EXECUTIVE SUMMARY

Aviation Industry in India is one of the fastest growing aviation industries in the

world. With the liberalization of the Indian aviation sector, aviation industry in

India has undergone a rapid transformation. From being primarily a

government-owned industry, the Indian aviation industry is now dominated by

privately owned full service airlines and low cost carriers.

Aviation accidents are serious accidents, especially those that happen while the

plane is in flight. Aviation or plane accidents do not only mean pilot error. It

could also be caused by malfunctioning gauges as a result of product liability or

failure of maintenance. Also, aviation accidents do not only connote plane

crashes or mishaps.

Aviation insurance is different from other forms of insurance in that it is very

subjective. Due to the vast array of aircraft types, uses and pilot experience,

policies should always be specifically tailored to suit the unique requirements of

each individual applicant. For this reason it is recommended that a broker,

specialising in aviation insurance be engaged to arrange cover.

The Indian aviation industry has witnessed remarkable growth in recent years,

with key drivers being positive economic factors, including high GDP growth,

good industrial performance, and corporate profitability and expansion. Other

factors include higher disposable incomes, growth in consumer spending, and

availability of low fares.

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

dominated by the four state-owned general insurance companies: New India

Assurance Company, Oriental Insurance Company, National Insurance

Company and United India.

Aviation insurance business is a high severity loss business and in the future

you could see a lot of Indian insurance companies joining hands to manage

airline accounts.

Aviation has come a long way the last 100 years. The industry is still

developing. With growth comes a problem that must be solved before the

industry can go to the next level.

HYPOTHESIS:

“Premium rates in aviation insurance are highly volatile.”

An interview with the Sr. Deputy Manager of The New India Assurance

Company Ltd, Mr. K.S.Kulkarni proves that premium rates can rise or fall

sharply, apparently without rhyme or reason. However, he explains that this

specialist market covers the enormous insurance risks of today’s airline

operations, where a single major accident might cost billions. Aviation

insurance is one of the most complex and specialized fields in the insurance

industry. It is a much smaller portion of the industry than home, auto, life,

health and other general commercial insurance sectors. In fact, in premium

volume, aviation insurance makes up less than 1 percent of the entire insurance

industry.

AN INTRODUCTION TO INSURANCE

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

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.

THE AVIATION SECTOR

India is one of the fastest growing aviation markets in the world. The Airport

Authority of India (AAI) manages a total of 127 airports in the country, which

include 13 international airports, 7 custom airports, 80 domestic airports and 28

civil enclaves. There are over 450 airports and 1091 registered aircrafts in the

country. The genesis of civil aviation in India goes back to December 1912

when the first domestic air route between Karachi and Delhi became

operational. In the early fifties, all airlines operating in the country were merged

into either Indian Airlines or Air India and, by virtue of the Air Corporations

Act 1953, this monopoly continued for the next forty years.

In 1990s, aviation industry in India saw some important changes. The Air

Corporations Act was abolished to end the monopoly of the public sector and

private airlines were reintroduced. With the liberalization of the Indian aviation

sector, the industry has witnessed a transformation with the entry of the

privately owned full service airlines and low cost carriers. In 2006, the private

carriers accounted for around 75% share of the domestic aviation market. The

sector has also seen a significant increase in the number of domestic air travel

passengers. Some of the factors that have resulted in higher demand for air

transport in India include the growing middle class and their purchasing power,

low airfares offered by low cost carriers like Air Deccan, etc.

Increasing liberalization and deregulation has led to an increase in the

number of private players. The aviation industry comprises of three types of

players:

Full cost carriers

Low cost carriers (LCC)

Other start-up airlines

REASONS FOR BOOM IN THE AVIATION INDUSTRY

1. Foreign equity allowed: Foreign equity up to 49 per cent and NRI (Non-

Resident Indian) investment up to 100 per cent is permissible in domestic

airlines without any government approval. However, the government policy

bars foreign airlines from taking a stake in a domestic airline company.

2. Low entry barriers: Nowadays, venture capital of $10 million or less is

enough to launch an airline. Private airlines are known to hire foreign pilots, get

expatriates or retired personnel from the Air Force or PSU airlines in senior

management positions. Further, they outsource such functions as ground

handling, check-in, reservation, aircraft maintenance, catering, training, revenue

accounting, IT infrastructure, loyalty and programme management. Airlines are

known to take on contract employees such as cabin crew, ticketing and check-in

agents.

