aviation insurance final (1)
TRANSCRIPT
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INSURANCE OF AVIATION INDUSTRY
Bachelor of Commerce
(Banking & Insurance)
Semester VI
(2012-13)
Submitted by
DIVYA KESWANI
SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS
BANDRA (W)
MUMBAI-50
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INSURANCE OF AVIATION INDUSTRY
Bachelor of Commerce
(Banking & Insurance)
Semester VI
(2012-13)
Submitted
In Partial Fulfilment of the requirements
For the Award of Degree of Bachelor of
Commerce Banking & Insurance
By
DIVYA KESWANI
SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS
BANDRA (W)
MUMBAI-50
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SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS
BANDRA (W)
MUMBAI-50
CERTIFICATE
(2012 2013)
This is to certify that DIVYA KESWANI of B.com (Banking & Insurance)
Semester VI (2012-13) has successfully completed the project on
INSURANCE OF AVIATION INDUSTRY under the guidance ofDR.
A.C. VANJANI.
Date: -
Place: - MUMBAI
(Prof. Mr. Vishal R Tomar) (Dr. Ashok Vanjani)
Course Co-ordinator Principal
(Prof. Mr. Ashok Vanjani)
Project Guide External Examiner
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DECLARATION
Date: -
I, Miss. DIVYA KESWANI the student of B.Com (Banking & Insurance)
Semester VI (2012-13) hereby declare that I have completed the project on
INSURANCE OF AVIATION INDUSTRY successfully.
The information submitted is true and original to the best of my knowledge.
Thank you,
Yoursfaithfully,
DIVYA KESWANI
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ACKNOWLEDGEMENT
At the beginning, I would like to thank Almighty God for his shower of
blessing. The desire of completing this dissertation was given a way by my
guide Dr. ASHOK VANJANI. I am very much thankful to him for the
guidance, support and for sparing his precious time from a busy and hectic
schedule.
I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College.
My sincere thanks to Mrs. Vishal Tomar who always motivated and
provided a helping hand for conceiving higher education.
I would fail in my duty if I dont thank my parents who are pillars of my life.
Finally, I would express my gratitude to all those persons who directly and
indirectly helped me in completing dissertation.
DIVYA KESWANI
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DECLARATION
Date:-
I the undersigned Dr. ASHOK VANJANI, have guided Miss. DIVYA
KESWANI for her project, she has completed the project INSURANCE
OF AVIATION INDUSTRY successfully.
I hereby, declared that information provided in this project is true as per the
best of my knowledge.
Thank you,
Yoursfaithfully,
Dr. ASHOK
VANJANI
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INDEX
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EXECUTIVE SUMMARY
Aviation Industry in India is one of the fastest growing aviation
SR.NO TOPIC PAGE NO.
1. EXECUTIVE SUMMARY. 08
2. AN INTRODUCTION TO INSURANCE. 09
3. AVIATION SECTOR. 10
4. HISTORY OF AVIATION INSURANCE. 11
5. CHALLENGES FACED BY THE AVIATIONINDUSTRY.
12
6. THE RISKS COVERED UNDER AVIATIONINSURANCE.
14
7. BUYING AN AVIATION INSURANCECONTRACT.
22
8. RENEWING AVIATION INSURANCE. 23
9. AVIATION INSURANCE IN INDIA. 26
10. CURRENT SCENARIO OF AVAITIONINSURANCE.
28
11. RECENT DEVELOPMENT IN AVIATIONSECTOR.
30
12. CASE STUDIES. 31
13. FUTURE OF AVIATION INSURANCE. 36
14. CONCLUSION. 38
15. BIBLIOGRAPHY. 39.
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industries in the world. With the liberalization of the Indian aviation
sector, aviation industry in India has undergone a rapid transformation.
From being primarily a government-owned industry, the Indian aviation
industry is now dominated by privately owned full service airlines and
low cost carriers.
