AVIATION INSURANCE

CHAPTER:-1 INTRODUCTION OF INSURANCE

INTRODUCTION TO SERVICE SECTOR

The service sector accounts for more than half of India's GDP: 51.16 percent in 1998 99. This sector has !ained at the e"pense of #oth the a!ricultural and industrial sectors throu!h the 199$s. The rise in the service sector's share in GDP mar%s a structural shift in the Indian econom& and ta%es it closer to the fundamentals of a developed econom& 'in the developed economies( the industrial and service sectors contri#ute a ma)or share in GDP *hile a!riculture accounts for a relativel& lo*er share+. The service sector's share has !ro*n from ,-.69 per cent in 199$ 91 to 51.16 per cent in 1998 99. In contrast( the industrial sector's share in GDP has declined from .5.-8 per cent to ...$1 per cent in 199$ 91 and 1998 99 respectivel&. The a!ricultural sector's share has fallen from -$.9- per cent to .6.8- per cent in the respective &ears.

AVIATION INSURANCE /ome economists caution that if the service sector #&passes the industrial sector( economic !ro*th can #e distorted. The& sa& that service sector !ro*th must #e supported #& proportionate !ro*th of the industrial sector0 other*ise the service sector !ro*n *ill not #e sustaina#le 1ithin the services sector( the share of trade( hotels and restaurants increased from 1..5. per cent in 199$ 91 to 15.68 per cent in 1998 99. The share of transport( stora!e and communications has !ro*n from 5..6 per cent to 2.61 per cent in the &ears under reference. The share of construction has remained nearl& the same durin! the period *hile that of financin!( insurance( real estate and #usiness services has risen from 1$... per cent to 11.,, per cent. The fact that the service sector no* accounts for more than half the GDP pro#a#l& mar%s a *atershed in the evolution of the Indian econom&.

AVIATION INSURANCE 3ustomer satisfaction predominates the success of an enterprise. In the service industr& *here intan!i#les are mar%eted( the importance of customer satisfaction is all the more si!nificant. /ervice is said to #e the sharpest ed!e of mar%etin! strate!&. /ales and service are the t*o important *in!s of service industr& li%e 4I3( ITI and the post office. If one of the *in!s turns *ea% the or!ani5ation cannot rise #ecause the *ea%er *in! *ill hamper its fli!ht. 6ence the emphasis should not #e concentrated onl& on the sales #ut on service aspects too. 7esides a supportive role in promotin! sales effort( servicin! influences the institutional ima!e. Prompt and effective service #oosts the morale of the sales force to present a #old form and hold their prospects. /ervice encompasses the service rendered to clients #efore( durin!( and after sales. 8 fe* e"amples of services are the 6otel industr&( 8irline industr&( Insurance industr&( Transportation industr&( etc.

INSURANCE:

AVIATION INSURANCE Insurance ma& #e descri#ed as a social device to reduce or eliminate ris% of loss to life and propert&. 9nder the plan of insurance( a lar!e num#er of people associate themselves #& sharin! ris%s attached to individuals. The ris%s( *hich can #e insured a!ainst( include fire( the perils of sea( death and accidents and #ur!lar&. 8n& ris% contin!ent upon these( ma& #e insured a!ainst at a premium commensurate *ith the ris% involved.

Definitions
In the *ords of :ohn ;a!ee( <Insurance is a plan #& themselves *hich lar!e num#er of people associate and transfer to the shoulders of all( ris%s that attach to individuals.=

3haracteristics of Insurance
/harin! of ris%s 3ooperative device >valuation of ris% Pa&ment on happenin! of a special event The amount of pa&ment depends on the nature of losses incurred. The success of insurance #usiness depends on the lar!e num#er of people insured a!ainst similar ris%.

AVIATION INSURANCE Insurance is a plan( *hich spreads the ris% and losses of fe* people amon! a lar!e num#er of people. The insurance is a plan in *hich the insured transfers his ris% on the insurer. Insurance is a le!al contract *hich is #ased upon certain principles of insurance *hich includes utmost !ood faith( insura#le interest( contri#ution( indemnit&( causes pro"ima( su#ro!ation( etc.

CHAPTER:-2 DEVELOPMENT OF INSURANCE

Origin and Devel !"en# $ In%&ran'e

Insurance in the modern form originated in the Mediterranean during 13/14th century. The earliest references to insurance have been
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AVIATION INSURANCE found in abylonia! the "ree#s and the $omans. The use of insurance

a%%eared in the account of &orth Italian merchant ban#s 'ho then dominated the international trade in (uro%e at that time. Marine insurance is the oldest form of insurance follo'ed by life insurance and fire insurance. The %atterns that have been used in (ngland follo'ed in other countries also in these #inds of insurance. The origin and gro'th of Marine Insurance! life Insurance! )ire Insurance and miscellaneous insurance are given belo'*

1( Marine In%&ran'e The oldest and the earliest records of marine %olicy relates to a Mediterranean voyage in 134+. In the year 14,,! a boo# 'ritten by a merchant of )lorence! indicates %remium rates charged for the shi%ments by sea from -ondon to .isa. Marine Insurance s%read from Italy to trading routes in other countries of (uro%e.

Marine In%&ran'e in India There is evidence that marine insurance 'as %racticed in India some three thousand years ago. In earlier days travelers by sea and land 'ere e/%osed to ris# of losing their vessels and merchandise because of %iracy on the o%en seas. Moreland has maintained that the %ractice of insurance 'as 0uite common during the rule of 1#bar to 1urang2eb! but the nature and coverage of insurance in this %eriod is not 'ell #no'n. It 'as the ritish! insurers 'ho introduced general insurance in India! in its

AVIATION INSURANCE modern form. The ritishers o%ened general insurance in India around

the year 1+,,. The first com%any! #no'n as the 4un Insurance 5ffice -td. 'as set u% in 6alcutta in the year 1+1,. This follo'ed by several insurance com%anies of different %arts of the 'orld! in the field of marine insurance. In 17+2! the government of India nationali2ed the general insurance business by forming "I6. 2( Li$e In%&ran'e The early develo%ments of life insurance 'ere closely lin#ed 'ith that of marine insurance. The first insurers of life 'ere the marine insurance under'riters 'ho started issuing life insurance %olicies on the life of master and cre' of the shi%! and the merchants. The early insurance contracts too# the nature of %olicies for a short %eriod only. The under'riters issued annuities and %ension for a fi/ed %eriod or for life to %rovide relief to 'ido's on the death of their husbands. The first life insurance %olicy 'as issued on 18th 9une 1583! on the life of :illiam "ibbons for a %eriod of 12 months. Li$e In%&ran'e in India The ritish com%anies started life insurance business in India! by

issuing %olicies e/clusively on the lives of (uro%ean soldiers and civilians. They sometimes issued %olicies on the lives of Indian;s by charging e/tra. <ifferent insurance com%anies li#e ombay Insurance 6om%any -T<. =1+73> and 5riental -ife 1ssurance 6om%any =1818> 'as formed to issue life assurance %olicies in India. "radually! the first Indian 6om%any named as ombay Mutual -ife Insurance 4ociety -td. 'as formed in
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AVIATION INSURANCE <ec. 18+,. com%anies. 1fter several changes have been made for the %eriod from 173, to 1738! the "overnment of India %assed Insurance 1ct! 1738. The act still a%%lies to all #inds of insurance business by instituting necessary amendments from time to time. 2( Fire In%&ran'e )ire insurance has its origin in "ermany 'here it 'as introduced in munici%alities for %roviding com%ensation to o'ners of the %ro%erty! in return for an annual contribution! based on the rent of those %remises. The fire insurance in its %resent form started after the most disastrous fire in human history #no'n as the ?"reat )ire? in -ondon! 'hich had destroyed several buildings. It dre' the attention of the %ublic and the first fire insurance commercially transacted in 133+. The Industrial $evolution =1+2,@185,> gave much im%etus to fire insurance. The &ineteenth century mar#ed the develo%ment of fire insurance. Fire In%&ran'e in India In India! fire insurance 'as started during the ritish regime. The y 17+1! the total numbers of com%anies 'or#ing in India ritish

'ere 15! out of 'hich + 'ere Indian and the remaining 'ere

oldest of these com%anies include the 4un Insurance 5ffice! 6alcutta =1+1,>! -ondon 1ssurance and $oyal (/change 1ssurance =1+2,>! .hoeni/ 1ssurance 6om%any =1+82>! etc. )( Mi%'ellane &% In%&ran'e

