, such as the experience the broker has in the consumers segment of aviation or operation, the infra-structure or team support behind the broker to achieve the demands of technical service and document handling, the market relationship and credibility with underwriters (the insurance company), and the overall reputation in the aviation community. Just as an extensive interview process in conducted to select an employee for a company, so should the hiring process involve searching for, and selecting the aviation insurance broker. This can be conducted by an interview process where the broker sells them and the organization they represent as well as a check upon their credentials with a client list of references. Once this process is complete and the consumer feels comfortable with the selection, the long-term relationship the consumer develops with his broker will provide the consumer years of professional service. If, however, the client believes his choice was not good or the broker service does not meet his expectations for a variety of reasons, the client can always change the broker as in the original selection process by writing a "Broker of Record" letter which is provided to the current insurance company. This letter will replace or fire the current broker with the client’s new selection, which is based on his criteria and not that of any insurance company. Whatever the process by which the client select or remove the broker representation is controlled by the client.
WHAT DOES YOUR BROKER DO FOR YOU? Understanding the broker’s job should help the client during the selection process. The broker will gather the "underwriting" information on the clients "risk", the aircraft or operation, and submit this information to the insurance company. This gathering of information can be as simple as a one-page application for small risk such as private aircraft usage or as complex as booklets of information for large commercial operations. In any event it is important that the broker knows what information to secure, how to present it and understands completely its context. That’s because the next important part of the broker’s responsibility to the client is to negotiate the best combination of coverage and price for client’s risk. This can only be achieved with a broker’s level of understanding of clients’ risk, their experience in this area, and for larger risk having a support mechanism the underwriter can relate to. It is in this process the broker’s skill is utilized to create the competition between insurance companies to obtain best industry prices at the current time. Once the broker has negotiated the clients insurance program, they will continue to advise the client from the purchasing process through the coverage issues that may arise during the policy period, usually one year. This expertise in service can deal with changes in your policy during its term to the most important reason the client bought the policy in the first place and that is handling a claim should one occur during the policy term. This service process from the client broker may not involve just one person, but multiples of support personnel depending on the size and complexity of your risk. As stated earlier, this is why the selection process is important and should involve understanding the structure of the entire brokerage firm for which to represent the client.
WHAT TO GIVE YOUR INSURANCE BROKER: Report year, make, model and AIRCRAFT
acquisition value, plus tail and
INFORMATION
serial numbers and information about passenger and crew seating.
BASE INFORMATION
Give details about home airport, hanger space and ground handling.
CONTRACTS
Supply drafts of usage, ownership and storage agreements.
LIABILITY LIMITS &
Report average passenger load and
PROVISIONS
Profile
and
review
insurance
provisions, deductibles and war— risk perils.
MAINTENANCE DETAILS
Explain whether you’ll outsource it, use an in-house mechanic or do a little of both.
MISSION INFORMATION
Detailed purpose of use, territory of operations
and
anticipated
annual
hours of operations.
PILOT HISTORY FORMS
Submit signed forms (which are obtainable from your broker) for all pilots.
In today’s changing and evolving aviation insurance market it is important for the consumer, to understand the responsibility of the broker and how best they can to serve. The broker works for the consumer/client and as the consumers want to hire the best pilot or mechanic, so do they want to hire the best broker. This is a profession where skill and experience is the best resource for the overall success in the client’s insurance program.
RENEWING AVIATION INSURANCE If you're like most owners and pilots, you simply renew your aviation insurance policy every year. If it was good enough last year then it will be good enough this year. Then you probably don't give it another thought until next year. And this pattern often repeats itself for many years. There are two very big problems with this scenario. First, things change. Your aircraft, where you fly, who you fly with, how much you fly…many of these things can change over the years, and they should be reflected in your policy. Second, it is quite possible that your policy wasn't the right one for you to begin with! In that situation, you are simply renewing your mistake year after year. In either case, your aviation insurance policy deserves a little bit of your time once a year. Here are the 5 things you should do to make sure you are adequately protected.
1. Choose your broker: When you insure your home or your business, a broker can choose from dozens and dozens of insurance companies. As a result, shopping around with a few brokers can make sense. Chances are that they may not even approach the same companies for your quote. In the case of aviation insurance, however, there are only four or five companies to choose from and even fewer that specialize in light aircrafts. Obviously, it doesn't matter how many brokers you go to, the odds are that they will be approaching the very same companies on your behalf. This can actually be a serious disadvantage for you, as some companies will simply refuse to quote in these circumstances in order to avoid the feeding frenzy that can result when a number of brokers vie for the same account. So, as you can see, choosing your broker is the first step. But how do you choose the right broker?