3. Attraction of foreign shores: Jet and Sahara have gone international by

starting operations, first to SAARC countries, and then to South-East Asia, the

UK, and the US. After five years of domestic operations, many domestic

airlines too will be entitled to fly overseas by using unutilised bilateral

entitlements to Indian carriers.

4. Rising income levels and demographic profile: Though India's GDP (per

capita) at $3,100 is still very low as compared to the developed country

standards, India is shining, at least in metro cities and urban centres, where IT

and BPO industries have made the young generation prosperous.

Demographically, India has the highest percentage of people in age group of 20-

50 among its 50 million strong middle class, with high earning potential. All

this contributes for the boost in domestic air travel, particularly from a low base

of 18 million passengers.

5. Untapped potential of India's tourism: Currently India attracts 3.2 million

tourists every year, while China gets 10 times the number. Tourist arrivals in

India are expected to grow exponentially, especially due to the open sky policy

between India and the SAARC countries and the increase in bilateral

entitlements with European countries, and US.

6. Glamour of the airlines: No industry other than film-making industry is as

glamorous as the airlines. Airline tycoons from the last century, like J. R. D.

Tata and Howard Hughes, and Sir Richard Branson and Dr. Vijay Mallya today,

have been idolized. Airlines have an aura of glamour around them, and high net

worth individuals can always toy with the idea of owning an airline. All the

above factors seem to have resulted in a "me too" rush to launch domestic

airlines in India.

CHALLENGES FACED BY THE AVIATION INDUSTRY

The growth in the aviation sector and capacity expansion by carriers has posed

challenges to aviation industry on several fronts. These include shortage of

workers and professionals, safety concerns, declining returns and the lack of

accompanying capacity and infrastructure. Moreover, stiff competition and

rising fuel costs are also negatively impacting the industry

1. Employee shortage: There is clearly a shortage of trained and skilled

manpower in the aviation sector as a consequence of which there is cut-

throat competition for employees which, in turn, is driving wages to

unsustainable levels. Moreover, the industry is unable to retain talented

employees.

2. Regional connectivity: One of the biggest challenges facing the aviation

sector in India is to be able to provide regional connectivity. What is

hampering the growth of regional connectivity is the lack of airports.

3. Rising fuel prices: As fuel prices have climbed, the inverse relationship

between fuel prices and airline stock prices has been demonstrated.

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

4. Declining yields: LCCs and other entrants together now command a

market share of around 46%. Legacy carriers are being forced to match

LCC fares, during a time of escalating costs. Increasing growth prospects

have attracted & are likely to attract more players, which will lead to

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

5. Gaps in infrastructure: Airport and air traffic control (ATC)

infrastructure is inadequate to support growth. While a start has been

made to upgrade the infrastructure, the results will be visible only after 2

- 3 years.

6. Trunk routes: It is also a matter of concern that the trunk routes, at

present, are not fully exploited. One of the reasons for inability to realize

the full potential of the trunk routes is the lack of genuine competition.

The entry of new players would ensure that air fares are brought to

realistic levels, as it will lead to better cost and revenue management,

increased productivity and better services. This in turn would stimulate

demand and lead to growth.

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

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

Withholding tax on interest repayments on foreign currency loans

for aircraft acquisition.

Increasing manpower costs due to shortage of technical personnel.

HISTORY OF AVIATION INSURANCE

Aviation Insurance was first introduced in the early years of the 20th

Century. The first aviation insurance policy was written by Lloyd's of London

in 1911. The company stopped writing aviation policies in 1912 after bad

weather and the resulting crashes at an air meet caused losses on many of those

first policies. It is believed that the first aviation polices were underwritten by

the Marine Insurance Underwriting community.

In 1929, the Warsaw convention was signed. The convention was an

agreement to establish terms, conditions and limitations of liability for carriage

by air, this was the first recognition of the airline industry as we know it today.

By 1933, realising that there should be a specialist industry sector, the

International Union of Marine Insurance (IUMI) set up an aviation committee,

and by 1934 eight European aviation insurance companies and pools were

formally established and the International Union of Aviation Insurers (IUAI)

was born.