AVIATION INSURANCE <ue to the increasing demands of the time! different forms of insurance have been develo%ed. Industrial $evolution of 17th century had facilitated the develo%ment of accidental insurance! theft and dacoit! fidelity insurance! etc. In 2,th century! many ty%es of social insurance started o%erating! vi2.! unem%loyment insurance! cro% insurance! cattle insurance! etc. This 'ay the business of insurance develo%ed simultaneously 'ith human and social develo%ment. Today! the use of com%uters in the field of insurance is fre0uently increasing. Insurance becomes an inse%arable %art of human develo%ment. Miscellaneous insurance are of many ty%es li#e* .ersonal 1ccident Insurance* %rotection for loss from inAuries or loss of life. Travel 1ccident Insurance * covering loss of life or inAury arising during Bnnamed <river and .assenger Insurance Cealth Insurance 1ll@ris#s Insurance 6onse0uential -oss Insurance "eneral .ublic -iability Insurance urglary Insurance level

"olf Insurance Money Insurance )idelity "uarantee Insurance :or#men 6om%ensation Insurance 6ontractual -iability Insurance

AVIATION INSURANCE ut for my %roAect I have ta#en the to%ic of AVIATION INSURANCE 'hich is again a ty%e of miscellaneous insurance! concentrating on each and every as%ect of aviation insurance and ho' it has affected the service sector in recent times. 1viation is the most e/%ensive industry means of trans%ort today. This sector gained im%ortance and created a'areness after the 7/11 attac# on the t'in to'ers of 1merica. 1fter this attac# lot of changes too# %lace in the aviation sector and also lot of amendments 'ere made by the la' to regulate the aviation insurance contracts. 4o let us see 'hat these changes are and ho' aviation insurance forms one of the im%ortant %art of any country;s insurance sector.

CHAPTER:-) AVIATION INSURANCE

1,

AVIATION INSURANCE

8?I8TI@A IA/9B8A3>

6istor&
Avia#i n Insurance 'as first introduced in the early years of the 2,th 6entury. The first aviation insurance %olicy 'as 'ritten by -loyd?s of -ondon in 1711. The com%any sto%%ed 'riting aviation %olicies in 1712 after bad 'eather and the resulting crashes at an air meet caused losses on many of those first %olicies. It is believed that the first aviation %olices 'ere under'ritten by the marine insurance Under*ri#ing community. In 1727 the +ar%a* ' nven#i n 'as signed. The convention 'as an agreement to establish terms! conditions and limitations of liability for carriage by air! this 'as the first recognition of the airline industry as 'e #no' it today.

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AVIATION INSURANCE y 1733 realising that there should be a s%ecialist industry sector the International Bnion of Marine Insurance =IBMI> set u% an aviation committee! and by 1734 eight (uro%ean aviation insurance com%anies and %ools 'ere formally established and the International Bnion of 1viation Insurers =IB1I> 'as born. The -ondon insurance mar#et is still the largest single centre for aviation insurance. The mar#et is made u% of the traditional Ll ,d% $ L nd n syndicates and numerous other traditional insurance mar#ets. Throughout the rest of the 'orld there are national mar#ets established in various countries! this is de%endent on the aviation activity 'ithin each country! the B4 has a large %ercentage of the 'orld?s general aviation fleet and has a large established mar#et. &o single insurer has the resources to retain a ris# the si2e of a maAor airline! or even a substantial %ro%ortion of such a ris#. The 6atastro%hic nature of aviation insurance can be measured in the number of losses that have cost insurers hundreds of millions of dollars -Avia#i n a''iden#% and in'iden#%.( Most airlines arrange Dfleet %oliciesD to cover all aircraft they o'n or o%erate.

The Bis%s

H&ll /All Ri%0%/

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AVIATION INSURANCE The hull D1ll $is#sD %olicy 'ill usually refer to something li#e Dall ris#s of %hysical loss or damage to the aircraft from any cause e/ce%t as hereinafter e/cludedD. 1irline hull D1ll $is#sD %olicies are subAect to a standard level of deductible =that is an uninsured amount borne by the Insured> a%%licable in the event of %artial =non@total> loss. 6urrently! this deductible can range from E5,!,,, in res%ect of a T'in 5tter to E1!,,,!,,, in res%ect of a 'ide@bodied Aet aircraft! such as a oeing +4+. <eductibles too can be reduced by means of a se%arate D<eductible InsuranceD %olicy. The <eductible Insurance .olicy is effected to reduce the large D1ll $is#sD %olicy deductibles to a more manageable level. )or e/am%le the B4E1!,,,!,,, a%%licable to a oeing +4+ can be reduced to say B4E1,,!,,,. The term Dall ris#sD can be misleading. D1ll ris#s of %hysical loss or damageD does not include loss of use! delay! or conse0uential loss. D"roundingD is a good e/am%le of conse0uential loss. 4ome years ago 'hen there had been a cou%le of accidents involving <61, 1ircraft! the 6ivil 1viation 1uthorities throughout the 'orld im%osed a Dgrounding orderD on that ty%e of aircraft. That order in effect said until certain things had been established and chec#ed out those aircraft could not fly. The o%erators of those aircraft 'ere unable to fly them and as a conse0uence of that they DlostD the use of them. ut the aircraft 'ere not DlostD @ it 'as #no'n %recisely 'here they 'ere but they could not be used to carry %assengers. 4uch an eventuality 'ould not be covered by an Dall ris#sD %olicy because in such circumstances there is no PH1SICAL loss or damage.
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AVIATION INSURANCE :hat the %olicy 'ill cover is the reinstatement of the aircraft to its D%re@lossD condition! if re%airable damage is involved! or some other form of settlement in the event that more substantial damage is sustained. (/actly 'hat form of settlement 'ill de%end on the %olicy conditions. Today! the vast maAority of airline hull Dall ris#sD %olicies are arranged on an D1greed Falue asisD. This %rovides that the Insurers agree 'ith the Insured! for the %olicy %eriod! the value of the aircraft and as such! in the event of total loss! this 1greed Falue is %ayable in full. Bnder an 1greed Falue %olicy the re%lacement o%tion is deleted.

>"clusions
:ear! tear and gradual deterioration @ in common 'ith most non@ marine %olicies these %erils are thought to be a trading e/%ense and not a %eril to be insured. Ingestion damage @ caused by stones! grit! dust! sand! ice! etc.! 'hich result in %rogressive engine deterioration is also regarded as D'ear and tear and gradual deteriorationD! and as such is e/cluded. Ingestion damage caused by a single recorded incident =such as ingestion of a floc# of birds> 'here the engine or engines concerned have to shut do'n is not regarded as 'ear and tear and is covered subAect to the a%%licable %olicy deductible. Mechanical rea#do'n @ li#e'ise is thought by aviation insurers

to be an o%erating e/%ense! but subse0uent damage outside the unit concerned is usually covered. Co'ever! it is %ossible to obtain insurance coverage against mechanical brea#do'n of engines by
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AVIATION INSURANCE 'ay of a se%arate %olicy. This coverage has a high degree of e/%osure and as a result is relatively e/%ensive. The maAority of airlines do not %urchase it %robably vie'ing such e/%osure as a %art of the DengineeringD budget.

S!are%
)irst of all 'e must identify 'hat 'e mean by a Ds%areD or %erha%s

@ D'hen is a s%are not a s%areD to 'hich a sim%le ans'er is D'hen it is attachedD. Bnder most DCullD %olicies the 'ord D1ircraftD means Culls! machinery! instruments and the entire e0ui%ment of the aircraft =including %arts removed but not re%laced>. 5nce a %art is re%laced it is no longer! from an insurance vie'%oint! %art of the aircraft. 6onversely once a s%are %art is attached to an aircraft as a %art of that aircraft =not in the hold as cargo or on the 'ing as an e/tra %od> it is no longer a Ds%areD. If the e0ui%ment is insured on the hull D1ll $is#sD %olicy the automatic transfer of coverage from DaircraftD to Ds%areD and vice versa is automatically accom%lished. Caving established 'hen a s%are is a s%are ho' is it insured as suchG Bsually in one of t'o 'ays. (ither under a Ds%aresD section of a hull %olicy or by a se%arate 4%ares .olicy. In either case the sco%e of coverage 'ill %robably be similar. 1ll $is#s 'hilst on the "round and in Transit for a limit of Hso muchI any one item or sending or any one location. :ar $is#s can also be covered =in res%ect of transits>! 4tri#es! $iots! 6ivil 6ommotions can be covered in accordance 'ith standard mar#et clauses. 4%ares coverage is usually subAect to a small deductible e/ce%t! ho'ever! in res%ect of ground running of s%are engines 'hen the a%%ro%riate Ingestion deductible 'ill be a%%lied. 4%ares are normally
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AVIATION INSURANCE covered on an agreed value basis @ usually their re%lacement cost =be it ne' or reconditioned @ as is re0uired>. 4%ares installed on any aircraft are not covered by the 4%ares Insurance. They become! from an insurance stand%oint! a %art of the aircraft u%on 'hich they are installed and a %art of the 1greed Falue for 'hich it is insured. This becomes %articularly im%ortant if the %arts are loaned to another airline.