Aviation accidents are serious accidents, especially those that happen
while the plane is in flight. Aviation or plane accidents do not only
mean pilot error. It could also be caused by malfunctioning gauges as aresult of product liability or failure of maintenance. Also, aviation
accidents do not only connote plane crashes or mishaps.
Aviation insurance is different from other forms of insurance in that it is
very subjective. Due to the vast array of aircraft types, uses and pilot
experience, policies should always be specifically tailored to suit the
unique requirements of each individual applicant. For this reason it is
recommended that a broker, specialising in aviation insurance be
engaged to arrange cover.
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The Indian aviation industry has witnessed remarkable growth in
recent years, with key drivers being positive economic factors,
including high GDP growth, good industrial performance, andcorporate profitability and expansion. Other factors include
higher disposable incomes, growth in consumer spending, and
availability of low fares. Before the boom in the Indian aviation
sector, the airline insurance market was dominated by the four
state-owned general insurance companies: New India Assurance
Company, Oriental Insurance Company, National Insurance
Company and United India. Aviation insurance business is a high
severity loss business. Aviation has come a long way the last 100
years. The industry is still developing. With growth comes a
problem that must be solved before the industry can go to the
next level.AN INTRODUCTION TOINSURANCE
With the insurance sector in full bloom, today, it would not be wrong to
say
that in the present market scenario, there is an insurance available for just
about anything and everything. With even a bourgeois family man opting
for various insurance schemes, the question today is not whether you have
insurance or not. Instead it is, whether you need a particular insurance or
not?
Insurance is no doubt an area of immense importance in regards to the
financial and monetary sectors of every individual. The whole idea behind
Insurance as a financial security tool was to design something which could
secure the financial well-being of an individual as well as his/her
dependents, in case he/she undergoes an unforeseen loss. These losses
could be related to health, property, assets or life in general.
Insurance helps people manage monetary risks and losses related to
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investments, liabilities for wrong financial actions, and risks for inability to
earn income at any stage of life. Insurance generally covers all these risks.
Insurance may be described as a social device to reduce or eliminate
risk of loss to life and property. Under the plan of insurance, a large
number of people associate themselves by sharing risks attached to
individuals. The risks, which can be insured against, include fire, the
perils of sea, death and accidents and burglary. Any risk contingent
upon these, may be insured against at a premium commensurate with
the risk involved. Thus collective bearing of risk is Insurance.
How it works
Insurance is a contract between two parties viz., the insurer and the
insured, whereby the insurer agrees to compensate the insured in the
event of any loss, in return for consideration (premium) from the insured.
In short, the insurance company promises to make good the loss, in the
event of occurrence of any incidence.
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THE AVIATION SECTOR
India is one of the fastest growing aviation markets in the world. The
Airport Authority of India (AAI) manages a total of 127 airports in the
country, which include 13 international airports, 7 custom airports, 80
domestic airports and 28 civil enclaves. There are over 450 airports and
1091 registered aircrafts in the country. The genesis of civil aviation in
India goes back to December 1912 when the first domestic air routebetween Karachi and Delhi became operational. In the early fifties,
all airlines operating in the country were merged into either Indian
Airlines or Air India and, by virtue of the Air Corporations Act 1953,
this monopoly continued for the next forty years.
In 1990s, aviation industry in India saw some important changes. The
Air Corporations Act was abolished to end the monopoly of the public
sector and private airlines were reintroduced. With the liberalization of
the Indian aviation sector, the industry has witnessed a
transformation with the entry of the privately owned full service
airlines and low cost carriers. In 2006, the private carriers accounted for
around 75% share of the domestic aviation market. The sector has also
seen a significant increase in the number of domestic air travel
passengers. Some of the factors that have resulted in higher demand for
air transport in India include the growing middle class and their
purchasing power, low airfares offered by low cost carriers like Air
Deccan, etc.
