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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