aviation insurance final (1)

7/29/2019 Aviation INSURANCE Final (1)

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INSURANCE OF AVIATION INDUSTRY

Bachelor of Commerce

(Banking & Insurance)

Semester VI

(2012-13)

Submitted by

DIVYA KESWANI

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)

MUMBAI-50

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INSURANCE OF AVIATION INDUSTRY

Bachelor of Commerce

(Banking & Insurance)

Semester VI

(2012-13)

Submitted

In Partial Fulfilment of the requirements

For the Award of Degree of Bachelor of

Commerce Banking & Insurance

By

DIVYA KESWANI


BANDRA (W)

MUMBAI-50


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BANDRA (W)

MUMBAI-50

CERTIFICATE

(2012 2013)

This is to certify that DIVYA KESWANI of B.com (Banking & Insurance)

Semester VI (2012-13) has successfully completed the project on

INSURANCE OF AVIATION INDUSTRY under the guidance ofDR.

A.C. VANJANI.

Date: -

Place: - MUMBAI

(Prof. Mr. Vishal R Tomar) (Dr. Ashok Vanjani)

Course Co-ordinator Principal

(Prof. Mr. Ashok Vanjani)

Project Guide External Examiner

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DECLARATION

Date: -

I, Miss. DIVYA KESWANI the student of B.Com (Banking & Insurance)

Semester VI (2012-13) hereby declare that I have completed the project on

INSURANCE OF AVIATION INDUSTRY successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yoursfaithfully,

DIVYA KESWANI


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ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of

blessing. The desire of completing this dissertation was given a way by my

guide Dr. ASHOK VANJANI. I am very much thankful to him for the

guidance, support and for sparing his precious time from a busy and hectic

schedule.

I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College.

My sincere thanks to Mrs. Vishal Tomar who always motivated and

provided a helping hand for conceiving higher education.

I would fail in my duty if I dont thank my parents who are pillars of my life.

Finally, I would express my gratitude to all those persons who directly and

indirectly helped me in completing dissertation.

DIVYA KESWANI

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DECLARATION

Date:-

I the undersigned Dr. ASHOK VANJANI, have guided Miss. DIVYA

KESWANI for her project, she has completed the project INSURANCE

OF AVIATION INDUSTRY successfully.

I hereby, declared that information provided in this project is true as per the

best of my knowledge.

Thank you,

Yoursfaithfully,

Dr. ASHOK

VANJANI


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INDEX

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EXECUTIVE SUMMARY

Aviation Industry in India is one of the fastest growing aviation

SR.NO TOPIC PAGE NO.

1. EXECUTIVE SUMMARY. 08

2. AN INTRODUCTION TO INSURANCE. 09

3. AVIATION SECTOR. 10

4. HISTORY OF AVIATION INSURANCE. 11

5. CHALLENGES FACED BY THE AVIATIONINDUSTRY.

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6. THE RISKS COVERED UNDER AVIATIONINSURANCE.

14

7. BUYING AN AVIATION INSURANCECONTRACT.

22

8. RENEWING AVIATION INSURANCE. 23

9. AVIATION INSURANCE IN INDIA. 26

10. CURRENT SCENARIO OF AVAITIONINSURANCE.

28

11. RECENT DEVELOPMENT IN AVIATIONSECTOR.

30

12. CASE STUDIES. 31

13. FUTURE OF AVIATION INSURANCE. 36

14. CONCLUSION. 38

15. BIBLIOGRAPHY. 39.


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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 aresult 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.

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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, andcorporate 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. 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.AN INTRODUCTION TOINSURANCE

With the insurance sector in full bloom, today, it would not be wrong to

say

that in the present market scenario, there is an insurance available for just

about anything and everything. With even a bourgeois family man opting

for various insurance schemes, the question today is not whether you have

insurance or not. Instead it is, whether you need a particular insurance or

not?

Insurance is no doubt an area of immense importance in regards to the

financial and monetary sectors of every individual. The whole idea behind

Insurance as a financial security tool was to design something which could

secure the financial well-being of an individual as well as his/her

dependents, in case he/she undergoes an unforeseen loss. These losses

could be related to health, property, assets or life in general.

Insurance helps people manage monetary risks and losses related to


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investments, liabilities for wrong financial actions, and risks for inability to

earn income at any stage of life. Insurance generally covers all these risks.

Insurance may be described as a social device to reduce or eliminate

risk of loss to life and property. Under the plan of insurance, a large

number of people associate themselves by sharing risks attached to

individuals. The risks, which can be insured against, include fire, the

perils of sea, death and accidents and burglary. Any risk contingent

upon these, may be insured against at a premium commensurate with

the risk involved. Thus collective bearing of risk is Insurance.

How it works

Insurance is a contract between two parties viz., the insurer and the

insured, whereby the insurer agrees to compensate the insured in the

event of any loss, in return for consideration (premium) from the insured.