Increasing liberalization and deregulation has led to an increase inthe number of private players. The aviation industry comprises of three
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types of players:
Full cost carriers Low cost carriers (LCC) Other start-up airlines
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HISTORY OF AVIATION INSURANCE
Aviation Insurance was first introduced in the early years of the
20th Century. The first aviation insurance policy was written by Lloyd's
of London in 1911. The company stopped writing aviation policies in
1912 after bad weather and the resulting crashes at an air meet caused
losses on many of those first policies. It is believed that the first aviation
polices were underwritten by the Marine Insurance Underwriting
community.
In 1929, the Warsaw convention was signed. The convention was an
agreement to establish terms, conditions and limitations of liability for
carriage by air, this was the first recognition of the airline industry as
we know it today. By 1933, realising that there should be a
specialist industry sector, the International Union of Marine Insurance
(IUMI) set up an aviation committee, and by 1934 eight European
aviation insurance companies and pools were formally established and
the International Union of Aviation Insurers (IUAI) was born.
The London insurance market is still the largest single centre for
aviation insurance. The market is made up of the traditional
Lloyds of London syndicates and numerous other traditional insurance
markets. US has a large percentage of the world's general aviation fleet
and has a large established market.
No single insurer has the resources to retain a risk the size of a major
airline, or even a substantial proportion of such a risk. Most airlines
arrange "fleet policies" to cover all aircraft they own or operate.
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CHALLENGES FACED BY THE
AVIATION INDUSTRY
The growth in the aviation sector and capacity expansion by carriers has
posed challenges to aviation industry on several fronts. These include
shortage of workers and professionals, safety concerns, declining
returns and the lack of accompanying capacity and infrastructure.
Moreover, stiff competition and rising fuel costs are also negatively
impacting the industry
Employee shortage: There is clearly a shortage of trained and skilled
manpower in the aviation sector as a consequence of which there is
cut- throat competition for employees which, in turn, is driving wages
to unsustainable levels. Moreover, the industry is unable to retain
talented employees.
Regional connectivity: One of the biggest challenges facing the
aviation sector in India is to be able to provide regional connectivity.
What is hampering the growth of regional connectivity is the lack of
airports.
Rising fuel prices: As fuel prices have climbed, the inverserelationship between fuel prices and airline stock prices has been
demonstrated. Moreover, the rising fuel prices have led to increase in
the air fares.
Declining yields: LCCs and other entrants together now command a
market share of around 46%. Legacy carriers are being forced to match
LCC fares, during a time of escalating costs. Increasing growth
prospects have attracted & are likely to attract more players, which will
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lead to more competition. All this has resulted in lower returns for all
operators.
Gaps in infrastructure: Airport and air traffic control (ATC)
infrastructure is inadequate to support growth. While a start has been
made to upgrade the infrastructure, the results will be visible only after
2 -3 years.
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Trunk routes: It is also a matter of concern that the trunk routes, at
present, are not fully exploited. One of the reasons for inability to
realize the full potential of the trunk routes is the lack of genuine
competition. The entry of new players would ensure that air fares are
brought to realistic levels, as it will lead to better cost and revenue
management, increased productivity and better services. This in turn
would stimulate demand and lead to growth.
High input costs: Apart from the above-mentioned factors, the input
costs are also high. Some of the reasons for high input costs are:-
o Withholding tax on interest repayments on foreign currency loans foraircraft acquisition.
o Increasing manpower costs due to shortage of technical personnel.
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THE RISKS COVERED UNDERAVIATION INSURANCE
There are different types of risk which takes place in aviation insurance
and those risks are covered in aviation insurance they are as follows:
Normal Risk
Liabilities
There are mainly two kinds of risks which an aviationinsurance company will cover. These two risks are further
divided into various parts which involve various risks and
liabilities.
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NORMAL RISKS
These risks are those risks which every aviation company in this
industry carries it on its back when it enters into the business. These
risks may differ from time to time and situation to situation. These
are:
1. Hull Risks2. Hull War Risks3. Spares All Risks/ War Risks4. Hull total Loss Only cover
These risks are those risks which takes place when these takes place
when any of these factors comes into action. Because all the above
risks mentioned above are unpredictable and may occur at any time
1. Hull All Risks They are risks of physical loss or damage to the
aircraft.