Start by finding an
aviation specialist. Although any general insurance broker can sell you aviation insurance, they simply do not have the experience or familiarity with the field to be your best choice. Even more importantly, they usually can't get you the best rates. If the insured is an aviation specialist, he may deal with the companies and underwriters every single day. He gets to know them personally and may place a lot of business with them. Now compare that to the average general insurance broker who maybe places one or two policies a year with that company. Who do you think will get you the better results? Finally, make sure that you are comfortable with the broker you choose. Just because someone special in aviation insurance doesn't automatically mean they are good. Do they take the time to ask you questions, get to know your needs, and fully explain things to you in a way you can understand? If they do congratulations, you've found your broker! They will probably ask you to sign a ―Letter of Brokerage‖ which will let insurance companies know that you have in fact appointed them to be your broker.
2. Confirm the value of your aircraft: Neglecting to keep up with the market value of your aircraft is one of the most common renewal mistakes. If you do this year after year, you could be in for a rude awakening. Aircraft values have soared in recent years, with many doubling in price over the last decade. Unlike home or auto insurance, aviation insurance is a ―stated value‖ policy. That means that the owner is responsible for declaring the value of the insured aircraft. If you undervalue your plane, you risk losing it after even a minor accident. As I have explained many times in this column, the ―stated value‖ is the maximum the insurance company will pay out —and they will keep the plane as salvage. So whether you have simply neglected to increase the value on your policy at renewal time or have tried to save a few bucks on the premium by insuring for a lower amount you are taking a very big gamble. Make sure you resolve this issue at your next renewal. 3. Get the right coverage for your needs: At every renewal, you should discuss your flying habits with your broker. Many companies have territorial restrictions and some have restrictions for dirt or grass landing strips. Make sure your policy covers the kind of flying you do. If you have made or are planning to make any upgrades or changes to the configuration of your aircraft, you may need to make some adjustments to your policy. Otherwise, you may find yourself out of luck in case of an accident. 4. Protect your interests: Finally, you should discuss other unusual circumstances regarding your aircraft. You may need to arrange for special coverage to protect your interests. One common example is that an owner who has his aircraft on lease to a flying school or commercial operator. If the lessee commits an illegal act or omission, your aviation policy could be nullified. In these situations, you obtain ―Breach of
Warranty‖ coverage which will pay a lien holder's interest despite the policy being otherwise invalidated. Following these simple steps once a year at renewal time is an easy way to make sure that your aviation insurance policy continues to protect you. So don't take the easy way out…don’t just say “renew it as it is for another year.”
MAJOR PLAYERS OF AVIATION INSURANCE
HOW CAN AN AIRLINE INFLUENCE THE LEVEL OF PREMIUM? Whatever method or combination of different techniques is used in setting the premium, the buyer of insurance can ultimately influence the price paid for the insurance cover. Underwriters are risk takers and the less risk they see, the readier they become to accept an individual airline’s exposure at a competitive price. The more attractive the airline’s insurance business the lower the price can be, as more and more underwriters would like to accept this risk. The law of supply and demand can work in the airline’s favour. By showing that the airline is proactive in safety matters and works with the latest techniques to reduce claims on its policy, the airline will gain in whatever market conditions that prevail during renewal negotiations.
A buyer of insurance may be able to influence the price by increasing the number of potential participants on its insurance policy. However, security of the insurer is most important and financially strong insurers represent good security.
An insurance company that has a solvency margin of 100% has a capital that is 100% of its annual premium volume. A solvency margin of 50% means that the capital is 50% of the premium volume, etc. With a lower solvency margin the insurer can write more business (take more risks) and charge less in premium than the insurer with a higher solvency. So the insurance buyer can influence his premium by accepting insurance security that (due to lower solvency) is in a position to offer lower premiums, but at a greater risk to his claims payment.
The last few years have seen a large number of insurance company failures, so great care is needed.
AVIATION INSURANCE IN INDIA The unbridled growth in the aviation sector has come as a bonanza for the insurance sector. Thanks to capacity addition and the entry of new aviation players, a host of insurance companies are eyeing this growing market t offer insurance cover to new planes that are being brought to India.
Before the boom in the Indian aviation sector, the airline insurance market was dominated by the four state-owned general insurance companies: New India Assurance Company, Oriental Insurance Company, National Insurance Company and United India. However, with the growth in the Indian aviation story, private players like ICICI Lombard, Bajaj Allianz, Iffco Tokyo General Insurance and Reliance General Insurance Company are also trying to muscle their way into this lucrative sector.
