INSURANCE:
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.
Definitions
General Definition
In the words of John Magee, ―Insurance is a plan by themselves which large number of people associate and transfer to the shoulders of all, risks that attach to individuals.‖
Fundamental Definition
In the words of D.S. Hansell, ―Insurance accumulated contributions of all parties participating in the scheme.‖
Contractual Definition
In the words of justice Tindall, ―Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer‘s incurring the risk of paying a large sum upon a given contingency.‖
Characteristics of Insurance
Sharing of risks
Cooperative device
Evaluation of risk
Payment on happening of a special event
The amount of payment depends on the nature of losses incurred.
The success of insurance business depends on the large number of people insured against similar risk.
Insurance is a plan, which spreads the risk and losses of few people among a large number of people.
The insurance is a plan in which the insured transfers his risk on the insurer.
Insurance is a legal contract which is based upon certain principles of insurance which includes utmost good faith, insurable interest, contribution, indemnity, causes proxima, subrogation, etc.
Origin and Development of Insurance
Insurance in the modern form originated in the Mediterranean during 13/14th century. The earliest references to insurance have been found in Babylonia, the Greeks and the Romans. The use of insurance appeared in the account of North Italian merchant banks who then dominated the international trade in Europe at that time. Marine insurance is the oldest form of insurance followed by life
insurance and fire insurance. The patterns that have been used in England followed in other countries also in these kinds of insurance. The origin and growth of Marine Insurance, life Insurance, Fire Insurance and miscellaneous insurance are given below:
Marine Insurance Life Insurance Fire Insurance
Miscellaneous Insurance
The oldest and the earliest records of marine policy relates to a Mediterranean voyage in 1347. In the year 1400, a book written by a merchant of Florence, indicates premium rates charged for the shipments by sea from London to Pisa. Marine Insurance spread from Italy to trading routes in other countries of Europe.
Marine Insurance in India
There is evidence that marine insurance was practiced in India some three thousand years ago. In earlier days travelers by sea and land were exposed to risk of losing their vessels and merchandise because of piracy on the open seas. Moreland has maintained that the practice of insurance was quite common during the rule of Akbar to Aurangzeb, but the nature and coverage of insurance in this period is not well known. It was the British, insurers who introduced general insurance in India, in its modern form. The British opened general insurance in India around the year 1700. The first company, known as the Sun Insurance Office Ltd. was set up in Calcutta in the year 1710. This followed by several insurance companies of different parts of the world, in the field of marine insurance. In 1972, the government of India nationalized the general insurance business by forming GIC.
2. Life Insurance
The early developments of life insurance were closely linked with that of marine insurance. The first insurers of life were the marine insurance underwriters who started issuing life insurance policies on the life of master and crew of the ship, and the merchants. The early insurance contracts took the nature of policies for a short period only. The underwriters issued annuities and pension for a fixed period or for life to provide relief to widows on the death of their husbands. The first life insurance policy was issued on 18th June 1583, on the life of William
Gibbons for a period of 12 months. Life Insurance in India
The British companies started life insurance business in India, by issuing policies exclusively on the lives of European soldiers and civilians. They sometimes issued policies on the lives of Indian‘s by charging extra. Different insurance companies like Bombay Insurance Company LTD. (1793) and Oriental Life Assurance Company (1818) was formed to issue life assurance policies in India. Gradually, the first Indian Company named as Bombay Mutual Life Insurance Society Ltd. was formed in
Dec. 1870. By 1971, the total numbers of companies working in India were 15, out of which 7 were Indian and the remaining were British companies.
After several changes have been made for the period from 1930 to 1938, the Government of India passed Insurance Act, 1938. The act still applies to all kinds of insurance business by instituting necessary amendments from time to time.
Fire insurance has its origin in Germany where it was introduced in municipalities for providing compensation to owners of the property, in return for an annual contribution, based on the rent of those premises. The fire insurance in its present form started after the most disastrous fire in human history known as the 'Great Fire' in London, which had destroyed several buildings. It drew the attention of the public and the first fire insurance commercially transacted in 1667. The Industrial Revolution (1720-1850) gave much impetus to fire insurance. The Nineteenth century marked the development of fire insurance.
Fire Insurance in India
In India, fire insurance was started during the British regime. The oldest of these companies include the Sun Insurance Office, Calcutta (1710), London Assurance and Royal Exchange Assurance (1720), Phoenix Assurance Company (1782), etc.