The London insurance market is still the largest single centre for aviation

insurance. The market is made up of the traditional Lloyds of London

syndicates and numerous other traditional insurance markets. US has a large

percentage of the world's general aviation fleet and has a large established

market.

No single insurer has the resources to retain a risk the size of a major airline,

or even a substantial proportion of such a risk. Most airlines arrange "fleet

policies" to cover all aircraft they own or operate.

THE RISKS COVERED UNDER AVIATION INSURANCE

There are different types of risk which takes place in aviation insurance and

those risks are covered in aviation insurance they are as follows:

The above diagram suggests that there are mainly two kinds of risks which an

aviation insurance company will cover. These two risks are further divided into

various parts which involve various risks and liabilities.

NORMAL RISKS

These risks are those risks which every aviation company in this industry

carries it on its back when it enters into the business. These risks may differ

from time to time and situation to situation. These are

1. Hull Risks

2. Hull War Risks

3. Spares All Risks/ War Risks

4. Hull total Loss Only cover

These risks are those risks which takes place when these takes place when

any of these factors comes into action. Because all the above risks mentioned

above are unpredictable and may occur at any time

LIABILITIES

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

the settlement of which is expected to result in an outflow from the enterprise of

resources embodying economic benefits. Liabilities are those risks which may

arise due to some consequences or some “reasons” the company has to face.

The main type of liability covered is:

1. Aircraft liability

Passenger

Third party

baggage

All the risks and liabilities are explained in detail below.

NORMAL RISKS

1. Hull All Risks – They are risks of physical loss or damage to the aircraft.

They also are coverage for total loss of the aircraft or partial damages to

the aircraft caused by all risks except the “War Risks” and except also

other risks mentioned in the Exclusion Section of the Policy.

It covers:

Loss or Accidental Damage to Aircraft whilst flying or on ground.

Provides for replace or repair on account of loss or damage to Aircraft

including disappearance.

Provides for reasonable recovery and emergency expenses incurred for

immediate safety of aircraft consequent upon damage.

Exclusions:

1. Wear, tear and gradual deterioration - in common with most non-marine

policies these perils are thought to be a trading expense and not a peril to

be insured.

2. Ingestion damage - caused by stones, grit, dust, sand, ice, etc., which

result in progressive engine deterioration is also regarded as "wear and

tear and gradual deterioration", and as such is excluded. Ingestion

damage caused by a single recorded incident (such as ingestion of a flock

of birds) where the engine or engines concerned have to shut down is not

regarded as wear and tear and is covered subject to the applicable policy

deductible.

3. Mechanical Breakdown - likewise is thought by aviation insurers to be an

operating expense, but subsequent damage outside the unit concerned is

usually covered. However, it is possible to obtain insurance coverage

against mechanical breakdown of engines by way of a separate policy.

This coverage has a high degree of exposure and as a result is relatively

expensive

2. Hull War Risks – It Provides cover for loss or damage to property

(aircraft and spares) arising out of War and Allied Perils. These risks are

excluded from the Hull All Risk policies and broadly include the

following:

War, Invasion, Hostilities, Civil War, Rebellion, Attempted Coups

Strike, Riot, Civil Commotion or Labour Disturbances

Sabotage

Hijacking (Attempted or Otherwise) or Seizure of Control

Acts for Political or Terrorist purposes

Confiscation, Naturalization, Detention, etc., for the use of any

Government or Public Authority

Exclusions are as follows:

1. Confiscation etc. by the "state" of registration (this exclusion can often be

deleted in respect of financial interests - albeit, in some instances at an

additional premium charge);

2. Any debt, failure to provide bond or security or any other financial cause

under court order or otherwise;

3. The repossession or attempted repossession of the Aircraft either by any

title holder or arising out of any contractual agreement to which any

Insured protected under the policy may be party;

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

for a limited amount for extra expenses necessarily incurred following

confiscation or hijacking).

3. Spares – First of all we must identify what we mean by a "spare" or

perhaps - "when is a spare not a spare" to which a simple answer is "when

it is attached". Under most "Hull" policies the word "Aircraft" means

Hulls, machinery, instruments and the entire equipment of the aircraft

(including parts removed but not replaced). Once a part is replaced it is

no longer, from an insurance viewpoint, part of the aircraft. Conversely

once a spare part is attached to an aircraft as a part of that aircraft (not in

the hold as cargo or on the wing as an extra pod) it is no longer a "spare".