They also are coverage for total loss of the aircraft
or partial damages to the aircraft caused by all risks
except the War Risks and except also other risks
mentioned in the Exclusion Section of the Policy.
It covers:
Loss or Accidental Damage to Aircraft whilst flying or on ground.
Provides for replace or repair on account of loss or damage to Aircraftincluding disappearance.
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Provides for reasonable recovery and emergency expenses incurred forimmediate safety of aircraft consequent upon damage.
Exclusions:
1. Wear, tear and gradual deterioration - in common with most non-marine policies these perils are thought to be a trading expense and
not a peril to be insured.
2. Ingestion damage - caused by stones, grit, dust, sand, ice, etc.,which result in progressive engine deterioration is also regarded as
"wear and tear and gradual deterioration", and as such is
excluded. Ingestion damage caused by a single recorded incident
(such as ingestion of a flock of birds) where the engine or engines
concerned have to shut down is not regarded as wear and tear and is
covered subject to the applicable policy deductible.
3. Mechanical Breakdown - likewise is thought by aviation insurers tobe an operating expense, but subsequent damage outside the unit
concerned is usually covered. However, it is possible to obtaininsurance coverage against mechanical breakdown of engines by
way of a separate policy. This coverage has a high degree of
exposure and as a result is relatively expensive .
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2.Hull War Risks It Provides cover for loss or damage to property
(aircraft and spares) arising out of War and Allied Perils. These risks are
excluded from the Hull All Risk policies and broadly include the
following:
War, Invasion, Hostilities, Civil War, Rebellion, Attempted Coups Strike, Riot, Civil Commotion or Labour Disturbances Sabotage Hijacking (Attempted or Otherwise) or Seizure of Control
Acts for Political or Terrorist purposes
Confiscation, Naturalization, Detention, etc., for the use of anyGovernment or Public Authority
Exclusions are as follows:
1.Confiscation etc. by the "state" of registration (this exclusion can
often be deleted in respect of financial interests - albeit, in some
instances at an additional premium charge);
2. Any debt, failure to provide bond or security or any other financialcause under court order or otherwise;
3. The repossession or attempted repossession of the Aircraft eitherby any title holder or arising out of any contractual agreement to
which any Insured protected under the policy may be party;
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4. Delay and loss of use. (Although there is often an extension to the
policy for a limited amount for extra expenses necessarily incurredfollowing confiscation or hijacking)
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3. Spares First of all we must identify what we mean by a "spare" orperhaps - "when is a spare not a spare" to which a simple answer is
"when it is attached". Under most "Hull" policies the word "Aircraft"
means Hulls, machinery, instruments and the entire equipment of the
aircraft (including parts removed but not replaced). Once a part is
replaced it is no longer, from an insurance viewpoint, part of the
aircraft. Conversely once a spare part is attached to an aircraft as a
part of that aircraft (not in the hold as cargo or on the wing as an extrapod) it is no longer a "spare".
It Covers loss or damage to spares, tools, equipments and supplies owned
by the insured or the property for which the insured is responsible whilst
on ground or in transit by land, sea, air including in own aircraft or whilst
on the premises of others for storage .
4. Hull Total Loss Only Cover - This is similar to Hull All Risks cover
given above but will respond only to total losses of aircraft, whether
actual, constructive or arranged. This is particularly given for old aircraft
since the old aircraft are heavily depreciated and insured for low sums
and premium on such low sums would result in low premium, which
would be inadequate for the partial losses. The ratio of partial losses to
total losses in such old aircraft is distorted.
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LIABILITIES
A liability is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in anoutflow from the enterprise of resources embodying
economic benefits. Liabilities are those risks which may
arise due to some consequences or some reasons the
company has to face. The main type of liability covered is:
1. Aircraft
Here in aircraft liability there are many other liabilities involved
which are further divided into three parts. They are:
a. Passengerb. Third partyc. Baggagea. Passenger : Coverage for aircraft operators in the event a passenger is injured,
killed or disabled during an accident while aboard an insured aircraft.