H&ll +ar Ri%0%

The hull D1ll $is#sD %olicy 'ill contain the e/clusion of D:ar and

1llied .erilsD. "enerally s%ea#ing! throughout the aviation insurance 'orld! D:ar and 1llied .erilsD have a defined meaning. In the -ondon 1viation Insurance Mar#et the standard e/clusion is called the :ar! Ci@ Aac#ing and 5ther .erils (/clusion 6lause =currently #no'n by its reference @ 1F&48 for short> this lists and defines these so@called 'ar and allied %erils. 1ar Definition : :ar @ this includes civil 'ar and 'ar 'here there is no formal declaration. The detonation of a 'ea%on of 'ar em%loying nuclear fission or fusion. 4tri#es! riots! civil commotions and labour disturbances. .olitical or terrorist acts.

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AVIATION INSURANCE Malicious or sabotage acts. 6onfiscation! nationali2ation! re0uisition and the li#e by any government. Ci@Aac#ing or any unla'ful sei2ure or e/ercise of control of the aircraft or cre' in flight. The e/clusion also a%%lies to any loss or damage occurring 'hilst the aircraft is outside the control of the o%erator by reason of any of these D'arD %erils. The maAority of the e/cluded D:ar and 1llied .erilsD! other than the detonation of a nuclear 'ea%on and a 'ar bet'een the "reat .o'ers =the aviation insurance 'orld identifies these as the B.4.1.! the $ussian )ederation! 6hina! )rance and the BJ>! can normally be covered by 'ay of a se%arate D:ar and 1llied .erilsD %olicy. 1ircraft deductibles are not normally a%%lied in res%ect of losses arising out of D:ar and 1llied .erilsD. 5ther e/clusions insurers 'ill usually a%%ly are! as follo's*@ 6onfiscation etc. by the DstateD of registration =this e/clusion can often be deleted in res%ect of financial interests @ albeit! in some instances at an additional %remium charge> 1ny debt! failure to %rovide bond or security or any other financial cause under court order or other'iseK The re%ossession or attem%ted re%ossession of the 1ircraft either by any title holder or arising out of any contractual agreement to 'hich any Insured %rotected under the %olicy may be %artyK

1+

AVIATION INSURANCE <elay and loss of use. =1lthough there is often an e/tension to the %olicy for a limited amount for e/tra e/%enses necessarily incurred follo'ing confiscation or hiAac#ing>. The aircraft hull D:ar and 1llied .erilsD %olicy 'ill cover the aircraft on an D1greed FalueD basis against %hysical loss or damage to the aircraft occasioned by any of these %erils. This statement is made carefully and deliberately in order to highlight the essential difference from a D.olitical $is#sD Insurance.

Lia2ili#, In%&ran'e

-iability can be divided basically into t'o categories* -iability in res%ect of .assengers! aggage! 6argo and Mail

carried on the aircraft. These liabilities result from the o%erations the airline is set u% to %erform and are normally the subAect of a contract of carriage li#e a tic#et or air'ay bill! 'hich %rovides some %ossibility of limiting the airline?s liability. 1ircraft Third .arty -iability @ the liability for damage done to %ro%erty or %eo%le outside the aircraft itself. (very airline 'ill arrange liability insurance for these t'o categories! normally in a single liability %olicy. In many countries there are re0uirements laid do'n im%osing minimum limits of liability that are a %rere0uisite to obtaining an o%erator?s licence. (lse'here limits are s%ecified for an aircraft to be allo'ed to land. The si2e of limit re0uired is often related to the si2e of the aircraft concerned =and its %otential for causing damage>. 1 small aircraft o%erating only in remote regions and
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AVIATION INSURANCE using small airstri%s incurs considerably less %otential e/%osure than an aircraft flying into and out of maAor air%orts.

General 4ia#ilities
The other category of liability covers %remises! hangar#ee%ers and

%roducts liability and is called D1irline "eneral Third .artyD @ being the liability for damage done to %ro%erty or %eo%le arising from other than the use of aircraft. Many airlines cover their D1irline "eneral Third .arty -iabilityD 'ithin their main liability %rogram. It is called D1irline "eneral Third .arty -iabilityD these days since the insurers too# ste%s s%ecifically to e/clude all non aviation activities =for e/am%le hotel o'nershi% or management> from D1viationD .olicies a fe' years ago. asically for a ris# to be considered as D1irline "eneral Third .arty -iabilityD it must arise from 'hat are described as Daviation occurrencesD being those involving aircraft or %arts relating thereto! or arising at air%ort locations or arising at other locations in connection 'ith the airline?s business or trans%orting %assengers/cargo or arising out of the sale of goods or services to others involved in the air trans%ort industry. This means that there is a definitive language detailing 'hat is considered as Daviation e/%osureD such that any other =non@aviation> e/%osure is e/cluded. Most %olicies are %laced on a 6ombined 4ingle -imit means asis. This

odily InAury and .ro%erty <amage combined. In the %ast!

%ersonal inAury 'as included but no' this has been se%arated. It should be mentioned! ho'ever! that these days the term Dbodily inAuryD! in addition to bodily inAury! sic#ness and death resulting at any time! 'ill
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AVIATION INSURANCE include shoc# and mental anguish. D.ersonal InAuryD on the other hand is defined as Doffences against the %ersonD! such as false arrest! malicious %rosecution! invasion! libel or slander and the li#e. In res%ect of .ersonal InAury the full %olicy limit! 'hatever that may be! is not available and is usually limited to B4E25!,,,!,,, any one offence and in the annual aggregate. :hat is e/cluded from a liability insurance are such things as*@ <amage to the Insured?s o'n %ro%erty. =It is after all a third %arty liability %olicy>. :ar and 1llied $is#s although these are D'ritten bac#D by a device called DThe (/tended 6overage (ndorsement @ 1F& 52D. $adioactive 6ontamination. &oise and .ollution @ unless caused by or resulting in a crash! fire! e/%losion or recorded Din flightD emergency. oth the 1ircraft and "eneral -iability %olicies usually includes the D'ar and allied %erilsD e/%osure by 'ay of a D'rite bac#D and 'ill %robably %rovide for such things as search and rescue e/%enses! first aid and other humanitarian e/%enses and also defence costs.

2,

AVIATION INSURANCE

CHAPTER:-3 INSURANCE CONTRACT

4U1IN5 CONTRACT: AVIATION INSURANCE

1s 'ith many s%eciali2ed service or commodity %urchasing! the use of an e/%erienced intermediary or middleman is usually %rudent for the transaction %rocess. 1lthough this middleman may not be re0uired in all facets or industries for successful %urchases! in the 1viation Insurance Industry! 'ith only one e/ce%tion! it is re0uired. The middleman 'e are discussing is often referred to as a ro#erK it is 0uite fran#ly the only 'ay to accom%lish this need. 1ll the 1viation Insurance com%anies or grou%s re0uire the use of a ro#er to secure insurance on behalf of the consumer. 4o 'hat is

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AVIATION INSURANCE this 1viation Insurance ro#er 'e need to utili2e and access most of the com%anies %roviding insuranceG :ell! the term bro#er refers to an inde%endent insurance %erson 'ho is licensed by the 4tate to re%resent and 'or# for the consumer in the insurance %urchasing and service %rocess. Bnli#e an insurance agent 'ho re%resents an insurance com%any and re%resents that insurance com%any;s interest! a bro#er is inde%endent of the insurance com%any and re%resents the needs and interest of the client. This inde%endence allo's the bro#er the freedom and o%%ortunity to deal 'ith multi%le aviation insurance com%anies and is considered to be 'or#ing the client. The bro#er;s com%ensation is %aid by a %ercentage of %remiums! 'hich comes from the consumer. This commission structure #ee%s the bro#er;s attention to re%resent the best interest of the client/consumer and %laces a res%onsibility that the bro#er %rovides a continuous service and handling of the insurance needs or re0uirements.