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

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

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

on the premises of others for storage

4. Hull Total Loss Only Cover: - This is similar to Hull All Risks cover

given above but will respond only to total losses of aircraft, whether

actual, constructive or arranged. This is particularly given for old aircraft

since the old aircraft are heavily depreciated and insured for low sums

and premium on such low sums would result in low premium, which

would be inadequate for the partial losses. The ratio of partial losses to

total losses in such old aircraft is distorted.

LIABILITIES

1. Aircraft

Here in aircraft liability there are many other liabilities involved which are

further divided into three parts. They are:

a) Passenger

b) Third party

c) Baggage

a) Passenger

Coverage for aircraft operators in the event a passenger is injured, killed or

disabled during an accident while aboard an insured aircraft. Aviation

policies divided liability coverage into two parts--general liability (excluding

passengers), and passenger liability.

A Passenger Liability policy covers incidents resulting from the

transportation of passengers by land, sea or air and can often be included as

part of a aviation insurance policy.

However care must be taken to check that the motor policy wording does not

exclude fare-paying passengers, which is often the case. It is unlikely that an

underwriter will be prepared to cancel or amend the wording of a standard

motor vehicle policy.

For this reason Daily Cover policies are specifically for to cater for fare-

paying passenger liability.

b) Third party

This program offers 3rd Party Liability insurance coverage for non-commercial

operations only. Pilot and passenger injuries and aircraft physical damage are

not covered. This member benefit program is designed to allow non-commercial

pilots the benefits that insurance coverage can offer. While pilot and passenger

injuries and damage to the aircraft itself are not covered under a Third Party

program, financial responsibilities, bodily injury or property damage caused by

the aircraft for which the pilot is found to be legally liable to pay to others is

covered. Additional insured parties such as landowners, municipalities and

airports, can also be covered under this type of policy.

Additionally, access to airports, flight parks, and flying events often require

liability coverage. Many states require insurance of this nature just to operate an

airplane of any description.

Third party liability coverage is also less expensive than full coverage, and

therefore allows the members (insurance holders) the opportunity to enjoy the

thrill of aviation without the worry of liability concerns or the expense of high-

priced insurance.

The people can be only eligible who are a registered, certificated or licensed

pilot are eligible. Sport Pilot Students who are endorsed to solo are also eligible.

Pilot registration can be with any recognized organization.

c) Baggage

This kind of liability may include various reasons in the happening. They are as

follows:

Delays

If your bags are delayed, try not to panic. The airlines typically have ways

to track them, and about 98 percent of all misplaced luggage is returned

eventually. If your bags are on the next flight, you could have them

within a few hours. Make sure to file your claim immediately at the

airport and give contact details.

Additionally, the airlines will reimburse any unexpected expenses caused

by the loss or delay on producing your receipts. However, the airline

sometimes has the option to deduct any reimbursement or stipend from

any subsequent awards.

Lost Baggage

If the airline loses your bags, a written claim for damages should be

made. This may require a different form than the original "missing

luggage" form. This can be done at the airport or by mail. You may need

to produce receipts to prove the value of items you had in your suitcase.

The airlines typically have a long list of items for which they will not be

held responsible; these include jewelry, money, heirlooms and other

valuables. These sorts of items should always be packed in your carry-on

bag.

Stolen Baggage: Head directly to the baggage carousel when you get off

your flight. Many airlines scan bags when they're loaded into the baggage

claim area and keep records, especially at larger airports. Once you've left

the baggage claim area, your claim is no longer with the airline, but with

the police.

Damaged Baggage Once you've gotten your bags off the carousel,

immediately check them for damage or other signs of tampering or

mishandling. Report any damage before leaving the airport; airline

customer service will often want to inspect the bag. Keep in mind that

most airlines won't cover minor wear and tear.

BUYING AN AVIATION INSURANCE CONTRACT

As with many specialized service or commodity purchasing, the use of an

experienced intermediary or middleman is usually prudent for the transaction

process. Although this middleman may not be required in all facets or industries

for successful purchases, in the Aviation Insurance Industry, with only one

exception, it is required. The middleman we are discussing is often referred to

as a Broker; it is quite frankly the only way to accomplish this need. All the

Aviation Insurance companies or groups require the use of a Broker to secure

insurance on behalf of the consumer. So what is this Aviation Insurance Broker

we need to utilize and access most of the companies providing insurance?