In short, the insurance company promises to make good the loss, in the

event of occurrence of any incidence.

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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 routebetween 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 inthe number of private players. The aviation industry comprises of three


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types of players:

Full cost carriers Low cost carriers (LCC) Other start-up airlines

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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 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.


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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

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.

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.

Rising fuel prices: As fuel prices have climbed, the inverserelationship between fuel prices and airline stock prices has been

demonstrated. Moreover, the rising fuel prices have led to increase in

the air fares.

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

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lead to more competition. All this has resulted in lower returns for all

operators.

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.


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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.

High input costs: Apart from the above-mentioned factors, the input

costs are also high. Some of the reasons for high input costs are:-

o Withholding tax on interest repayments on foreign currency loans foraircraft acquisition.

o Increasing manpower costs due to shortage of technical personnel.

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THE RISKS COVERED UNDERAVIATION 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:

Normal Risk

Liabilities

There are mainly two kinds of risks which an aviationinsurance company will cover. These two risks are further

divided into various parts which involve various risks and

liabilities.


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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 Risks2. Hull War Risks3. Spares All Risks/ War Risks4. 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

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 Aircraftincluding disappearance.

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Provides for reasonable recovery and emergency expenses incurred forimmediate 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 tobe an operating expense, but subsequent damage outside the unit

concerned is usually covered. However, it is possible to obtaininsurance 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 .


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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 anyGovernment 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 financialcause under court order or otherwise;

3. The repossession or attempted repossession of the Aircraft eitherby any title holder or arising out of any contractual agreement to

which any Insured protected under the policy may be party;

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4. Delay and loss of use. (Although there is often an extension to the

policy for a limited amount for extra expenses necessarily incurredfollowing confiscation or hijacking)


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3. Spares First of all we must identify what we mean by a "spare" orperhaps - "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 extrapod) 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.

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LIABILITIES

A liability is a present obligation of the enterprise arising from past

events, the settlement of which is expected to result in anoutflow 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

Here in aircraft liability there are many other liabilities involved

which are further divided into three parts. They are:

a. Passengerb. Third partyc. Baggagea. 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


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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)

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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.


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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 jewellery, 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

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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.


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BUYING AN AVIATION INSURANCECONTRACT

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.

In todays changing and evolving aviation insurance market it is

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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


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RENEWING AVIATION INSURANCE

If you're like most owners and pilots, you simply renew your aviation

insurance policy every year. If it was good enough last year then it will

be good enough this year. Then you probably don't give it another

thought until next year. And this pattern often repeats itself for many

years.

There are two very big problems with this scenario. First, things change.

Your aircraft, where you fly, who you fly with, how much you fly

many of these things can change over the years, and they should be

reflected in your policy. Second, it is quite possible that your policy

wasn't the right one for you to begin with! In that situation, you aresimply 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:

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

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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 a 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.

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


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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.

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.

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

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illegal act or a mission, 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.


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AVIATION INSURANCE IN INDIA

The unbridled growth in the aviation sector has come as a bonanza for

the insurance sector. Thanks to capacity addition and the entry of new

aviation players, a host of insurance companies are eyeing this growing

market t offer insurance cover to new planes that are being brought to

India.

Before the boom in the Indian aviation sector, the airline insurance

market was dominated by the four state-owned general insurance

companies: New India Assurance Company, Oriental Insurance

Company, National Insurance Company and United India. However,

with the growth in the Indian aviation story, private players like ICICI

Lombard, Bajaj Allianz, Iffco Tokyo General Insurance and Reliance

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

lucrative sector.

The unprecedented growth in this sector is also seeing private players

join hands with each other to bid for accounts. The latest such case is

the ICICI 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.

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.

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Indian insurance companies do not have the financial muscle to address

claims of airlines and generally go in for reinsurance which means

sharing the risk of loss with another insurance company.

The role of a reinsurer is important in the Indian context as most

of the companies do not have the requisite experience of handling a

market of this size. The reinsurer helps in providing the technical

expertise, capacity to underwrite the business and their ability to handle

such large risks. National reinsurer, GIC, leads Indias reinsurance

treaties.

Out of the eight private players, Bajaj Allianz General Insurance

Company and ICICI Lombard General Insurance Company Limited are

most active in this segment.

Although there are no official estimates, industry players put a ballpark

figure of the Indian aviation insurance market at somewhere around Rs

400 cr to Rs 500 cr. With new aircraft being bought by new players

entering the sky and the existing one in expansion mode, this segment

will only grow.

According to Ernst & Young, a global consultancy firm, Indian skies

would have over 700 aircraft - from 235 currently - by 2012, an increase

of almost 200%. The numbers speak for the potential of this segment in

the market, which is one of the fastest growing in the world. The total

premium figures for aviation insurance in India for 2006-07 stood at Rs


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417.29 cr. Typically, the premium depends upon underwriting factors

such as age of the aircraft, experiences of the pilot flying the aircraft,

make and model and use of the aircraft. It is generally 1% to 3% of the

aircraft value.