SELECTION OF A 4RO6ER: The selection %rocess of a bro#er should be more involving for

the consumer! than 'hich insurance com%any to buy the coverage from. That is a %rocess consumer and the bro#er decide u%on. The selection of a bro#er should ta#e several considerations! such as the e/%erience the bro#er has in the consumers segment of aviation or o%eration! the infra@structure or team su%%ort behind the bro#er to achieve the demands of technical service and document handling! the mar#et relationshi% and credibility 'ith under'riters =the insurance com%any>! and the overall re%utation in the aviation community.

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AVIATION INSURANCE 9ust as an e/tensive intervie' %rocess in conducted to select an em%loyee for a com%any! so should the hiring %rocess involve searching for! and selecting the aviation insurance bro#er. This can be conducted by an intervie' %rocess 'here the bro#er sells themselves and the organi2ation they re%resent as 'ell as a chec# u%on their credentials 'ith a client list of references. 5nce this %rocess is com%lete and the consumer feels comfortable 'ith the selection! the long@term relationshi% the consumer develo%s 'ith his bro#er 'ill %rovide the consumer years of %rofessional service. If! ho'ever! the client believes his choice 'as not good or the bro#er service does not meet his e/%ectations for a variety of reasons! the client can al'ays change the bro#er as in the original selection %rocess by 'riting a D ro#er of $ecordD letter 'hich is %rovided to the current insurance com%any. This letter 'ill re%lace or fire the current bro#er 'ith the client;s ne' selection! 'hich is based on his criteria and not that of any insurance com%any. :hatever the %rocess by 'hich the client select or remove the bro#er re%resentation is controlled by the client.

+HAT DOES 1OUR 4RO6ER DO FOR 1OU7 Bnderstanding the bro#er;s Aob should hel% the client during the

selection %rocess. The bro#er 'ill gather the Dunder'ritingD information on the clients Dris#D! the aircraft or o%eration! and submit this information to the insurance com%any. This gathering of information can be as sim%le as a one@%age a%%lication for small ris# such as %rivate aircraft usage or as com%le/ as boo#lets of information for large commercial o%erations. In any event it is im%ortant that the bro#er #no's 'hat information to secure! ho' to %resent it and understands com%letely its conte/t. That;s because the ne/t im%ortant %art of the bro#er;s
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AVIATION INSURANCE res%onsibility to the client is to negotiate the best combination of coverage and %rice for client;s ris#. This can only be achieved 'ith a bro#er;s level of understanding of clients; ris#! their e/%erience in this area! and for larger ris# having a su%%ort mechanism the under'riter can relate to. It is in this %rocess the bro#er;s s#ill is utili2ed to create the com%etition bet'een insurance com%anies to obtain best industry %rices at the current time.

5nce the bro#er has negotiated the clients insurance %rogram! they 'ill continue to advise the client from the %urchasing %rocess through the coverage issues that may arise during the %olicy %eriod! usually one year. This e/%ertise in service can deal 'ith changes in your %olicy during its term to the most im%ortant reason the client bought the %olicy in the first %lace and that is handling a claim should one occur during the %olicy term. This service %rocess from the client bro#er may not involve Aust one %erson! but multi%les of su%%ort %ersonnel de%ending on the si2e and com%le/ity of your ris#. 1s stated earlier! this is 'hy the selection %rocess is im%ortant and should involve understanding the structure of the entire bro#erage firm for 'hich to re%resent the client. +HAT TO 5IVE 1OUR INSURANCE 4RO6ER:
AIRCRAFT INFORMATION

$e%ort year! ma#e! model and ac0uisition value! %lus tail and serial numbers and information about %assenger seating. and cre'

4ASE INFORMATION

"ive details about home air%ort! hanger s%ace and ground handling.
24

AVIATION INSURANCE

CONTRACTS

4u%%ly drafts of usage! o'nershi% and storage agreements.

LIA4ILIT1 LIMITS 8 PROVISIONS

$e%ort average %assenger load and %rofile and revie' insurance %rovisions! deductibles and 'arLris# %erils. (/%lain 'hether you;ll outsource it! use an in@house mechanic or do a little of both.

MAINTENANCE DETAILS

MISSION INFORMATION

<etailed

%ur%ose

of

use!

territory

of

o%erations and antici%ated annual hours of o%erations.

PILOT HISTOR1 FORMS

4ubmit signed forms ='hich are obtainable from your bro#er> for all %ilots.

In today;s changing and evolving aviation insurance mar#et it is im%ortant for the consumer! to understand the res%onsibility of the bro#er and ho' best they can to serve. The bro#er 'or#s for the consumer/client and as the consumers 'ant to hire the best %ilot or mechanic! so do they 'ant to hire the best bro#er. This is a %rofession 'here s#ill and e/%erience is the best resource for the overall success in the client;s insurance %rogram.

RENE+IN5 AVIATION INSURANCE

If you?re li#e most o'ners and %ilots! you sim%ly rene' your aviation insurance %olicy every year. If it 'as good enough last year it 'ill be good enough this year. Then you %robably don?t give it another
25

AVIATION INSURANCE thought until ne/t year. 1nd this %attern often re%eats itself for many years. There are t'o very big %roblems 'ith this scenario. )irst! things change. Mour aircraft! 'here you fly! 'ho you fly 'ith! ho' much you flyNmany of these things can change over the years! and they should be reflected in your %olicy. 4econd! and even more serious! it is 0uite %ossible that your %olicy 'asn?t the right one for you to begin 'ithO In that situation! you are sim%ly rene'ing your mista#e year after year. In either case! your aviation insurance %olicy deserves a little bit of your time once a year. Cere are the five things you should do to ma#e sure you are ade0uately %rotected.

1( C9 %e , &r 2r 0er

:hen you insure your home or your business! a bro#er can choose from do2ens and do2ens of insurance com%anies. 1s a result! sho%%ing around 'ith a fe' bro#ers can ma#e sense. 6hances are! they may not even a%%roach the same com%anies for your 0uote. In the case of aviation insurance! ho'ever! there are only four or five com%anies in 6anada to choose from and even fe'er that s%eciali2e in light aircraft. 5bviously! it doesn?t matter ho' many bro#ers you go to!
23

AVIATION INSURANCE the odds are that they 'ill be a%%roaching the very same com%anies on your behalf. This can actually be a serious disadvantage for you! as some com%anies 'ill sim%ly refuse to 0uote in these circumstances in order to avoid the feeding fren2y that can result 'hen a number of bro#ers vie for the same account. 4o! as you can see! choosing your bro#er is the first ste%. ut ho' do you chooseG 1nd are there any alternatives to a bro#erG -et?s loo# at alternatives first. The only alternatives to a bro#er are the direct sellers and s%ecial %rograms. In these cases you are dealing 'ith a sales%erson 'ho can only offer you the one %roduct they re%resent. 1s a result! these o%tions tend to be %romoted on the basis of chea% rates Lbut li#e PbargainsQ any'here! they do so by cutting coverage and often leaving you seriously underinsured. If you really 'ant to #no' 'hat they can offer you! chec# them out. ut before you ma#e your decisionK be sure to tal# to a bro#er 'ho 'or#s for you and not any one com%any. 4o ho' do you choose the right bro#erG 4tart by finding an aviation s%ecialist. 1lthough any general insurance bro#er can sell you aviation insurance! they sim%ly do not have the e/%erience or familiarity 'ith the field to be your best choice. (ven more im%ortantly! they usually can?t get you the best rates. If the insured is an aviation s%ecialist! he may deal 'ith the com%anies and under'riters every single day. Ce gets to #no' them %ersonally and may %lace a lot of business 'ith them. &o' com%are that to the average general insurance bro#er 'ho maybe %laces one or t'o %olicies a year 'ith that com%any. :ho do you thin# 'ill get you the better resultsG )inally! ma#e sure that you are comfortable 'ith the bro#er you choose. 9ust because someone s%ecial in aviation insurance doesn?t
2+

AVIATION INSURANCE automatically mean they are good. <o they ta#e the time to as# you 0uestions! get to #no' your needs! and fully e/%lain things to you in a 'ay you can understandGG If they doLcongratulations! you?ve found your bro#erO They 'ill %robably as# you to sign a P-etter of ro#erageQ 'hich 'ill let insurance com%anies #no' that you have in fact a%%ointed them to be your bro#er. Then you can move on to the other four ste%s belo'.