Well, the term broker refers to an independent insurance person who is licensed

by the State to represent and work for the consumer in the insurance purchasing

and service process. Unlike an insurance agent who represents an insurance

company and represents that insurance

Company’s interest, a broker is independent of the insurance company and

represents the needs and interest of the client. This independence allows the

broker the freedom and opportunity to deal with multiple aviation insurance

companies and is considered to be working the client. The broker’s

compensation is paid by a percentage of premiums, which comes from the

consumer. This commission structure keeps the broker’s attention to represent

the best interest of the client/consumer and places a responsibility that the

broker provides a continuous service and handling of the insurance needs or

requirements.

SELECTION OF A BROKER:

The selection process of a broker should be more involving for the consumer,

than which insurance company to buy the coverage from. That is a process

consumer and the broker decides upon. The selection of a broker should take

several considerations, such as the experience the broker has in the consumers

segment of aviation or operation, the infra-structure or team support behind the

broker to achieve the demands of technical service and document handling, the

market relationship and credibility with underwriters (the insurance company),

and the overall reputation in the aviation community.

Just as an extensive interview process in conducted to select an employee for a

company, so should the hiring process involve searching for, and selecting the

aviation insurance broker. This can be conducted by an interview process where

the broker sells them and the organization they represent as well as a check

upon their credentials with a client list of references. Once this process is

complete and the consumer feels comfortable with the selection, the long-term

relationship the consumer develops with his broker will provide the consumer

years of professional service. If, however, the client believes his choice was not

good or the broker service does not meet his expectations for a variety of

reasons, the client can always change the broker as in the original selection

process by writing a "Broker of Record" letter which is provided to the current

insurance company. This letter will replace or fire the current broker with the

client’s new selection, which is based on his criteria and not that of any

insurance company. Whatever the process by which the client select or remove

the broker representation is controlled by the client.

WHAT DOES YOUR BROKER DO FOR YOU?

Understanding the broker’s job should help the client during the selection

process. The broker will gather the "underwriting" information on the clients

"risk", the aircraft or operation, and submit this information to the insurance

company. This gathering of information can be as simple as a one-page

application for small risk such as private aircraft usage or as complex as

booklets of information for large commercial operations. In any event it is

important that the broker knows what information to secure, how to present it

and understands completely its context. That’s because the next important part

of the broker’s responsibility to the client is to negotiate the best combination of

coverage and price for client’s risk. This can only be achieved with a broker’s

level of understanding of clients’ risk, their experience in this area, and for

larger risk having a support mechanism the underwriter can relate to. It is in this

process the broker’s skill is utilized to create the competition between insurance

companies to obtain best industry prices at the current time. Once the broker has

negotiated the clients insurance program, they will continue to advise the client

from the purchasing process through the coverage issues that may arise during

the policy period, usually one year. This expertise in service can deal with

changes in your policy during its term to the most important reason the client

bought the policy in the first place and that is handling a claim should one occur

during the policy term. This service process from the client broker may not

involve just one person, but multiples of support personnel depending on the

size and complexity of your risk. As stated earlier, this is why the selection

process is important and should involve understanding the structure of the entire

brokerage firm for which to represent the client.

WHAT TO GIVE YOUR INSURANCE BROKER:

AIRCRAFT

INFORMATION

Report year, make, model and

acquisition value, plus tail and

serial numbers and information

about passenger and crew seating.

BASE INFORMATION Give details about home airport,

hanger space and ground handling.

CONTRACTS Supply drafts of usage, ownership and

storage agreements.

LIABILITY LIMITS &

PROVISIONS

Report average passenger load and

Profile and review insurance

provisions, deductibles and war— risk

perils.

MAINTENANCE DETAILS Explain whether you’ll outsource it,

use an in-house mechanic or do a little

of both.

MISSION INFORMATION Detailed purpose of use, territory of

operations and anticipated annual

hours of operations.

PILOT HISTORY FORMS Submit signed forms (which are

obtainable from your broker) for all

pilots.