The unprecedented growth in this sector is also seeing private players join hands with each other to bid for accounts. The latest such case is the ICICI LombardBajaj Allianz tie-up where they are jointly bidding for Air India’s insurance account which includes providing cover for 50 planes valued over $3 billion.
In India, this segment is highly reinsurance-driven. A majority of the players have re-insured the value of risk covered with foreign companies. Take the case of Air India where almost 90% of the risk is insured overseas through reinsurance arrangements, while the remaining cover rests domestically. Indian insurance companies do not have the financial muscle to address claims of airlines and generally go in for reinsurance which means sharing the risk of loss with another insurance company. The role of a reinsurer is important in the Indian context as most of the companies do not have the requisite experience of handling a market of this
size. The reinsurer helps in providing the technical expertise, capacity to underwrite the business and their ability to handle such large risks. National reinsurer, GIC, leads India’s reinsurance treaties.
Out of the eight private players, Bajaj Allianz General Insurance Company and ICICI Lombard General Insurance Company Limited are most active in this segment.
Although there are no official estimates, industry players put a ballpark figure of the Indian aviation insurance market at somewhere around Rs 400 cr to Rs 500 cr. With new aircraft being bought by new players entering the sky and the existing one in expansion mode, this segment will only grow.
According to Ernst & Young, a global consultancy firm, Indian skies would have over 700 aircraft - from 235 currently - by 2012, an increase of almost 200%. The numbers speak for the potential of this segment in the market, which is one of the fastest growing in the world. The total premium figures for aviation insurance in India for 2006-07 stood at Rs 417.29 cr. Typically, the premium depends upon underwriting factors such as age of the aircraft, experiences of the pilot flying the aircraft, make and model and use of the aircraft. It is generally 1% to 3% of the aircraft value.
The aviation insurance market is looking up and is currently at Rs 350 crore. But with new aircraft being bought by new players entering the business and the existing one on an expansion mode, the aviation market is set to take off.
CURRENT SCENARIO OF AVIATION INSURANCE
The magic of multiplier effect is now working for the aviation ancillary industry. Reaping the benefits of the aviation boom is not only maintenance, repairs & overhaul (MRO) operations but also the insurance sector. In fact, the spiralling growth in the aviation sector has given an upshot to the insurance segment.
Predictions for aircraft deliveries to meet the increasing demand for air travel, particularly in Asia, mean that some 4,000 new airliners are on order, with this region at 1,242 leading the way. Growth in purchasing power of passengers and entry of low cost airlines has driven the upward movement of the airline industry both in terms of equipment and staff and opening new opportunities for this niche segment.
The shot in the arm for this industry has further come from the fact that aircraft are becoming bigger in size with large seating capacity. This, in turn, increases the risk for insurers, sometimes even catastrophic. With the emergence of bigger aircrafts, the values of the aircraft as well as the liability are slated to increase tremendously. The severity of each loss is also expected to go up proportionately. Currently, at least 10-15 re-insurers participate in an airline insurance programme. However, with the introduction of larger aircraft, the number of reinsurers participating would increase to 25.
The domestic aviation business is enjoying the benefits of a softening market with claim ratio being very low. Save for a few cases such as improper landing or bird hit damages, there are not many claims made in the recent past.
Industrialists, however, does not anticipate terror risks pushing up the aviation insurance costs. This space is very price competitive. The number of players in the market is increasing, which has led to insurance rates steadily coming down in spite of recent air crashes in the world.
Aircraft hull and liability insurance for the senior pilot has become such a concern that the insurance industry should develop a special task force to help deal with this problem. The need to extend the insurable age of the senior pilots and to introduce new blood in to the cockpits will only help matters with the attempt to lower insurance cost for the industry. Insurance cost for the industry remains high, with the shrinking fleet of aircraft, means that the training cost will increase. The value of airplanes is soaring; the high cost of new replacement aircraft for training isn’t feasible. The FBOs’ are facing insurance that’s inadequate and expensive, and its forcing companies to reduce their operations or even cut them all together. Owners of flight schools are having a hard time just staying in business. The shortage of qualified instructors has slowed the flow of new pilots, which in turn is putting a hardship on the industry.