2( C n$ir" #9e val&e $ , &r air'ra$#

&eglecting to #ee% u% 'ith the mar#et value of your aircraft is one of the most common rene'al mista#es. If you do this year after year! you
28

AVIATION INSURANCE could be in for a rude a'a#ening. 1ircraft values have soared in recent years! 'ith many doubling in %rice over the last decade. Bnli#e home or auto insurance! aviation insurance is a Pstated valueQ %olicy. That means that the o'ner is res%onsible for declaring the value of the insured aircraft. If you undervalue your %lane! you ris# losing it after even a minor accident. 1s I have e/%lained many times in this column! the Pstated valueQ is the ma/imum the insurance com%any 'ill %ay out and they will keep the plane as salvage.

)( Revie* , &r lia2ili#,

Ma#e sure your %olicy doesn?t have %assenger or family member restrictions. This is the most common 'ay that com%anies offer PbargainQ %olicies. It is also the most common 'ay o'ners lose everything they o'n 'hen courts a'ard large inAury settlements that are not covered by their PbargainQ %olicy. I regularly see %eo%le 'ith limits of only E1,,!,,, %er %erson. Mou?d never consider such a lo' amount for your home or auto insurance! so 'hy allo' it on your aviation %olicyG :ith the high court settlements being a'arded today! one to t'o million dollars should be the least you consider.

3( 5e# #9e rig9# ' verage $ r , &r need%

27

AVIATION INSURANCE

1t every rene'al! you should discuss your flying habits 'ith your bro#er. Many com%anies have territorial restrictions to the and some have restrictions for dirt or grass landing stri%s. Ma#e sure your %olicy covers the #ind of flying you do. If you have madeLor are %lanning to ma#eLany u%grades or changes to the configuration of your aircraft! you may need to ma#e some adAustments to your %olicy. 5ther'ise! you may find yourself out of luc# in case of an accident.

:( Pr #e'# , &r in#ere%#%

)inally! you should discuss any other unusual circumstances regarding your aircraft. Mou may need to arrange for s%ecial coverage to
3,

AVIATION INSURANCE %rotect your interests. 5ne common e/am%le I run into is an o'ner 'ho has his aircraft on lease to a flying school or commercial o%erator. If the lessee commits an illegal act or omission! your aviation %olicy could be nullified. In these situations! you should obtain P reach of :arrantyQ coverage 'hich 'ill %ay a lien holder?s interest des%ite the %olicy being other'ise invalidated. )ollo'ing these sim%le ste%s once a year at rene'al time is an easy 'ay to ma#e sure that your aviation insurance %olicy continues to %rotect you. 4o don?t ta#e the easy 'ay outNdon?t Aust say renew it as is for another year.

CHAPTER:-: AVIATION INSURANCE IN INDIA

AVIATION INSURANCE IN INDIA: TA6E OFF STA5E

31

AVIATION INSURANCE

The unbridled gro'th in the aviation sector has come as a bonan2a for the insurance sector. Than#s to ca%acity addition and the entry of ne' aviation %layers! a host of insurance com%anies are eyeing this gro'ing mar#et to offer insurance cover to ne' %lanes that are being brought to India. RRThe aviation insurance mar#et is loo#ing u% and is currently at $s 35, crore. ut 'ith ne' aircraft being bought by ne' %layers aAaA 1llian2 "eneral entering the business and the e/isting one on an e/%ansion mode! the aviation mar#et is set to ta#e off!;; said Insurance;s Cead@Bnder'riting J. Jrishnamoorthy. :ith the entry of several lo' cost airlines along 'ith fleet e/%ansions by e/isting ones and increasing cor%orate aircraft o'nershi%! the Indian aviation insurance mar#et is all set to ta#e off in a big 'ay. Industry trac#ers believe that 'ith several airlines including Indi"o! (ast :est 1irlines and Magic 1ir set to enter the mar#et in the coming 'ee#s! the airline %remium income could be u% 5, %er cent in the ne/t t'o years.

32

AVIATION INSURANCE Though India;s contribution to the total global insurance %remium %aid by airlines 'hich stands at B4 E 5.83 billion is miniscule! the gro'th in aviation %remium %ayout is highest in 6hina follo'ed by India! e/%erts say. 1irline insurance 'hich is ty%ically offered to %assengers! cargo airlines or com%any or individually@o'ned aircraft generally consists of coverage to the aircraft and liability to %assengers. efore the boom in the Indian aviation sector! the airline insurance mar#et 'as dominated by the four state@o'ned general insurance com%anies* &e' India 1ssurance 6om%any! 5riental Insurance 6om%any! &ational Insurance 6om%any and Bnited India. Co'ever! 'ith the gro'th in the Indian aviation story! %rivate %layers li#e I6I6I -ombard! aAaA 1llian2! Iffco To#yo "eneral Insurance and $eliance "eneral Insurance 6om%any are also trying to muscle their 'ay into this lucrative sector. The un%recedented gro'th in this sector is also seeing %rivate %layers Aoin hands 'ith each other to bid for accounts. The latest such case is the I6I6I -ombard@ aAaA 1llian2 tie@u% 'here they are Aointly bidding for 1ir India;s insurance account 'hich includes %roviding cover for 5, %lanes valued over E3 billion. 6urrently! a consortium of %ublic sector insurance com%anies including &e' India 1ssurance! 5riental )ire and "eneral Insurance and Bnited )ire and "eneral Insurance handle 1ir India;s account for 'hich the airline is %aying an annual %remium of close to B4 E 14 million. 1viation insurance business is a high severity loss business and in the future you could see a lot of Indian insurance com%anies Aoining hands to manage airline accounts.
33

AVIATION INSURANCE (/%erts say that the role of an reinsurer L generally foreign insurance com%anies L is also bound to increase in the future. Indian insurance com%anies do not have the financial muscle to address claims of airlines and generally go in for reinsurance 'hich means sharing the ris# of loss 'ith another insurance com%any. The role of an reinsurer is im%ortant in the Indian conte/t as most of the com%anies do not have the re0uisite e/%erience of handling a mar#et of this si2e. The reinsurer hel%s in %roviding the technical e/%ertise! ca%acity to under'rite the business and their ability to handle such large ris#s!Q the official said. (stimated to be in the region of $s.3.5 billion! aviation insurance %remium business is gro'ing at a fast cli%. 1t %resent the government@ o'ned four non@life insurers are the maAor %layers in this segment as they cover %ublic sector airlines li#e 1ir India and Indian. 5ut of the eight %rivate %layers! most active in this segment. The .une@based aAaA 1llian2 is co@insurer for Jingfisher 1irlines! "o 1ir! Indigo 1ir among the scheduled airlines and has also insured aircrafts o'ned by cor%orates li#e the aAaA 1uto consortium! )orce Motors! $anba/y grou%! 4hamanur 4ugar grou% and 5rient )light 4chool. I6I6I -ombard has insured around +5 aircrafts. 1viation insurance is offered to scheduled airlines =%assenger or cargo airlines> and non@scheduled airlines =com%any or individual@o'ned aircrafts> and also crafts o'ned by flying clubs. aAaA 1llian2 "eneral Insurance

6om%any and I6I6I -ombard "eneral Insurance 6om%any -imited are

34

AVIATION INSURANCE The basic coverage offered is to the hull of the aircraft! liability to %assengers and third %arty and also can include %ersonal accident cover to the cre' members. &ormally the ty%es of insurance covers available are* 1ircraft o'ners / o%erators 1ircraft hull %olicy @ covering loss of or damage to aircraft 1ircraft liability %olicy -iability of aircraft o'ner/ o%erator in res%ect of accidental bodily inAury or %ro%erty damage. -iability to'ards %assengers both in res%ect of accidental bodily inAury and also to'ards loss or damage to baggage and %ersonal belongings of %assengers. 1viation 'ar and allied %erils 1viation %roduct?s liability 1ir%ort o%erator?s liability 1viation service %rovider?s liability The %olicy covering aircraft hull insurance is usually on an agreed value basis. In the event of a total loss the stated amount can be %aid as agreed and the o%tion to re%lace the aircraft can be avoided. This fre0uently occurs because of develo%ment of ne'er and faster ty%es of aircraft or due to %urchase of an aircraft on mortgage. The insurers base their rating on variables li#e* aircraft age! ty%e of aircraft i.e. fi/ed 'ing or rotor! geogra%hical area of flying o%erations! maintenance facilities! %ast e/%erience! e/%erience of the %ilots! claims e/%erience of the fleet and the carrier! the number of %assengers! etc.