The aviation insurance market is looking up and is currently at Rs 350

crore. But with new aircraft being bought by new players entering the

business and the existing one on an expansion mode, the aviation

market is set to take off.

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CURRENT SCENARIO OF AVIATION

INSURANCEThe 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 asimproper landing or bird hit damages, there are not many claims made


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in the recent past.

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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.


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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 .

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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.


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AVIATION INSURANCE OF AIR INDIA

New India Assurance Company participated in the Aviation Insurance of

Air India way back in 1946. New India

Assurance Company provides professional aviation insurance advice and

solutions to the needs of small aircraft operators as well as scheduled airlines.

The aviation portfolio of New India Assurance Company encompasses

following type of covers:

Hull All Risk Insurance Policy

This policy is suitable for small aircraft operators belonging to flying clubs,

companies engaged in agricultural spraying operations, aircrafts especially

designed for VVIPs, business executives and for those engaged in industrial

aids. The policy scope includes all physical loss or damage sustained by the

insured aircraft including total loss, disappearance. All losses are paid subject

to deductibles.

Spares All Risk Insurance Policy

Covers loss or damage to spares, tools, equipments and supplies owned

by the insured or the property for which the insured is responsible whilst on

ground or in transit by land, sea, air including in own aircraft or whilst on the

premises of others for storage only.

Hull/Spares War Risk Insurance

Indemnity is provided to the aircraft as well as spares caused by

war, invasion, acts of foreign enemies, hostilities, civil war, rebellion,

revolution, resurrection, martial law, strikes, riots, civil commotion,

malicious acts, sabotage.

Hull Deductible Insurance

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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.


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Aviation Personal Accident (crew member) Insurance

This cover is designed to cover insured person againstinjury, 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

insuredor 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 onmedical 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.

ClaimsIn case of claims following are illustrative documents that are generally

called for from the insured.

o Documents in connection with aircraft & flight detailso Documents in connection with the accidento Certificate of airworthiness/registrationo Crew detailso Maintenance & engineering informationo Operational manual passenger documentation in case of claims

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EFFECTS OF 9/11 ATTACK ON AVIATION

INSURANCE

Following the September 11th attack in the United States, the

subject of aviation insurance attracted much attention in the media and

elsewhere after aviation insurers worldwide withdrew cover for the

specific acts of war and terrorism. As a result, many national

governments stepped in to provide temporary insurance cover to ensure

that airlines continued flying.

Short to medium term solutions

At the request of the airline industry the International

Civil Aviation Organisation established a special group on

war risk insurance ( SGWI

) which, as a short and medium

term measure recommended the setting up of an international

mechanism funded by insurance premiums to provide non cancellable

third-party aviation war risk coverage through a 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


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major airlines limited no cancellable third party coverage. However,

with other classes of catastrophe business, there remain underlying

uncertainties in the aviation insurance market that could dramatically

change the environment. One of those uncertainties is the prospect of a

catastrophic event caused by dirty bombs, bio-chemical and

electromagnetic devices or weapons of mass destruction.

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The fear is that the use of adirty bomb at a major international airport

could not only lead to immediate multiple aircraft, passenger and third

party losses, but also long term contamination of sites preventing access

and the uncontrolled spread of diseases.

Convention and statutory limits

The Montreal Convention 1999, which governs the liability of airlines

in relation to passengers and cargo interests, requires airlines to

obtain adequate insurance to cover their liabilities under the

Convention. In addition, airlines are required by many states to have

minimum insurance limits to cover such liabilities including third party

surface damage.

After the September 11, 2001, terrorist attacks on the United

States, the insurance costs for commercial airlines and college aviation

programs rose sharply. The prevailing assumption is that increased

aviation insurance costs are the result of an increased risk of life and

property loss from additional terrorist attacks. This project questions the

assumption and posits that the September 11,

2001. Attacks were a catalyst for and not the cause of increased

insurance costs. Two alternative explanations for the increasedcosts 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


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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.

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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 willchange 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 postIndian 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


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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.

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CONCLUSION

I started this Project by asking the question Why Aviation Insurance is

required? In the course of the analysis various trends and developments in

the aviation industry were discussed that provide partial answers to this

question.

Airlines employ a wide variety of businessmodels 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 andthe underwriting cycle of insurance . Historically,the market wide

premium appearsto 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 canbe used to develop more effective

underwriting rating models for aviation insurance and this should result in


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better selection of risks and

more consistent profits for theinsurer.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.

BIBLIOGRAPHY

www.wikipedia.com

www.google.com

www.businesstoday.com

www.aviationnews-online.com