RECENT DEVELOPMENTS IN AVIATION SECTOR
Modernization of airports
Policy on merchant airports
Growth in MRO segment:
Airport security policy
Augmentation of fleet by various airlines
Foreign equity participation in air transport services
Boom in Indian aviation sector is likely to generate more jobs
CASE STUDIES AVIATION INSURANCE OF KINGFISHER AIRLINES
Two private sector general insurance companies, ICICI Lombard General Insurance and Bajaj Allianz General Insurance, have bagged the insurance account of Vijay Malaya’s Kingfisher Airlines. This is for the first time that the private sector general insurance companies have made major inroads into the aviation sector, which has mainly been the forte of the public sector insurers. Both ICICI Lombard and Bajaj General Insurance will share the Kingfisher Airlines account in a 7.5:2.5 ratio. After a ―beauty parade‖ by the public sector and private general insurance companies, the account was awarded to the two private sector general insurance companies last week. ICICI Bank, one of the promoters of ICICI Lombard, has also financed the aircraft acquisition plans of the Kingfisher Airlines. The insurance deal will be executed the moment Kingfisher Airlines acquires its fleet of aircraft. Kingfisher will be the first private carrier to be launched with an all-new fleet. The airline has signed an agreement with Airbus Industry of France for the purchase of three brand new Airbus A319 aircraft. With this new purchase, Kingfisher Airlines, which will launch its operations on May 7, has ordered a total of 33 brand new aircraft. Of these, a total of 13 aircraft — 10 A320s and 3 A319s — are on firm order, with options for buying a further 20 aircraft.
AVIATION INSURANCE OF AIR INDIA New India Assurance Company participated in the Aviation Insurance of Air India way back in 1946. New India Assurance Company provides professional aviation insurance advice and solutions to the needs of small aircraft operators as well as scheduled airlines. The aviation portfolio of New India Assurance Company encompasses following type of covers: Hull All Risk Insurance Policy : This policy is suitable for small aircraft operators belonging to flying clubs, companies engaged in agricultural spraying operations, aircrafts especially designed for VVIPs, business executives and for those engaged in industrial aids. The policy scope includes all physical loss or damage sustained by the insured aircraft including total loss, disappearance. All losses are paid subject to deductibles. Spares All Risk Insurance Policy: Covers loss or damage to spares, tools, equipments and supplies owned by the insured or the property for which the insured is responsible whilst on ground or in transit by land, sea, air including in own aircraft or whilst on the premises of others for storage only. Hull/Spares War Risk Insurance: Indemnity is provided to the aircraft as well as spares caused by war, invasion, acts of foreign enemies, hostilities, civil war, rebellion, revolution, resurrection, martial law, strikes, riots, civil commotion, malicious acts, sabotage. Hull Deductible Insurance: Airlines at times have to bear a proportion of loss due to application of a deductible under All Risk Policy, which may impose considerable financial difficulty on the insured.
Therefore the operators insure part of their deductibles under this kind of insurance. Aviation Personal Accident (crew member)Insurance: This cover is designed to cover insured person against injury, disablement or death arising as result of an accident that is generally granted on annual basis. The cover operates while mounting or dismounting from and whilst travelling an aircraft while the aircraft is being used within the geographical scope as per its permitted usage. This cover can also be on 24 hours basis. The capital sum insured varies according to the status of the insured or earning capacity and fixed by the insurers. Loss of License Insurance: Operating crews of the aircraft are required to have valid license. License is liable to be suspended either temporarily or permanently on medical grounds. Consequential financial loss is covered by the loss of license policy. Cover provided is in respect of incapacity causing permanent total disablement or temporary total disablement due to bodily injury or illness.
Claims: In case of claims following are illustrative documents that are generally called for from the insured. Documents in connection with aircraft & flight details Documents in connection with the accident Certificate of airworthiness/registration Crew details Maintenance & engineering information Operational manual passenger documentation in case of claims
EFFECTS OF 9/11 ATTACK ON AVIATION INSURANCE
Following the September 11th attack in the United States, the subject of aviation insurance attracted much attention in the media and elsewhere after aviation insurers worldwide withdrew cover for the specific acts of war and terrorism. As a result, many national governments stepped in to provide temporary insurance cover to ensure that airlines continued flying. Short to medium term solutions At the request of the airline industry the International Civil Aviation Organisation established a special group on war risk insurance (―SGWI‖) which, as a short and medium term measure recommended the setting up of an international mechanism funded by insurance premiums to provide non cancellable third-party aviation war risk coverage through a nonprofit special purpose insurance entity (GLOBALTIME) with multilateral government backing for the initial years. As a long-term solution the SGWI recommended that an international convention be developed which would limit the third-party liability of the aviation industry for losses arising from war, hijacking and allied perils. Uncertainty ahead Some four years on from 9/11, most governments have withdrawn guarantees for hull and liability war cover to airlines and airport service providers. Notable exceptions include the United States, China and Singapore. The market has now responded with certain insurers offering major airlines limited no cancellable third party coverage. However, with other classes of catastrophe business, there remain underlying uncertainties in the aviation insurance market that could dramatically change the environment. One of those uncertainties is the prospect of a
catastrophic
event
caused
by
dirty
bombs,
bio-chemical
and
electromagnetic devices or weapons of mass destruction (―WMD‖). The fear is that the use of a ―dirty bomb‖ at a major international airport could not only lead to immediate multiple aircraft, passenger and third party losses, but also long term contamination of sites preventing access and the uncontrolled spread of diseases. Convention and statutory limits The Montreal Convention 1999, which governs the liability of airlines in relation to passengers and cargo interests, requires airlines to obtain adequate insurance to cover their liabilities under the Convention. In addition, airlines are required by many states to have minimum insurance limits to cover such liabilities including third party surface damage.