In today’s changing and evolving aviation insurance market it is important for

the consumer, to understand the responsibility of the broker and how best they

can to serve. The broker works for the consumer/client and as the consumers

want to hire the best pilot or mechanic, so do they want to hire the best broker.

This is a profession where skill and experience is the best resource for the

overall success in the client’s insurance program.

RENEWING AVIATION INSURANCE

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

policy every year. If it was good enough last year 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 are simply renewing your mistake year after

year. In either case, your aviation insurance policy deserves a little bit of your

time once a year. Here are the 5 things you should do to make sure you are

adequately protected.

1. Choose your broker: When you insure your home or your business, a

broker can choose from dozens and dozens of insurance companies. As a

result, shopping around with a few brokers can make sense. Chances are

that they may not even approach the same companies for your quote.

In the case of aviation insurance, however, there are only four or

five companies to choose from and even fewer that specialize in light

aircrafts. Obviously, it doesn't matter how many brokers you go to, the

odds are that they will be approaching the very same companies on your

behalf. This can actually be a serious disadvantage for you, as some

companies will simply refuse to quote in these circumstances in order to

avoid the feeding frenzy that can result when a number of brokers vie for

the same account. So, as you can see, choosing your broker is the first

step. But how do you choose the right broker? Start by finding an

aviation specialist. Although any general insurance broker can sell you

aviation insurance, they simply do not have the experience or familiarity

with the field to be your best choice. Even more importantly, they usually

can't get you the best rates. If the insured is an aviation specialist, he may

deal with the companies and underwriters every single day. He gets to

know them personally and may place a lot of business with them. Now

compare that to the average general insurance broker who maybe places

one or two policies a year with that company. Who do you think will get

you the better results? Finally, make sure that you are comfortable with

the broker you choose. Just because someone special in aviation

insurance doesn't automatically mean they are good. Do they take the

time to ask you questions, get to know your needs, and fully explain

things to you in a way you can understand? If they do congratulations,

you've found your broker! They will probably ask you to sign a “Letter of

Brokerage” which will let insurance companies know that you have in

fact appointed them to be your broker.

2. Confirm the value of your aircraft: Neglecting to keep up with the

market value of your aircraft is one of the most common renewal

mistakes. If you do this year after year, you could be in for a rude

awakening. Aircraft values have soared in recent years, with many

doubling in price over the last decade. Unlike home or auto insurance,

aviation insurance is a “stated value” policy. That means that the owner is

responsible for declaring the value of the insured aircraft. If you

undervalue your plane, you risk losing it after even a minor accident. As I

have explained many times in this column, the “stated value” is the

maximum the insurance company will pay out —and they will keep the

plane as salvage. So whether you have simply neglected to increase the

value on your policy at renewal time or have tried to save a few bucks on

the premium by insuring for a lower amount you are taking a very big

gamble. Make sure you resolve this issue at your next renewal.

3. Get the right coverage for your needs: At every renewal, you should

discuss your flying habits with your broker. Many companies have

territorial restrictions and some have restrictions for dirt or grass landing

strips. Make sure your policy covers the kind of flying you do. If you

have made or are planning to make any upgrades or changes to the

configuration of your aircraft, you may need to make some adjustments to

your policy. Otherwise, you may find yourself out of luck in case of an

accident.

4. Protect your interests: Finally, you should discuss other unusual

circumstances regarding your aircraft. You may need to arrange for

special coverage to protect your interests. One common example is that

an owner who has his aircraft on lease to a flying school or commercial

operator. If the lessee commits an illegal act or omission, your aviation

policy could be nullified. In these situations, you obtain “Breach of

Warranty” coverage which will pay a lien holder's interest despite the

policy being otherwise invalidated.

Following these simple steps once a year at renewal time is an easy way to

make sure that your aviation insurance policy continues to protect you. So don't

take the easy way out…don’t just say “renew it as it is for another year.”

MAJOR PLAYERS OF AVIATION INSURANCE

HOW CAN AN AIRLINE INFLUENCE THE LEVEL OF PREMIUM?

Whatever method or combination of different techniques is used in setting the

premium, the buyer of insurance can ultimately influence the price paid for the

insurance cover. Underwriters are risk takers and the less risk they see, the

readier they become to accept an individual airline’s exposure at a competitive

price. The more attractive the airline’s insurance business the lower the price

can be, as more and more underwriters would like to accept this risk. The law of

supply and demand can work in the airline’s favour. By showing that the airline

is proactive in safety matters and works with the latest techniques to reduce

claims on its policy, the airline will gain in whatever market conditions that

prevail during renewal negotiations.