35

AVIATION INSURANCE &ormally the %remium 'ould de%end on the aircraft and its si2e besides o%erations. Co'ever it 'ould vary from 1 to 2.5 %er cent of the aircraft value. Interestingly the aviation insurance %remium is highly reinsurance@driven as the value of ris# covered is so huge that the %rimary insurers do not 'ant to shoulder on their o'n. )or instance 5riental Insurance 6om%any -imited retained Aust $s.3, million out of the $s1.5 billion aviation %remium earned last fiscal. In terms of loss e/%erience the domestic aviation business is 0uite %rofitable 'ith very fe' claims @ e/ce%t for a fe' im%ro%er landing and bird hit damages @ registered in the recent %ast. Mean'hile! %layers also feel that airlines can also benefit from this gro'th in the mar#et as gro'ing com%etition could mean lo'er %remiums. RRThe Indian aviation industry has had a fe' good years 'ith no maAor losses re%orted and hence the %layers can have the benefit of reduction in %remiums for good records. This 'ould encourage clients to go for higher covers or o%timi2e it!;; Jrishnamoorthy says.

CURRENT SCENARIO INSURANCE*

OF

AVIATION

The magic of multi%lier effect is no' 'or#ing for the aviation ancillary industry. $ea%ing the benefits of the aviation boom is not only maintenance! re%airs S overhaul =M$5> o%erations but also the insurance sector. In fact! the s%iraling gro'th in the aviation sector has given an u%shot to the insurance segment. 1s %er an airline ris# management survey @ commissioned by international maga2ine 1irline
33

usiness and global airline insurance

AVIATION INSURANCE bro#er 1on @ airlines are s%ending no less than E8.33 bn a year on ris# management! 'ith around +,T! or E5.83 bn! s%ent on insurance %remiums. 1viation %remiums are! on an average! gro'ing by 15.5T %ost@7/11! the survey re%orts. It further states that 'hile the industry?s loss record has been res%ectable in the last four years! traffic and %assenger numbers have risen significantly! increasing the e/%osure to ris#. In India! a maAority of the %rivate %layers! including aAaA 1llian2! I6I6I -ombard! $eliance and the four %ublic sector general insurance com%anies @ 5riental! &e' India 1ssurance! Bnited India! &ational Insurance @ offer aviation insurance in the mar#et. 1lthough there are no official estimates! industry %layers %ut a ball%ar# figure of the Indian aviation insurance mar#et at some'here around $s 4,, cr to $s 5,, cr. D:ith ne' aircraft being bought by ne' %layers entering the s#y and the e/isting one in e/%ansion mode! this segment 'ill only gro'!D says T 1 $amalingam! head! under'riting! aAaA 1llian2. aAaA 1llian2 is one of the most active %layers in the mar#et and a co@insurer 'ith Jingfisher 1irlines! "o 1ir! Indigo 1ir and 1ir India among the scheduled airlines and also insured aircraft o'ned by India com%anies such as aAaA 1uto consortium! )orce Motors! $anba/y grou%! 4hamanur 4ugar grou%! 5rient )light school! 1sia 1viation! a %art of the I-T grou%! Mundra .ort and 4(U -td! an 1dani grou% com%any. In India! this segment is highly reinsurance@driven. 1 maAority of the %layers have re@insured the value of ris# covered 'ith foreign com%anies. Ta#e the case of 1ir India 'here almost 7,T of the ris# is
3+

AVIATION INSURANCE insured overseas through reinsurance arrangements! 'hile the remaining cover rests domestically. 1ccording to (rnst S Moung! a global consultancy firm! Indian s#ies 'ould have over +,, aircraft @ from 235 currently @ by 2,12! an increase of almost 2,,T. The numbers s%ea# for the %otential of this segment in the mar#et! 'hich is one of the fastest gro'ing in the 'orld. D.redictions for aircraft deliveries to meet the increasing demand for air travel! %articularly in 1sia! mean that some 4!,,, ne' airliners are on order! 'ith this region at 1!242 leading the 'ay. "ro'th in %urchasing %o'er of %assengers and entry of lo' cost airlines has driven the u%'ard movement of the airline industry both in terms of e0ui%ment and staff and o%ening ne' o%%ortunities for this niche segment!D believes Jarti# 9ain! head! mar#eting and e@channel! I6I6I -ombard. The com%any has insured more than +5 aircraft till date. The shot in the arm for this industry has further come from the fact that aircraft are becoming bigger in si2e 'ith large seating ca%acity. This! in turn! increases the ris# for insurers! sometimes even catastro%hic. :ith the emergence of bigger aircraft such as 1irbus 1 38, and oeing +++ <ream liners! the values of the aircraft as 'ell as the liability are slated to increase tremendously. The severity of each loss is also e/%ected to go u% %ro%ortionately. 6urrently! at least 1,@15 re@insurers %artici%ate in an airline insurance %rogramme. Co'ever! 'ith the introduction of larger aircraft! the number of re@insurers %artici%ating 'ould increase to 25. The total %remium figures for aviation insurance in India for 2,,3@ ,+ stood at $s 41+.27 cr. $eliance! 'hich does not hold a maAor share in the airline business till no'! is counting on its e/%erience of handling
38

AVIATION INSURANCE maAor ris#s %ertaining to energy/ off@shore ris#s/ %ac#age %olicies of large clients and strong net'or# of international under'riters. D&ational reinsurer! "I6! leads our reinsurance treaties. 1s reinsurance su%%ort is essential in getting com%etitive 0uote in aviation insurance! 'e aim to increase our share considerably in this financial year!D says J 1 4omase#haran! 6(5! $eliance "eneral Insurance. Ty%ically! the %remium de%ends u%on under'riting factors such as age of the aircraft! e/%eriences of the %ilot flying the aircraft! ma#e and model and use of the aircraft. It is generally 1T to 3T of the aircraft value. 5n the %rofitability %art! 5riental Insurance chairman@cum@ managing director M $amadoss says that the domestic aviation business is enAoying the benefits of a softening mar#et 'ith claim ratio being very lo'. 4ave for a fe' cases such as im%ro%er landing or bird hit damages! there are not many claims made in the recent %ast. The com%any?s client includes 9et 1ir'ays! .aramount 1ir'ays! and 1ir India! among others. Industrialists! ho'ever! does not antici%ate terror ris#s %ushing u% the aviation insurance costs. This s%ace is very %rice com%etitive. The number of %layers in the mar#et are increasing! 'hich has led to insurance rates steadily coming do'n in s%ite of recent air crashes in the 'orld.

MA;OR PLA1ERS OF AVIATION INSURANCE IN INDIA

37

AVIATION INSURANCE

6IN5FISHER AIRLINES

4,

AVIATION INSURANCE

Jingfisher 1irlines is IndiaVs first and only %rivate airline to receive the %restigious! V est &e' 1irline of the MearV a'ard in the 1sia@.acific and Middle (ast region from 6entre for 1sia .acific 1viation =61.1>. Jingfisher 1irlines has also been voted as the 3rd Most 4uccessful rand -aunch of the Mear 2,,5! in the annual rand rand <erby 4urvey conducted by India;s leading business daily@ usiness 4tandard. In another 4urvey conducted by agencyfa0s.com and $e%orter! Jingfisher 'as voted as the +th u22iest rand of 2,,5

amongst 2,,, leading national and international brands. More recently! Jingfisher 1irlines has bagged the P4ervice (/cellence for a &e' 1irlineQ a'ard from 4#ytra/! a BJ based s%ecialist global air trans%ort advisor. The latest addition to the list of laurels is the P est &e' <omestic 1irline for (/cellent 4ervices and 6uisineQ a'ard from .acific 1rea Travel :riters 1ssociation =.1T:1>! the biggest travel 'riters; organi2ation! re%resenting members from +, countries across the globe! that conducts inde%endent annual surveys across various industries related 'ith Travel and Tourism in order to select the best in each category. Jingfisher 1irlines commenced o%erations on May 7th! 2,,5 'ith a brand ne' fleet of aircraft.