After the September 11, 2001, terrorist attacks on the United States, the insurance costs for commercial airlines and college aviation programs rose sharply. The prevailing assumption is that increased aviation insurance costs are the result of an increased risk of life and property loss from additional terrorist attacks. This project questions the assumption and posits that the September 11, 2001, attacks were a catalyst for and not the cause of increased insurance costs. Two alternative explanations for the increased costs are offered. First, after September 11th, insurance managers became aware that they had not been making the incremental rate increases necessary to maintain acceptable profit margins. Second, sharp declines in the value of the insurance company stock portfolios eroded profits. Increases in aviation insurance cost will be compared to increases in other types of insurance, such as medical insurance, to determine if the rate of increase in aviation insurance cost is significantly higher than in other sectors of the economy. The impact of these insurance rate increases on domestic and international air transportation and commerce is presented.
FUTURE OF AVIATION INSURANCE As the industry enters into the millennium, the insurance industry must look at several problems that also face the aviation industry. Survival for the small FBO’s is getting harder each day; the threat of financial devastation is real when it comes to lawsuits. General aviation may be forced to change its way of doing business and become more like the military and commercial airlines. One can only hope that society will change their attitude towards the aviation industry and the litigation that surrounds the industry. We all hope for a positive future for the community.
The aviation industry, as it is known today, has grown into a set of definable industries. Modern aircraft range from military to commercial airlines to the most diverse group, general aviation. Aviation has come a long way the last 100 years. The industry is still developing. With growth comes a problem that must be solved before the industry can go to the next level. Because of modern technology, we’ll never again have the numbers that we once had. The ageing fleet and pilots can’t help the situation that the industry is facing; the average aircraft age is 15 to 20 years, and the post Indian pilot is now 50 to 60 years of age. The underwriters are very worried about the age of both the pilots and the aircraft.
The future of the industry could hold a brighter outlook. The industry hopes that with the use of simulators at all levels of training will increase the number of better-trained pilots and hopefully lower insurance cost at the same time. Insurance can be one of the most expensive elements in the fix cost of owning an aircraft. To keep insurance cost under control in this difficult environment, aircraft and aviation business owners are going to have to make some changes in the way they purchase and think about insurance. There are ways to reduce
your insurance cost, buying cheap insurance isn’t always the best way to go, and it’s not heavily regulated by our government. Companies can write policies pretty much the way they want to, you must pick the right company for you and your aircraft. Aviation has come a long way the last 100 years, and the future could hold a brighter out-look for the industry. One can only hope that society will change their attitude towards the aviation industry and the litigation that surrounds the industry. In the future, this could drive cost down and make liability insurance affordable to the private owners, and to the FBO’s. Aviation insurance business is a high severity loss business and in the future you could see a lot of Indian insurance companies joining hands to manage airline accounts.
CONCLUSION I started this Project by asking the question “Why Aviation Insurance is required?” In the course of the analysis various trends and developments in the aviation industry were discussed that provide partial answers to this question. Airlines employ a wide variety of business models while taking an aviation insurance contract. For example, some companies like Kingfisher Airlines take policy with high premium while others like Air India take an aviation insurance contract with low premium. The aviation insurance market is highly volatile due to the inherent nature of the risk and the underwriting cycle of insurance. Historically, the market wide premium appears to be almost as volatile as the claims, suggesting a lack of consistency in underwriting this business. The major caveat to my conclusion is that there is significant amount of public data available to assist in underwriting and pricing aviation insurance. This data can be used to develop more effective underwriting rating models for aviation insurance and this should result in better selection of risks and more consistent profits for the insurer. The aviation insurance market, by its own nature, is highly volatile. There are many causes including the overall insurance underwriting cycle, the major accident risk, the short-term memory of the insurance market, and the long tailed nature of determining responsible parties. However, the increasing involvement of analytical professionals such as actuaries should introduce more effective methods for pricing airline insurance and this should help stabilize the premium component of the loss ratio equation.