Aviation policies divided liability coverage into two parts--general
liability (excluding passengers), and passenger liability.
A Passenger Liability policy covers incidents resulting from the
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transportation of passengers by land, sea or air and can often be
included as part of a aviation insurance policy.
However care must be taken to check that the motor policy wording
does not exclude fare-paying passengers, which is often the case. It is
unlikely that an underwriter will be prepared to cancel or amend the
wording of a standard motor vehicle policy. For this reason Daily
Cover policies are specifically for to cater for fare-paying passenger
liability.
b. Third party
This program offers 3rd Party Liability insurance coverage for non-
commercial operations only. Pilot and passenger injuries and aircraft
physical damage are not covered. This member benefit
program is designed to allow non-commercial pilots the benefits that
insurance coverage can offer. While pilot and passenger injuries and
damage to the aircraft itself are not covered under a Third Party
program, financial responsibilities, bodily injury or property damage
caused by the aircraft for which the pilot is found to be legally liable to
pay to others is covered. Additional insured parties such as
landowners, municipalities and airports, can also be covered under this
type of policy.
Additionally, access to airports, flight parks, and flying events
often require liability coverage. Many states require insurance of
this nature just to operate an airplane of any description.
Third party liability coverage is also less expensive than full
coverage, and therefore allows the members (insurance holders)
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the opportunity to enjoy the thrill of aviation without the worry of
liability concerns or the expense of high- priced insurance.
The people can be only eligible who are a registered, certificated
or licensed pilot are eligible. Sport Pilot Students who are
endorsed to solo are also eligible. Pilot registration can be with
any recognized organization.
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c. Baggage
This kind of liability may include various reasons in the happening. They are
as follows:
Delays
If your bags are delayed, try not to panic. The airlines typically have ways to
track them, and about 98 percent of all misplaced luggage is returned
eventually. If your bags are on the next flight, you could have them within a
few hours. Make sure to file your claim immediately at the airport and give
contact details. Additionally, the airlines will reimburse any unexpected
expenses caused by the loss or delay on producing your receipts. However,
the airline sometimes has the option to deduct any reimbursement or stipend
from any subsequent awards.
Lost Baggage
If the airline loses your bags, a written claim for damages should be made.
This may require a different form than the original "missing luggage"
form. This can be done at the airport or by mail. You may need to produce
receipts to prove the value of items you had in your suitcase. The airlines
typically have a long list of items for which they will not be held responsible;
these include jewellery, money, heirlooms and other valuables. These sorts of
items should always be packed in your carry-on bag.
Stolen Baggage
Head directly to the baggage carousel when you get off your flight . Many
airlines scan bags when they're loaded into the baggage claim area and keep
records, especially at larger airports. Once you've left the baggage claim area,
your claim is no longer with the airline, but with the police.
Damaged Baggage
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Once you've gotten your bags off the carousel, immediately check them
for damage or other signs of tampering or mishandling. Report any
damage before leaving the airport; airline customer service will often want to
inspect the bag. Keep in mind that most airlines won't cover minor wear and
tear.
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BUYING AN AVIATION INSURANCECONTRACT
As with many specialized service or commodity purchasing, the use of
an experienced intermediary or middleman is usually prudent for the
transaction process. Although this middleman may not be required in all
facets or industries for successful purchases, in the Aviation Insurance
Industry, with only one exception, it is required. The middleman we are
discussing is often referred to as a Broker; it is quite frankly the only
way to accomplish this need. All the Aviation Insurance companies or
groups require the use of a Broker to secure insurance on behalf of the
consumer. So what is this Aviation Insurance Broker we need to utilize
and access most of the companies providing insurance?
