Aviation Insurance: An Introduction

Aviation insurance is insurance coverage geared specifically to the operation of

aircraft and the risks involved in aviation.
Aviation insurance policies are distinctly different from those for other areas of
transportation and tend to incorporate aviation terminology, as well as
terminology, limits and clauses specific to aviation insurance.
Aviation insurance has come to acquire an increasingly broad scope, and is
sometimes referred to in modern times by the wider term Aerospace
insurance. This is because of the presence of insurance policies that cover a
wide range, from privately-owned ultralights to entire airline jet fleets, from
maintenance shops to airframe and engine manufacturers, from small general
aviation airfields to major airports, and from micro-satellites to commercial
space launchers
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.

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

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 cut-
throat 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.

Key features of aviation insurance



One of the most specialized fields in Insurance Underwriting &Claims
Handling

Losses can be catastrophic in nature

Losses have cost insurers worldwide hundreds of millions in dollars

No single insurer has resources to retain a risk the size of a largeairline,
or even a substantial proportion of such a risk

Thus a large portion of the risk is placed in the Reinsurance
markettypically this involves Lloyds Syndicates, European Pools,
ROW and US Pools, Bermuda Specialty Writers, etc.

On account of Reinsurance as also due to its specialized
nature..Aviation Insurance is largely broker driven

Specialized aviation insurance broker play a key role in making the
best terms to clients
















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 fare-
paying 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 high-
priced 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

Companys 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 brokers
compensation is paid by a percentage of premiums, which comes from the
consumer. This commission structure keeps the brokers 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
clients 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 brokers 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. Thats because the next important part
of the brokers responsibility to the client is to negotiate the best combination of
coverage and price for clients risk. This can only be achieved with a brokers
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 brokers 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:


AIRCRAFT
INFORMATION

Report year, make, model and
acquisition value, plus tail and
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 &
PROVISIONS

Report average passenger load and
Profile and review insurance
provisions, deductibles and war risk
perils.

MAINTENANCE DETAILS

Explain whether youll 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 todays 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 clients 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 flymany 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 outdont 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 airlines exposure at a competitive
price. The more attractive the airlines 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 airlines 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






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 isnt feasible. The FBOs are facing insurance
thats 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

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 VIPs, 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


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
FBOs 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, well never again have the numbers that we
once had. The ageing fleet and pilots cant 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 isnt always the best way to go,
and its 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 FBOs. 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.


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 Malayas 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.



CONCLUSION

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.