Roll No 57(Aviation Insurance) 18 Pgs

8/3/2019 Roll No 57(Aviation Insurance) 18 Pgs

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AVIATION INSURANCE

1.1 INTRODUCTION OF AVIATION INSURANCE

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.

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 Indias 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. 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

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General Insurance Company are also trying to muscle their way into this

lucrative sector.

The unprecedented growth in this sector is also seeing private playersjoin 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 Indias 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 Indias 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.

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.

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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.

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1.2 Meaning And Definition Of General Insurance

Meaning

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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 insurers

incurring the risk of paying a large sum upon a given

contingency.

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1.3 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.

The scope of insurance is much wider and extensive.

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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 insuranceUnderwriting 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.

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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).

Most airlines arrange "fleet policies" to cover all aircraft they own or

operate.

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1.5 Types of Risks In Aviation Insurance

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

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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.

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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.

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.

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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.

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).

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.

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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 license. 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, hangar keepers and

products liability 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

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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

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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 isdistorted.

Passenger Liability Insurance :

The insurers indemnify the

insured for all sums which are legally required as payment for

damages in respect to bodily injuries to (or the death of) the

passengers. The policy can also cover loss of or damage to baggage

and personal articles of passengers arising out of an accident to the

insured aircraft.

Third Party Liability Insurance :

This form of insurance protects the

insured against liability to third parties (other than passengers) whosuffer damage or injury as a result of the operation of the aircraft.

Cargo Insurance :

Two types of cargo insurance exist: cargo legal liability

insurance and cargo all risks insurance.

Cargo Legal Liability Insurance :

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Cargo legal liability

insurance aims to protect an air carrier against legal liability

for loss of or damage to goods while in the care, custody and

control of the carrier.

Cargo All Risks Insurance :

Cargo all risk insurance is usually

affected by a consignor or consignee of goods. It protects

against loss of or damage to goods during their shipment by

air.

Products Liability Insurance :

This concerns the legal liability of

aircraft product manufacturers to the third party in case of injury, loss

or damage caused by a defective design or manufacture of aircraft

products.

Airport Operations Liability Insurance:

This type of insurance covers

the liability of entities which operate and provide facilities at airports.

It includes: maintenance, repair and service facilities, air traffic

control services, aircraft refuellers, hangarkeepers, airport owners and

operators. Usually the liabilities of airport operators are divided intothree categories: airport premises liability; products-type liability; and

hangarkeepers liability.

Workers Compensation Insurance :

Insurance that pays benefits on

behalf of an insured employer to employees or their families in the

case of injury, disability, or death resulting from occupational hazards.

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Business Credit Insurance :

This policy protects aircraft parts dealers,

component manufactures etc... against losses arising from buyers

insolvencies. Losses on unpaid receivables are indemnified by the

insurer at an agreed rate.

Loss of License Insurance :

This is a form of combined personal

accident and sickness insurance. It is designed to compensate an air

crew member (or pilot) for the loss of his/her license resulting from an

illness or bodily injury. To qualify, the individual must be currently

employed as a commercial pilot.

Personal Accident and Life Insurance :

This policy is designed to

provide cover against the risks of the insured sustaining injury or

death because of an aviation accident. It usually seeks to exclude

liability for injury or death caused by the risks of aviation and permits

the insured to fly on an aircraft operated by an air carrier.

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1.6 MAJOR PLAYERS OF AVIATION INSURANCE IN

INDIA

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AVIATION INSURANCE OF KINGFISHER

AIRLINES

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Two private sector general insurance companies, ICICI Lombard GeneralInsurance and Bajaj Allianz General Insurance, have bagged the

insurance account of Vijay Mallyas 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 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 Industries 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.

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Documents

Roll No 57(Aviation Insurance) 18 Pgs