4. Miscellaneous Insurance
Due to the increasing demands of the time, different forms of insurance have been developed. Industrial Revolution of 19th century had facilitated the development of accidental insurance, theft and dacoit, fidelity insurance, etc. In 20th century, many types of social insurance started operating, viz., unemployment insurance, crop insurance, cattle insurance, etc. This way the business of insurance developed simultaneously with human and social development. Today, the use of computers in the field of insurance is frequently increasing. Insurance becomes an inseparable part of human development. Miscellaneous insurance are of many types like:
Travel Accident Insurance : covering loss of life or injury arising during Level
Unnamed Driver and Passenger Insurance Health Insurance
All-risks Insurance
Consequential Loss Insurance General Public Liability Insurance Burglary Insurance
Golf Insurance Money Insurance
Fidelity Guarantee Insurance
Workmen Compensation Insurance Contractual Liability Insurance
Aviation is the most expensive industry means of transport today.
This sector gained importance and created awareness after the 9/11 attack on the twin towers of America. After this attack lot of changes took place in the aviation sector and also lot of amendments were made by the law to regulate the aviation insurance contracts. So let us see what these changes are and how aviation insurance forms one of the important part of any country‘s insurance sector.
AVIATION INSURANCE
History
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 realizing 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. Throughout the rest of the world there are national markets established in various countries, this is dependent on the aviation activity within each country, the 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. The Catastrophic nature of aviation insurance can be measured in the number of losses that have cost insurers hundreds of millions of dollars (Aviation accidents and incidents).
The Risks
Hull "All Risks"
The hull "All Risks" policy will usually refer to something like "all risks of physical loss or damage to the aircraft from any cause except as hereinafter excluded".
Airline hull "All Risks" policies are subject to a standard level of deductible (that is an uninsured amount borne by the Insured) applicable in the event of partial (non-total) loss. Currently, this deductible can range from $50,000 in respect of a Twin Otter to $1,000,000 in respect of a wide-bodied jet aircraft, such as a Boeing 747.
Deductibles too can be reduced by means of a separate "Deductible Insurance" policy. The Deductible Insurance Policy is effected to reduce the large "All Risks" policy deductibles to a more manageable level. For example the US$1,000,000 applicable to a Boeing 747 can be reduced to say US$100,000.
The term "all risks" can be misleading. "All risks of physical loss or damage" does not include loss of use, delay, or consequential loss. "Grounding" is a good example of consequential loss. Some years ago when there had been a couple of accidents involving DC10 Aircraft, the Civil Aviation Authorities throughout the world imposed a "grounding order" on that type of aircraft.
That order in effect said until certain things had been established and checked out those aircraft could not fly. The operators of those aircraft were unable to fly them and as a consequence of that they "lost" the use of them. But the aircraft were not "lost" - it was known precisely where they were but they could not be used to carry passengers. Such an eventuality would not be covered by an "all risks" policy because in such circumstances there is no PHYSICAL loss or damage.
What the policy will cover is the reinstatement of the aircraft to its "pre-loss" condition, if repairable damage is involved, or some other form of settlement in the event that more substantial damage is sustained. Exactly what form of settlement will depend on the policy conditions.
Today, the vast majority of airline hull "all risks" policies are arranged on an "Agreed Value Basis". This provides that the Insurers agree with the Insured, for the policy period, the value of the aircraft and as such, in the event of total loss, this Agreed Value is payable in full. Under an Agreed Value policy the replacement option is deleted.
Exclusions
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.
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.
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. The majority of airlines do not purchase it probably viewing such exposure as a part of the "engineering" budget.
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
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". If the equipment is insured on the hull "All Risks" policy the automatic transfer of coverage from "aircraft" to "spare" and vice versa is automatically accomplished. Having established when a spare is a spare how is it insured as such? Usually in one of two ways. Either under a "spares" section of a hull policy or by a separate Spares Policy. In either case the scope of coverage will probably be similar. All Risks whilst on the Ground and in Transit for a limit of [so much] any one item or sending or any one location. War Risks can also be covered (in respect of transits), Strikes, Riots, Civil Commotions can be covered in accordance with standard market clauses. Spares coverage is usually subject to a small deductible except, however, in respect of ground running of spare engines when the appropriate Ingestion deductible will be applied. Spares are normally covered on an agreed value basis - usually their replacement cost (be it new or reconditioned - as is required).