A buyer of insurance may be able to influence the price by increasing the

number of potential participants on its insurance policy. However, security of

the insurer is most important and financially strong insurers represent good

security.

An insurance company that has a solvency margin of 100% has a capital that is

100% of its annual premium volume. A solvency margin of 50% means that the

capital is 50% of the premium volume, etc. With a lower solvency margin the

insurer can write more business (take more risks) and charge less in premium

than the insurer with a higher solvency. So the insurance buyer can influence his

premium by accepting insurance security that (due to lower solvency) is in a

position to offer lower premiums, but at a greater risk to his claims payment.

The last few years have seen a large number of insurance company failures, so

great care is needed.

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 India’s 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.

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 India’s 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 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.

CURRENT SCENARIO OF AVIATIONINSURANCE

The magic of multiplier effect is now working for the aviation ancillary

industry. Reaping the benefits of the aviation boom is not only maintenance,

repairs & overhaul (MRO) operations but also the insurance sector. In fact, the

spiralling growth in the aviation sector has given an upshot to the insurance

segment.

Predictions for aircraft deliveries to meet the increasing demand for air travel,

particularly in Asia, mean that some 4,000 new airliners are on order, with this

region at 1,242 leading the way. Growth in purchasing power of passengers and

entry of low cost airlines has driven the upward movement of the airline

industry both in terms of equipment and staff and opening new opportunities for

this niche segment.

The shot in the arm for this industry has further come from the fact that aircraft

are becoming bigger in size with large seating capacity. This, in turn, increases

the risk for insurers, sometimes even catastrophic. With the emergence of

bigger aircrafts, the values of the aircraft as well as the liability are slated to

increase tremendously. The severity of each loss is also expected to go up

proportionately. Currently, at least 10-15 re-insurers participate in an airline

insurance programme. However, with the introduction of larger aircraft, the

number of reinsurers participating would increase to 25.

The domestic aviation business is enjoying the benefits of a softening market

with claim ratio being very low. Save for a few cases such as improper landing

or bird hit damages, there are not many claims made in the recent past.

Industrialists, however, does not anticipate terror risks pushing up the aviation

insurance costs. This space is very price competitive. The number of players in

the market is increasing, which has led to insurance rates steadily coming down

in spite of recent air crashes in the world.

Aircraft hull and liability insurance for the senior pilot has become such a

concern that the insurance industry should develop a special task force to help

deal with this problem. The need to extend the insurable age of the senior pilots

and to introduce new blood in to the cockpits will only help matters with the

attempt to lower insurance cost for the industry. Insurance cost for the industry

remains high, with the shrinking fleet of aircraft, means that the training cost

will increase. The value of airplanes is soaring; the high cost of new

replacement aircraft for training isn’t feasible. The FBOs’ are facing insurance

that’s inadequate and expensive, and its forcing companies to reduce their

operations or even cut them all together. Owners of flight schools are having a

hard time just staying in business. The shortage of qualified instructors has

slowed the flow of new pilots, which in turn is putting a hardship on the

industry.

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

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 Malaya’s Kingfisher Airlines.

This is for the first time that the private sector general insurance companies

have made major inroads into the aviation sector, which has mainly been the

forte of the public sector insurers.

Both ICICI Lombard and Bajaj General Insurance will share the Kingfisher

Airlines account in a 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.

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: Airlines at times have to bear a proportion

of loss due to application of a deductible under All Risk Policy, which

may impose considerable financial difficulty on the insured.

Therefore the operators insure part of their deductibles under this kind of

insurance.

Aviation Personal Accident (crew member)Insurance : This cover is

designed to cover insured person against injury, disablement or death

arising as result of an accident that is generally granted on annual basis.

The cover operates while mounting or dismounting from and whilst

travelling an aircraft while the aircraft is being used within the

geographical scope as per its permitted usage. This cover can also be on

24 hours basis. The capital sum insured varies according to the status of

the insured or earning capacity and fixed by the insurers.