Well, the term broker refers to an independent insurance person who is
licensed by the State to represent and work for the consumer in the
insurance purchasing and service process. Unlike an insurance agent
who represents an insurance company and represents that insurance
Companys interest, a broker is independent of the insurance company
and represents the needs and interest of the client. This independence
allows the broker the freedom and opportunity to deal with multiple
aviation insurance companies and is considered to be working the
client. The brokers compensation is paid by a percentage of
premiums, which comes from the consumer. This commission structure
keeps the brokers attention to represent the best interest of the
client/consumer and places a responsibility that the broker provides a
continuous service and handling of the insurance needs or requirements.
In todays changing and evolving aviation insurance market it is
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important for the consumer, to understand the responsibility of the
broker and how best they can to serve. The broker works for the
consumer/client and as the consumers want to hire the best pilot or
mechanic, so do they want to hire the best broker. This is a profession
where skill and experience is the best resource for the overall success in
the clients insurance program
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RENEWING AVIATION INSURANCE
If you're like most owners and pilots, you simply renew your aviation
insurance policy every year. If it was good enough last year then it will
be good enough this year. Then you probably don't give it another
thought until next year. And this pattern often repeats itself for many
years.
There are two very big problems with this scenario. First, things change.
Your aircraft, where you fly, who you fly with, how much you fly
many of these things can change over the years, and they should be
reflected in your policy. Second, it is quite possible that your policy
wasn't the right one for you to begin with! In that situation, you aresimply renewing your mistake year after year. In either case, your
aviation insurance policy deserves a little bit of your time once a year.
Here are the 5 things you should do to make sure you are adequately
protected:
Choose your broker
When you insure your home or your business, a broker can choose from
dozens and dozens of insurance companies. As a result, shopping around with
a few brokers can make sense. Chances are that they may not even approach
the same companies for your quote.
In the case of aviation insurance, however, there are only four or five
companies to choose from and even fewer that specialize in light aircrafts.
Obviously, it doesn't matter how many brokers you go to, the odds are that
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they will be approaching the very same companies on your behalf. This can
actually be a serious disadvantage for you, as some companies will simply
refuse to quote in these circumstances in order to avoid the feeding frenzy
that can result when a number of brokers vie for the same account. So, as you
can see, choosing your broker is the first step. But how do you choose the
right broker? Start by finding an aviation specialist. Although any general
insurance broker a sell you aviation insurance, they simply do not have the
experience or familiarity with the field to be your best choice. Even more
importantly, they usually can't get you the best rates. If the insured is an
aviation specialist, he may deal with the companies and underwriters every
single day. He gets to know them personally and may place a lot of business
with them. Now compare that to the average general insurance broker who
maybe places one or two policies a year with that company. Who do you
think will get you the better results? Finally, make sure that you are
comfortable with the broker you choose. Just because someone special in
aviation insurance doesn't automatically mean they are good. Do they take
the time to ask you questions, get to know your needs, and fully explain
things to you in a way you can understand? If they do congratulations, you've
found your broker! They will probably ask you to sign a -Letter of Brokerage
which will let insurance companies know that you have in fact appointed
them to be your broker.
Confirm the value of your aircraft
Neglecting to keep up with the market value of your aircraft is one of the
most common renewal mistakes. If you do this year after
year, you could be in for a rude awakening. Aircraft values
have soared in recent years, with many doubling in price over
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the last decade. Unlike home or auto insurance, aviation
insurance is a stated value policy. That means that the
owner is responsible for declaring the value of the insured
aircraft. If you undervalue your plane, you risk losing it after
even a minor accident. As I have explained many times in
this column, the stated value is the maximum the insurance
company will pay out -and they will keep the plane as salvage. So whether
you have simply neglected to increase the value on your policy at renewal
time or have tried to save a few bucks on the premium by insuring for a lower
amount you are taking a very big gamble. Make sure you resolve this issue at
your next renewal.
Get the right coverage for your needs
At every renewal, you should discuss your flying habits with your broker.