Spares installed on any aircraft are not covered by the Spares Insurance. They become, from an insurance standpoint, a part of the aircraft upon which they are installed and a part of the Agreed Value for which it is insured. This becomes particularly important if the parts are loaned to another airline.
Hull War Risks
The hull "All Risks" policy will contain the exclusion of "War and Allied Perils". Generally speaking, throughout the aviation insurance world, "War and Allied Perils" have a defined meaning. In the London Aviation Insurance Market the standard exclusion is called the War, Hi-jacking and Other Perils Exclusion Clause (currently known by its reference - AVN48B for short) this lists and defines these so-called war and allied perils.
War Definition :
War - this includes civil war and war where there is no formal declaration.
The detonation of a weapon of war employing nuclear fission or fusion. Strikes, riots, civil commotions and labour disturbances.
Political or terrorist acts. Malicious or sabotage acts.
Confiscation, nationalization, requisition and the like by any government.
Hi-jacking or any unlawful seizure or exercise of control of the aircraft or crew in flight.
The exclusion also applies to any loss or damage occurring whilst the aircraft is outside the control of the operator by reason of any of these "war" perils.
The majority of the excluded "War and Allied Perils", other than the detonation of a nuclear weapon and a war between the Great Powers (the aviation insurance world identifies these as the U.S.A., the Russian Federation, China, France and the UK), can normally be covered by way of a separate "War and Allied Perils" policy. Aircraft deductibles are not normally applied in respect of losses arising out of "War and Allied Perils".
Other exclusions insurers will usually apply are, as follows:-
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)
Any debt, failure to provide bond or security or any other financial cause under court order or otherwise;
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;
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).
The aircraft hull "War and Allied Perils" policy will cover the aircraft on an "Agreed Value" basis against physical loss or damage to the aircraft occasioned by any of these perils. This statement is made carefully and deliberately in order to highlight the essential difference from a "Political Risks" Insurance.
Liability Insurance
Liability can be divided basically into two categories:
Liability in respect of Passengers, Baggage, Cargo and Mail carried on the aircraft. These liabilities result from the operations the airline is set up to perform and are normally the subject of a contract of carriage like a ticket or airway bill, which provides some possibility of limiting the airline's liability.
Aircraft Third Party Liability - the liability for damage done to property or people outside the aircraft itself.
Every airline will arrange liability insurance for these two categories, normally in a single liability policy. In many countries there are requirements laid down imposing minimum limits of liability that are a prerequisite to obtaining an operator's licence. Elsewhere limits are specified for an aircraft to be allowed to land. The size of limit required is often related to the size of the aircraft concerned (and its potential for causing damage). A small aircraft operating only in remote regions and using small airstrips incurs considerably less potential exposure than an aircraft flying into and out of major airports.
General Liabilities
The other category of liability covers premises, hangarkeepers and products liability and is called "Airline General Third Party" - being the liability for damage done to property or people arising from other than the use of aircraft. Many airlines cover their "Airline General Third Party Liability" within their main liability program.
It is called "Airline General Third Party Liability" these days since the insurers took steps specifically to exclude all non aviation activities (for example hotel ownership or management) from "Aviation" Policies a few years ago. Basically for a risk to be considered as "Airline General Third Party Liability" it must arise from what are described as "aviation occurrences" being those involving aircraft or parts relating thereto, or arising at airport locations or arising at other locations in connection with the airline's business or transporting passengers/cargo or arising out of the sale of goods or services to others involved in the air transport industry.
This means that there is a definitive language detailing what is considered as "aviation exposure" such that any other (non-aviation) exposure is excluded. Most policies are placed on a Combined Single Limit Basis. This means Bodily Injury and Property Damage combined. In the past, personal injury was included but now this has been separated. It should be mentioned, however, that these days the term "bodily injury", in addition to bodily injury, sickness and death resulting at any time, will include shock and mental anguish. "Personal Injury" on the other hand is defined as "offences against the person", such as false arrest, malicious prosecution, invasion, libel or slander and the like.
In respect of Personal Injury the full policy limit, whatever that may be, is not available and is usually limited to US$25,000,000 any one offence and in the annual aggregate.
What is excluded from a liability insurance are such things as:-
Damage to the Insured's own property. (It is after all a third party liability policy).