41

AVIATION INSURANCE Jingfisher 1irlines offers )ull 4ervice at True Falue and %romises an un%aralleled e/%erience to the Indian air traveler. 5n offer are e/tra@'ide seats and s%acious leg room! delicious gourmet meals! international@class cabin cre' and a 'hole host of comforts and delights. Jingfisher 1irlines also facilitates doorste% delivery of tic#ets on guest re0uest. Jingfisher 1irlines has further raised the bar by introducing the Indian business traveller to a %remium %roduct@ Jingfisher )irst! the finest e/%erience in the Indian s#ies.

AIR INDIA

1ir India is India?s finest flying 1mbassador. The urge to e/cel and the enthusiasm! 'hich characterised 1ir India?s first flight! 'ay bac# on 5ctober 15! 1732! is 0uintessential even today @ than#s to 1ir Indians 'ho have #e%t alive the tradition of flying high.The recent merger of 1ir India and Indian! the country?s leader in the domestic sector! has hel%ed the airline to emerge as a maAor force in the airline industry. The re@ branding e/ercise is currently under'ay and %assengers are getting to see the unified face of the ne' invigorated 1ir india.

42

AVIATION INSURANCE

CHAPTER:-< EFFECT OF AVIATION INSURANCE

EFFECTS OF =>11 ATTAC6 ON AVIATION INSURANCE

)ollo'ing the 4e%tember 11th attac# in the Bnited 4tates! the subAect of aviation insurance attracted much attention in the media and else'here after aviation insurers 'orld'ide 'ithdre' cover for the s%ecific acts of 'ar and terrorism. 1s a result! many national governments ste%%ed in to %rovide tem%orary insurance cover to ensure that airlines continued flying.

S9 r# # "edi&" #er" % l&#i n%

1t the re0uest of the airline industry the International 6ivil 1viation 5rganisation established a s%ecial grou% on 'ar ris# insurance

43

AVIATION INSURANCE =P4":IQ> 'hich! as a short and medium term measure recommended the setting u% of an international mechanism funded by insurance %remiums to %rovide noncancellable third@%arty aviation 'ar ris# coverage through a non@%rofit s%ecial %ur%ose insurance entity ="-5 1-TIM(> 'ith multilateral government bac#ing for the initial years. 1s a long@term solution the 4":I recommended that an international convention be develo%ed 'hich 'ould limit the third@%arty liability of the aviation industry for losses arising from 'ar! hiAac#ing and allied %erils.

Un'er#ain#, a9ead7
4ome four years on from 7/11! most governments have 'ithdra'n guarantees for hull and liability 'ar cover to airlines and air%ort service %roviders. &otable e/ce%tions include the Bnited 4tates! 6hina and 4inga%ore. The mar#et has no' res%onded 'ith certain insurers offering maAor airlines limited noncancellable third %arty coverage. (nthusiasm for "-5 1-TIM( has 'aned and a ne' convention on damage caused to third %arties on the ground has yet to be agreed. In 1sia at least! the airline industry has e/%erienced a dramatic turnaround in fortunes 'ith rene'ed %ros%erity. Co'ever! as 'ith other classes of catastro%he business! there remain underlying uncertainties in the aviation insurance mar#et that could dramatically change the environment. 5ne of those uncertainties is the %ros%ect of a catastro%hic event caused by dirty bombs! bio@chemical and electromagnetic devices or 'ea%ons of mass destruction =P:M<Q>. The fear is that the use of a Pdirty bombQ at a maAor international air%ort could not only lead to immediate multi%le aircraft! %assenger and third %arty losses! but also long term contamination of sites %reventing access and the uncontrolled s%read of diseases.
44

AVIATION INSURANCE

C nven#i n and %#a#&# r, li"i#%

The Montreal 6onvention 1777! 'hich governs the liability of airlines in relation to %assengers and cargo interests! re0uires airlines to obtain ade0uate insurance to cover their liabilities under the 6onvention. In addition! airlines are re0uired by many states to have minimum insurance limits to cover such liabilities including third %arty surface damage. 1fter the 4e%tember 11! 2,,1! terrorist attac#s on the Bnited 4tates! the insurance costs for commercial airlines and college aviation %rograms rose shar%ly. The %revailing assum%tion is that increased aviation insurance costs are the result of an increased ris# of life and %ro%erty loss from additional terrorist attac#s. This %a%er 0uestions the assum%tion and %osits that the 4e%tember 11! 2,,1! attac#s 'ere a catalyst for and not the cause of increased insurance costs. T'o alternative e/%lanations for the increased costs are offered. )irst! after 4e%tember 11th! insurance managers became a'are that they had not been ma#ing the incremental rate increases necessary to maintain acce%table %rofit margins. 4econd! shar% declines in the value of the insurance com%any stoc# %ortfolios eroded %rofits. Increases in aviation insurance cost 'ill be com%ared to increases in other ty%es 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 im%act of these insurance rate increases on domestic and international air trans%ortation and commerce is %resented.

45

AVIATION INSURANCE

F&#&re $ Avia#i n In%&ran'e:

1s the industry enters into the millennium! the insurance industry must loo# at several %roblems that also face the aviation industry. 4urvival for the small ) 5;s is getting harder each dayK the threat of financial devastation is real 'hen it comes to la'suits. "eneral aviation may be forced to change its 'ay of doing business and become more li#e the military and commercial airlines. 5ne can only ho%e that society 'ill change their attitude to'ards the aviation industry and the litigation that surrounds the industry. :e all ho%e for a %ositive future for the community. Insurance and the )uture of 1viation the aviation industry! as it is #no'n today! has gro'n into a set of definable industries. Modern aircraft range from military to commercial airlines to the most diverse grou%! general aviation. 1viation has come a long 'ay the last 1,, years. The industry is still develo%ing. :ith gro'th comes %roblems that must be solved before the industry can go to the ne/t level.