Many companies have territorial restrictions and some have restrictions for
dirt or grass landing strips. Make sure your policy covers the kind of flying
you do. If you have made or are planning to make any upgrades or changes to
the configuration of your aircraft, you may need to make some adjustments to
your policy. Otherwise, you may find yourself out of luck in case of an
accident.
Protect your interests
Finally, you should discuss other unusual circumstances regarding your
aircraft. You may need to arrange for special coverage to protect your
interests. One common example is that an owner who has his aircraft on
lease to a flying school or commercial operator. If the lessee commits an
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illegal act or a mission, your aviation policy could be nullified. In these
situations, you obtain -Breach of Warranty coverage which will pay a
lien holder's interest despite the policy being otherwise invalidated.
Following these simple steps once a year at renewal time is an easy way
to make sure that your aviation insurance policy continues to protect
you. So don't take the easy way outdont just say renew it as
it is for another year.
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AVIATION INSURANCE IN INDIA
The unbridled growth in the aviation sector has come as a bonanza for
the insurance sector. Thanks to capacity addition and the entry of new
aviation players, a host of insurance companies are eyeing this growing
market t offer insurance cover to new planes that are being brought to
India.
Before the boom in the Indian aviation sector, the airline insurance
market was dominated by the four state-owned general insurance
companies: New India Assurance Company, Oriental Insurance
Company, National Insurance Company and United India. However,
with the growth in the Indian aviation story, private players like ICICI
Lombard, Bajaj Allianz, Iffco Tokyo General Insurance and Reliance
General Insurance Company are also trying to muscle their way into this
lucrative sector.
The unprecedented growth in this sector is also seeing private players
join hands with each other to bid for accounts. The latest such case is
the ICICI Lombard- Bajaj Allianz tie-up where they are jointly bidding
for Air Indias insurance account which includes providing cover for 50
planes valued over $3 billion.
In India, this segment is highly reinsurance-driven. A majority of the
players have re-insured the value of risk covered with foreign
companies. Take the case of Air India where almost 90% of the
risk is insured overseas through reinsurance arrangements, while the
remaining cover rests domestically.
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Indian insurance companies do not have the financial muscle to address
claims of airlines and generally go in for reinsurance which means
sharing the risk of loss with another insurance company.
The role of a reinsurer is important in the Indian context as most
of the companies do not have the requisite experience of handling a
market of this size. The reinsurer helps in providing the technical
expertise, capacity to underwrite the business and their ability to handle
such large risks. National reinsurer, GIC, leads Indias reinsurance
treaties.
Out of the eight private players, Bajaj Allianz General Insurance
Company and ICICI Lombard General Insurance Company Limited are
most active in this segment.
Although there are no official estimates, industry players put a ballpark
figure of the Indian aviation insurance market at somewhere around Rs
400 cr to Rs 500 cr. With new aircraft being bought by new players
entering the sky and the existing one in expansion mode, this segment
will only grow.
According to Ernst & Young, a global consultancy firm, Indian skies
would have over 700 aircraft - from 235 currently - by 2012, an increase
of almost 200%. The numbers speak for the potential of this segment in
the market, which is one of the fastest growing in the world. The total
premium figures for aviation insurance in India for 2006-07 stood at Rs
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417.29 cr. Typically, the premium depends upon underwriting factors
such as age of the aircraft, experiences of the pilot flying the aircraft,
make and model and use of the aircraft. It is generally 1% to 3% of the
aircraft value.
The aviation insurance market is looking up and is currently at Rs 350
crore. But with new aircraft being bought by new players entering the
business and the existing one on an expansion mode, the aviation
market is set to take off.
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CURRENT SCENARIO OF AVIATION
INSURANCEThe magic of multiplier effect is now working for the aviation
ancillary industry. Reaping the benefits of the aviation boom is not only
maintenance, repairs & overhaul (MRO) operations but also the
insurance sector. In fact, the spiralling growth in the aviation sector has
given an upshot to the insurance segment.