War and Allied Risks although these are "written back" by a device called "The Extended Coverage Endorsement - AVN 52".
Radioactive Contamination.
Noise and Pollution - unless caused by or resulting in a crash, fire, explosion or recorded "in flight" emergency.
Both the Aircraft and General Liability policies usually includes the "war and allied perils" exposure by way of a "write back" and will probably provide for such things as search and rescue expenses, first aid and other humanitarian expenses and also defense costs.
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.
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 decide 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 themselves 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.
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.
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 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 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, and even more serious, 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 five things you should do to make sure you are adequately protected.
Choose your broker
Confirm the value of your aircraft
Review your liability
Get the right coverage for your needs
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, 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 in Canada to choose from and even fewer that specialize in light aircraft. 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? And are there any alternatives to a broker?
Let's look at alternatives first. The only alternatives to a broker are the direct sellers and special programs. In these cases you are dealing with a salesperson who can only offer you the one product they represent. As a result, these options tend to be promoted on the basis of cheap rates—but like ―bargains‖ anywhere,
they do so by cutting coverage and often leaving you seriously underinsured. If you really want to know what they can offer you, check them out. But before you make your decision; be sure to talk to a broker who works for you and not any one company.
So 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. Then you can move on to the other four steps below.
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. Review your liability
Make sure your policy doesn't have passenger or family member restrictions. This is the most common way that companies offer ―bargain‖ policies. It is also the most common way owners lose everything they own when courts award large injury settlements that are not covered by their ―bargain‖ policy. I regularly see people with limits of only $100,000 per person. You'd never consider such a low amount for your home or auto insurance, so why allow it on your aviation policy? With the high court settlements being awarded today, one to two million dollars should be the least you consider.
4. Get the right coverage for your needs
At every renewal, you should discuss your flying habits with your broker. Many companies have territorial restrictions to the 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.
5. Protect your interests
Finally, you should discuss any other unusual circumstances regarding your aircraft. You may need to arrange for special coverage to protect your interests.
One common example I run into is 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 should 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 is for another year.”
AVIATION INSURANCE IN INDIA: TAKE OFF
STAGE
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 to offer insurance cover to new planes that are being brought to India.
‗‗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,‘‘ said Bajaj Allianz General Insurance‘s Head-Underwriting K. Krishnamoorthy. With the entry of several low cost airlines along with fleet expansions by existing ones and increasing corporate aircraft ownership, the Indian aviation insurance market is all set to take off in a big way.
Industry trackers believe that with several airlines including IndiGo, East West Airlines and Magic Air set to enter the market in the coming weeks, the airline premium income could be up 50 per cent in the next two years.
Though India‘s contribution to the total global insurance premium paid by airlines which stands at US $ 5.86 billion is miniscule, the growth in aviation premium payout is highest in China followed by India, experts say. Airline insurance which is typically offered to passengers, cargo airlines or company or individually-owned aircraft generally consists of coverage to the aircraft and liability to passengers.
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 Lombard-Bajaj 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.
Currently, a consortium of public sector insurance companies including New India Assurance, Oriental Fire and General Insurance and United Fire and General Insurance handle Air India‘s account for which the airline is paying an annual premium of close to US $ 14 million.
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.
Experts say that the role of an reinsurer — generally foreign insurance companies — is also bound to increase in the future. 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 an 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,‖ the official said.
Estimated to be in the region of Rs.3.5 billion, aviation insurance premium business is growing at a fast clip. At present the government-owned four non-life insurers are the major players in this segment as they cover public sector airlines like Air India and Indian.
Out of the eight private players, Bajaj Allianz General Insurance Company and ICICI Lombard General Insurance Company Limited are most active in this segment.
The Pune-based Bajaj Allianz is co-insurer for Kingfisher Airlines, Go Air, Indigo Air among the scheduled airlines and has also insured aircrafts owned by corporates like the Bajaj Auto consortium, Force Motors, Ranbaxy group, Shamanur Sugar group and Orient Flight School. ICICI Lombard has insured around 75 aircrafts.
Aviation insurance is offered to scheduled airlines (passenger or cargo airlines) and non-scheduled airlines (company or individual-owned aircrafts) and also crafts owned by flying clubs.
The basic coverage offered is to the hull of the aircraft, liability to passengers and third party and also can include personal accident cover to the crew members.