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AVIATION INSURANCE 1s the industry enters into the millennium! the insurance industry must loo# at several %roblems that face the aviation industry. -egal concerns! in many cases! they;re influenced by our society. The court system %lays a big %art by their decisions that are %assed do'n. It;s rare 'hen an aviation case goes to court! because insurance agencies #no' they;ll lose 'hen the Aury hears the case. It;s Aust too easy to %rove %ilot negligenceK most aviation accidents result from %ilot error. 1lso! 'hen they do go to court! they very seldom mount a defense due to the unreasonable verdicts! and ridiculous a'ards. These %ractices has forced aircraft o'ners to stay a'ay from ne' %olicies and let their insurance coverage la%se. 1ircraft o'ners %ay three to five times the amount for ade0uate liability coverage than their counter %arts else'here in the 'orld. 4urvival for the small business o%erators is getting harder each day due to the "eneral 1viation $evitali2ation 1ct ="1$1>K the threat of financial devastation is real 'hen it comes to la'suits. The ="1$1> defects la'suits from manufacturers to aviation service %roviders. ) 5s; insurance rates are s#yroc#eting because of this! 'hich contributes to the cycle by causing higher re%air cost. Many small business o%erators really don;t 'ant to ta#e the chance and can;t afford the rising cost that;s associated 'ith liability insurance. 1s of )ebruary 2,,, at least three aviation insurance under 'riters ceased 'riting coverage for the small business o%erators! saying it;s a maAor ris#. 5ne of the main reasons is the cost to the under'riters. 1viation insurance com%anies have %aid out a dollar and 0uarter for every dollar they;ve ta#ing in! for each of the last several years. &o 'onder so many are closing do'n! merging! or getting out of the historically ris#ier aviation activities! "eneral aviation may be forced to change its 'ay of doing business and become more li#e the military and commercial airlines.
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AVIATION INSURANCE Maintenance %roblems may be identified by com%uters! and then re%aired by the manufacturers. The industry is co%ing 'ith the mounting cost associated 'ith liability insurance. P$emove and re%lace maintenanceQ is the attitude the industry must lean to'ards. The manufacturers 'ould set u% ne' factory service centers and re%air facilities for the general aviation customers. This system 'ouldn;t hel% the rising cost of insurance! but maintenance and ground liabilities 'ould rest on the shoulders of the manufacture. The mar#et itself is shrin#ing! 'e;ve had a generation of %ilots from ::II! Jorea! and Fietnam that 'as introduced to aviation and trained at the government;s e/%ense. ecause of modern technology! 'e;ll never again have the numbers that 'e once had. The ageing fleet and %ilots can;t hel% the situation that the industry is facingK the average aircraft age is 15 to 2, years! and the %ost Indian %ilot is no' 5, to 3, years of age. The under'riters are very 'orried about the age of both the %ilots and the aircraft. <uring a tele%hone intervie' 'ith <arrel Cyde of 64S1 Insurance! he statedK P1ircraft hull and liability insurance for the senior %ilot has become such a concern that the insurance industry should develo% a s%ecial tas# force to hel% deal 'ith this %roblem. The need to e/tend the insurable age of the senior %ilots and to introduce ne' blood in to the coc#%its 'ill only hel% matters 'ith the attem%t to lo'er insurance cost for the industry. Insurance cost for the industry remains high! 'ith the shrin#ing fleet of aircraft! means that the training cost 'ill increase. The value of air%lanes is soaringK the high cost of ne' re%lacement aircraft for training
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AVIATION INSURANCE isn;t feasible. The ) 5s; are facing insurance that;s inade0uate and e/%ensive! and its forcing com%anies to reduce their o%erations or even cut them all together. 5'ners of flight schools are having a hard time Aust staying in business. The shortage of 0ualified instructors has slo'ed the flo' of ne' %ilots! 'hich in turn is %utting a hardshi% on the industry. The future of the industry could hold a brighter out@loo#. 5ne can only ho%e that society 'ill change their attitude to'ards litigation! this 'ould ho%efully drive do'n cost of liability coverage insurance. The industry ho%es that 'ith the use of simulators at all levels of training 'ill increase the number of betterWtrained %ilots and ho%efully lo'er insurance cost at the same time. Insurance can be one of the most e/%ensive elements in the fi/ cost of o'ning an aircraft. To #ee% insurance cost under control in this difficult environment! aircraft and aviation business o'ners are going to have to ma#e some changes in the 'ay they %urchase and thin# about insurance. There are 'ays to reduce your insurance cost! remember buying chea% insurance isn;t al'ays the best 'ay to go! and it;s not heavily regulated by our government. 6om%anies can 'rite %olicies %retty much the 'ay they 'ant to! you must %ic# the right com%any for you and your aircraft. :hen sho%%ing you can as# your friends 'ho they do business 'ith and as# them their feelings on that com%any! and are they treated 'ell. -oo#ing in one of the aviation trade maga2ines for information dealing 'ith aviation insurance com%anies is a great sourceK get a %hone number or a 'eb address so you can ma#e contact. 4aving money is the #ey 'hen sho%%ing for insurance. 5nly buy the needed coverageK if you don;t fly %assengers! 'hy %ay for the %rotection against themG Mou can al'ays change your coverage 'hen the need arises. Most %eo%le %ay for coverage in the 'inter even if they;re
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AVIATION INSURANCE not flying. In the 'inter %aying for in flight liability insurance can be a 'aste. :hy not store the aircraft in the 'inter! and change to storage coverage for that %eriod of time. In most %laces flying 'ithout heater 'ould be very uncomfortable. "et e/tra training from the )11 =Federal Avia#i n Ad"ini%#ra#i n. and other 'or#sho%s! and %rove to the insurance com%any that you;re safe and deserve a brea# on you insurance. 4elf@insure 'henever %ossible. 6hoose the highest liability limits you can 0ualify for and afford! to guard against the catastro%hic loss! and only as much hull %rotection that you can afford. Match your e0ui%ment to your needs. 1viation has come a long 'ay the last 1,, years! and the future could hold a brighter out@loo# for the industry. 5ne can only ho%e that society 'ill change their attitude to'ards the aviation industry and the litigation that surrounds the industry. In the future! this could drive cost do'n and ma#e liability insurance affordable to the %rivate o'ners! and to the ) 5;s.

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AVIATION INSURANCE

CONCLUSION

I started this .roAect by as#ing the 0uestion ?+9, Avia#i n In%&ran'e i% re@&ired7A In the course of the analysis various trends and develo%ments in the aviation industry 'ere discussed that %rovide %artial ans'ers to this 0uestion. 1irlines em%loy a 'ide variety of business models 'hile ta#ing an aviation insurance contract. )or e/am%le! some com%anies li#e Jingfisher 1irlines ta#e %olicy 'ith high %remium 'hile others li#e 1ir India ta#e an aviation insurance contract 'ith lo' %remium. It 'as also observed that airlines 'ith huge and e/%ensive airbuses li#e ATR 32-:BB aircraft tend to generate high amounts of ris#K 'hile relatively less e/%ensive aircraft li#e A))B aircraft tend to generate less ris#. The aviation insurance mar#et is highly volatile due to the inherent nature of the ris# and the under'riting cycle of insurance. Cistorically! the mar#et 'ide %remium a%%ears to be almost as volatile as the claims! suggesting a lac# of consistency in under'riting this business. The maAor caveat to my conclusion is that there is significant amount of %ublic data available to assist in under'riting and %ricing aviation insurance. This data can be used to develo% more effective under'riting rating models for aviation insurance and this should result in better selection of ris#s and more consistent %rofits for the insurer. The aviation insurance mar#et! by its o'n nature! is highly volatile. There are many causes including the overall insurance

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AVIATION INSURANCE under'riting cycle! the maAor accident ris#! the short@term memory of the insurance mar#et! and the long@tailed nature of determining res%onsible %arties. Co'ever! the increasing involvement of analytical %rofessionals such as actuaries should introduce more effective methods for %ricing airline insurance and this should hel% stabili2e the %remium com%onent of the loss ratio e0uation. 1viation has come a long 'ay the last 1,, years! and the future could hold a brighter out@loo# for the industry. 5ne can only ho%e that society 'ill change their attitude to'ards the aviation industry and the litigation that surrounds the industry.

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AVIATION INSURANCE

RECOMMENDATIONS

<uring the %ast century! man has reali2ed his dream to fly. The aircraft has been develo%ed and %artially %erfected. The aviation industry! as it is #no'n today! has gro'n into a set of definable sub@ industries based u%on usage. Modern@day aircraft range from military to commercial airlines to the most diverse grou%! general aviation. 1s 'ith any technology@based industry! aviation continues to gro' and develo%. &e' uses for aircraft are identified! better aircraft and avionics are created! and %roblems are recogni2ed and solved. 1lthough aviation has come a long 'ay in the last 1,, years! it is still a develo%ing industry. :ith gro'th and develo%ment! come %roblems that must be solved before an industry can graduate to the ne/t level.

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AVIATION INSURANCE -egal concerns are the biggest threat. It;s rare 'hen an aviation case goes to court! because insurance agencies #no' they;ll lose 'hen the Aury hears the case. It;s Aust too easy to %rove %ilot negligenceK most aviation accidents result from %ilot error. Cence! today there is a strict need that the legal authorities should be lenient and should also listen to the airline. (very time it;s not the fault of the %ilots. Bnbiased decision can really enhance and im%rove the 'or#ing of airlines and also the efficiency of the %ilots gets boosted. The average age of both our %ilot %o%ulation and the fleet =both commercial and general aviation> is increasing. 1ircraft hull and liability insurance for the senior %ilot has become a serious concern. The under'riters are very 'orried about the age of both the %ilots and the aircraft. Cence! the insurance industry should develo% a s%ecial tas# force to hel% deal 'ith this %roblem. The insurable age of the senior %ilots should be e/tended and ne' blood should be introduced in the coc#%its to lo'er insurance cost for the industry. The airline should only buy the needed coverageK if they don;t fly %assengers! 'hy %ay for the %rotection against themG They can al'ays change the coverage 'hen the need arises. Most %eo%le %ay for coverage in the 'inter even if they;re not flying. In the 'inter %aying for in flight liability insurance can be a 'aste. $ather they should store the aircraft in the 'inter! and change to storage coverage for that %eriod of time.
To #ee% insurance cost under control in this difficult environment!

aircraft and aviation business o'ners 'ill have to ma#e some changes in the 'ay they %urchase and thin# about insurance.
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AVIATION INSURANCE uying chea% insurance isn;t al'ays the best 'ay to go! and it;s not heavily regulated by the government. The airline should find an insurance %layer 'hich ta#es lo' %remiums and has %lenty of coverage o%tions.

4I4LIO5RAPH1
4OO6S:
Insurance in India @..4. .alande @$.4. 4hah @M.-. -una'at Insurance =)undamentals! (nvironment and .rocedures> @ .4. odla @M.6. "arg @J... 4ingh )undamentals of $is# and Insurance (mmett 9. Faughan Therese M. Faughan Insurance 6hronicle@ The I6)1I Bniversity .ress =4e%tember! 2,,4>

+E4LIO5RAPH1

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AVIATION INSURANCE ***(g gle(' "

'''.fly#ingfisher.com

'''.airindia.com

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