Loss of License Insurance : Operating crews of the aircraft are required

to have valid license. License is liable to be suspended either temporarily

or permanently on medical grounds. Consequential financial loss is

covered by the loss of license policy. Cover provided is in respect of

incapacity causing permanent total disablement or temporary total

disablement due to bodily injury or illness.

Claims: In case of claims following are illustrative documents that are

generally called for from the insured.

Documents in connection with aircraft & flight details

Documents in connection with the accident

Certificate of airworthiness/registration

Crew details

Maintenance & engineering information

Operational manual passenger documentation in case of claims

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

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 (“WMD”). The

fear is that the use of a “dirty bomb” at a major international airport could

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

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

the uncontrolled spread of diseases.

Convention and statutory limits

The Montreal Convention 1999, which governs the liability of airlines in

relation to passengers and cargo interests, requires airlines to obtain

adequate insurance to cover their liabilities under the Convention. In

addition, airlines are required by many states to have minimum insurance

limits to cover such liabilities including third party surface damage.

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

insurance costs for commercial airlines and college aviation programs rose

sharply. The prevailing assumption is that increased aviation insurance costs are

the result of an increased risk of life and property loss from additional terrorist

attacks. This 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 increased costs are offered. First, after

September 11th, insurance managers became aware that they had not been

making the incremental rate increases necessary to maintain acceptable profit

margins. Second, sharp declines in the value of the insurance company stock

portfolios eroded profits. Increases in aviation insurance cost will be compared

to increases in other types of insurance, such as medical insurance, to determine

if the rate of increase in aviation insurance cost is significantly higher than in

other sectors of the economy. The impact of these insurance rate increases on

domestic and international air transportation and commerce is presented.

FUTURE OF AVIATION INSURANCE

As the industry enters into the millennium, the insurance industry must look at

several problems that also face the aviation industry. Survival for the small

FBO’s is getting harder each day; the threat of financial devastation is real when

it comes to lawsuits. General aviation may be forced to change its way of doing

business and become more like the military and commercial airlines. One can

only hope that society will change their attitude towards the aviation industry

and the litigation that surrounds the industry. We all hope for a positive future

for the community.

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, we’ll never again have the numbers that we

once had. The ageing fleet and pilots can’t help the situation that the industry is

facing; the average aircraft age is 15 to 20 years, and the post Indian pilot is

now 50 to 60 years of age. The underwriters are very worried about the age of

both the pilots and the aircraft.

The future of the industry could hold a brighter outlook. The industry hopes that

with the use of simulators at all levels of training will increase the number of

better-trained pilots and hopefully lower insurance cost at the same time.

Insurance can be one of the most expensive elements in the fix cost of owning

an aircraft. To keep insurance cost under control in this difficult environment,

aircraft and aviation business owners are going to have to make some changes

in the way they purchase and think about insurance. There are ways to reduce

your insurance cost, buying cheap insurance isn’t always the best way to go,

and it’s not heavily regulated by our government. Companies can write policies

pretty much the way they want to, you must pick the right company for you and

your aircraft.

Aviation has come a long way the last 100 years, and the future could hold a

brighter out-look for the industry. One can only hope that society will change

their attitude towards the aviation industry and the litigation that surrounds the

industry. In the future, this could drive cost down and make liability insurance

affordable to the private owners, and to the FBO’s. 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.

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 business models while taking an aviation

insurance contract. For example, some companies like Kingfisher Airlines take

policy with high premium while others like Air India take an aviation insurance

contract with low premium. The aviation insurance market is highly volatile due

to the inherent nature of the risk and the underwriting cycle of insurance.

Historically, the market wide premium appears to be almost as volatile as the

claims, suggesting a lack of consistency in underwriting this business. The

major caveat to my conclusion is that there is significant amount of public data

available to assist in underwriting and pricing aviation insurance. This data can

be used to develop more effective underwriting rating models for aviation

insurance and this should result in better selection of risks and more consistent

profits for the insurer.

The aviation insurance market, by its own nature, is highly volatile. There are

many causes including the overall insurance underwriting cycle, the major

accident risk, the short-term memory of the insurance market, and the long

tailed nature of determining responsible parties.

However, the increasing involvement of analytical professionals such as

actuaries should introduce more effective methods for pricing airline insurance

and this should help stabilize the premium component of the loss ratio equation.