Normally the types of insurance covers available are:
Aircraft owners / operators
Aircraft hull policy - covering loss of or damage to aircraft Aircraft liability policy
Liability of aircraft owner/ operator in respect of accidental bodily injury or property damage.
Liability towards passengers both in respect of accidental bodily injury and also towards loss or damage to baggage and personal belongings of passengers.
Aviation war and allied perils Aviation product's liability Airport operator's liability
Aviation service provider's liability
The policy covering aircraft hull insurance is usually on an agreed value basis. In the event of a total loss the stated amount can be paid as agreed and the option to replace the aircraft can be avoided. This frequently occurs because of development of newer and faster types of aircraft or due to purchase of an aircraft on mortgage.
The insurers base their rating on variables like: aircraft age, type of aircraft i.e. fixed wing or rotor, geographical area of flying operations, maintenance facilities, past experience, experience of the pilots, claims experience of the fleet and the carrier, the number of passengers, etc.
Normally the premium would depend on the aircraft and its size besides operations. However it would vary from 1 to 2.5 per cent of the aircraft value. Interestingly the aviation insurance premium is highly reinsurance-driven as the value of risk covered is so huge that the primary insurers do not want to shoulder on their own. For instance Oriental Insurance Company Limited retained just Rs.60 million out of the Rs1.5 billion aviation premium earned last fiscal.
In terms of loss experience the domestic aviation business is quite profitable with very few claims - except for a few improper landing and bird hit damages - registered in the recent past.
Meanwhile, players also feel that airlines can also benefit from this growth in the market as growing competition could mean lower premiums. ‗‗The Indian aviation industry has had a few good years with no major losses reported and hence the players can have the benefit of reduction in premiums for good records. This would encourage clients to go for higher covers or optimize it,‘‘ Krishnamoorthy says.
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 spiraling growth in the aviation sector has given an upshot to the insurance segment. As per an airline risk management survey - commissioned by international magazine Airline Business and global airline insurance broker Aon - airlines are spending no less than $8.36 bn a year on risk management, with around 70%, or $5.86 bn, spent on insurance premiums. Aviation premiums are, on an average, growing by 15.5% post-9/11, the survey reports. It further states that while the industry's loss record has been respectable in the last four years, traffic and passenger numbers have risen significantly, increasing the exposure to risk. In India, a majority of the private players, including Bajaj Allianz, ICICI Lombard, Reliance and the four public sector general insurance companies - Oriental, New India Assurance, United India, National Insurance - offer aviation insurance in the market.
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," says T A Ramalingam, head, underwriting, Bajaj Allianz.
airlines and also insured aircraft owned by India companies such as Bajaj Auto consortium, Force Motors, Ranbaxy group, Shamanur Sugar group, Orient Flight school, Asia Aviation, a part of the BILT group, Mundra Port and SEZ Ltd, an Adani group company.
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.
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.
"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," believes Kartik Jain, head, marketing and e-channel, ICICI Lombard. The company has insured more than 75 aircraft till date.
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 aircraft such as Airbus A 380 and Boeing 777 Dream liners, the values of the
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 re-insurers participating would increase to 25.
The total premium figures for aviation insurance in India for 2006-07 stood at Rs 417.29 cr. Reliance, which does not hold a major share in the airline business till now, is counting on its experience of handling major risks pertaining to energy/ off-shore risks/ package policies of large clients and strong network of international underwriters. "National reinsurer, GIC, leads our reinsurance treaties.
As reinsurance support is essential in getting competitive quote in aviation insurance, we aim to increase our share considerably in this financial year," says K A Somasekharan, CEO, Reliance General Insurance. 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.
On the profitability part, Oriental Insurance chairman-cum-managing director M Ramadoss says that 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. The company's client includes Jet Airways, Paramount Airways, and Air India, among others.
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 are increasing, which has led to insurance rates steadily coming down in spite of recent air crashes in the world.
AVIATION INSURANCE OF KINGFISHER AIRLINES
(PRIMARY DATA)
Two private sector general insurance companies, ICICI Lombard General Insurance and Bajaj Allianz General Insurance, have bagged the insurance account of Vijay Mallya‘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 75:25 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 Lomabrd, 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 Industrie 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
(Primary data)
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 traveling 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
Besides the aforesaid general aviation policies New India Assurance Company also provides various other tailor-made insurance as per specific requirements of the insured.
Claims: In case of claims following are illustrative documents that are
generally called for from the insured. Documents in connection with aircraft details Documents in connection with flight details Documents in connection with the accident Certificate of airworthiness/registration Crew details
Maintenance & engineering information
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 noncancellable third-party aviation war risk coverage through a non-profit 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.
Enthusiasm for GLOBALTIME has waned and a new convention on damage caused to third parties on the ground has yet to be agreed. In Asia at least, the airline industry has experienced a dramatic turnaround in fortunes with renewed prosperity. However, as 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 paper 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.
Insurance and the Future of Aviation 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 problems that must be solved before the industry can go to the next level.
As the industry enters into the millennium, the insurance industry must look at several problems that face the aviation industry. Legal concerns, in many cases, they‘re influenced by our society. The court system plays a big part by their decisions that are passed down. It‘s rare when an aviation case goes to court, because insurance agencies know they‘ll lose when the jury hears the case. It‘s just too easy to prove pilot negligence; most aviation accidents result from pilot error. Also, when they do go to court, they very seldom mount a defense due to the unreasonable verdicts, and ridiculous awards. These practices has forced aircraft owners to stay away from new policies and let their insurance coverage lapse. Aircraft owners pay three to five times the amount for adequate liability coverage than their counter parts elsewhere in the world. Survival for the small business operators is getting harder each day due to the General Aviation Revitalization Act (GARA); the threat of financial devastation is real when it comes to lawsuits. The (GARA) defects lawsuits from manufacturers to aviation service providers.
FBOs‘ insurance rates are skyrocketing because of this, which contributes to the cycle by causing higher repair cost. Many small business operators really don‘t want to take the chance and can‘t afford the rising cost that‘s associated with liability insurance. As of February 2000 at least three aviation insurance under writers ceased writing coverage for the small business operators, saying it‘s a major risk. One of the main reasons is the cost to the underwriters. Aviation insurance companies have paid out a dollar and quarter for every dollar they‘ve taking in, for each of the last several years. No wonder so many are closing down, merging, or getting out of the historically riskier aviation activities, General
the military and commercial airlines. Maintenance problems may be identified by computers, and then repaired by the manufacturers. The industry is coping with the mounting cost associated with liability insurance. ―Remove and replace maintenance‖ is the attitude the industry must lean towards. The manufacturers would set up new factory service centers and repair facilities for the general aviation customers. This system wouldn‘t help the rising cost of insurance, but maintenance and ground liabilities would rest on the shoulders of the manufacture.
The market itself is shrinking, we‘ve had a generation of pilots from WWII, Korea, and Vietnam that was introduced to aviation and trained at the government‘s expense. 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.
During a telephone interview with Darrel Hyde of CS&A Insurance, he stated; ―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.
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. The future of the industry could hold a brighter out-look. One can only hope that society will change their attitude towards litigation, this would hopefully drive down cost of liability coverage insurance.
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, remember 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. When shopping you can ask your friends who they do business with and ask them their feelings on that company, and are they treated well. Looking in one of the aviation trade magazines for information dealing with aviation insurance companies is a great source; get a phone number or a web address so you can make contact.
Saving money is the key when shopping for insurance. Only buy the needed coverage; if you don‘t fly passengers, why pay for the protection against them?
coverage in the winter even if they‘re not flying. In the winter paying for in flight liability insurance can be a waste. Why not store the aircraft in the winter, and change to storage coverage for that period of time. In most places flying without heater would be very uncomfortable. Get extra training from the FAA (Federal Aviation Administration) and other workshops, and prove to the insurance company that you‘re safe and deserve a break on you insurance. Self-insure whenever possible. Choose the highest liability limits you can qualify for and afford, to guard against the catastrophic loss, and only as much hull protection that you can afford. Match your equipment to your needs.
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.
CONCLUSION
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. It was also observed that airlines with huge and expensive airbuses
like ATR 42-500 aircraft tend to generate high amounts of risk; while relatively
less expensive aircraft like A330 aircraft tend to generate less risk.
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.
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.
BIBLIOGRAPHY
BOOKS:
Insurance in India -P.S. Palande -R.S. Shah -M.L. Lunawat Insurance (Fundamentals, Environment and Procedures) -B.S. Bodla
-M.C. Garg -K.P. Singh
Fundamentals of Risk and Insurance Emmett J. Vaughan Therese M. Vaughan
Insurance Chronicle- The ICFAI University Press (September, 2004)