Predictions for aircraft deliveries to meet the increasing demand for air
travel, particularly in Asia, mean that some 4,000 new airliners are on
order, with this region at 1,242 leading the way. Growth in purchasing
power of passengers and entry of low cost airlines has driven the
upward movement of the airline industry both in terms of equipment
and staff and opening new opportunities for this niche segment.
The shot in the arm for this industry has further come from the fact that
aircraft are becoming bigger in size with large seating capacity. This, in
turn, increases the risk for insurers, sometimes even catastrophic. With
the emergence of bigger aircrafts, the values of the aircraft as well as
the liability are slated to increase tremendously. The severity of each
loss is also expected to go up proportionately. Currently, at least 10-15
re-insurers participate in an airline insurance programme. However,
with the introduction of larger aircraft, the number of reinsurers
participating would increase to 25.
The domestic aviation business is enjoying the benefits of a softening
market with claim ratio being very low. Save for a few cases such asimproper landing or bird hit damages, there are not many claims made
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in the recent past.
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Industrialists, however, does not anticipate terror risks pushing up the
aviation insurance costs. This space is very price competitive. The
number of players in the market is increasing, which has led to
insurance rates steadily coming down in spite of recent air crashes in the
world.
Aircraft hull and liability insurance for the senior pilot has become such
a concern that the insurance industry should develop a special task force
to help deal with this problem. The need to extend the insurable age of
the senior pilots and to introduce new blood in to the cockpits will only
help matters with the attempt to lower insurance cost for the industry.
Insurance cost for the industry remains high, with the shrinking fleet of
aircraft, means that the training cost will increase. The value of
airplanes is soaring; the high cost of new replacement aircraft for
training isnt feasible. The FBOs are facing insurance thats inadequate
and expensive, and its forcing companies to reduce their operations or
even cut them all together. Owners of flight schools are having a hard
time just staying in business. The shortage of qualified instructors has
slowed the flow of new pilots, which in turn is putting a hardship on the
industry.
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RECENT DEVELOPMENTS IN AVIATION
SECTOR
Modernization of airports
Policy on merchant airports
Growth in MRO segment:
Airport security policy
Augmentation of fleet by various airlines
Foreign equity participation in air transport services
Boom in Indian aviation sector is likely to generate more jobs .
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CASE STUDIES
AVIATION INSURANCE OF KINGFISHER AIRLINES
Two private sector general insurance companies, ICICI Lombard
General Insurance and Bajaj Allianz General Insurance, have
bagged the insurance account of Vijay Malayas Kingfisher Airlines.
This is for the first time that the private sector general insurance
companies have made major inroads into the aviation sector, which has
mainly been the forte of the public sector insurers.
Both ICICI Lombard and Bajaj General Insurance will share the
Kingfisher Airlines account in a 7.5:2.5 ratio. After a beauty parade by
the public sector and private general insurance companies, the account
was awarded to the two private sector general insurance companies last
week.
ICICI Bank, one of the promoters of ICICI Lombard, has also financed
the aircraft acquisition plans of the Kingfisher Airlines. The insurance
deal will be executed the moment Kingfisher Airlines acquires its fleet
of aircraft. Kingfisher will be the first private carrier to be launched
with an all-new fleet. The airline has signed an agreement with Airbus
Industry of France for the purchase of three brand new Airbus A319
aircraft. With this new purchase, Kingfisher Airlines, which will launch
its operations on May 7, has ordered a total of 33 brand new aircraft. Of
these, a total of 13 aircraft 10 A320s and 3 A319s are on firm
order, with options for buying a further 20 aircraft.
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AVIATION INSURANCE OF AIR INDIA
New India Assurance Company participated in the Aviation Insurance of
Air India way back in 1946. New India
Assurance Company provides professional aviation insurance advice and
solutions to the needs of small aircraft operators as well as scheduled airlines.
The aviation portfolio of New India Assurance Company encompasses
following type of covers:
Hull All Risk Insurance Policy
This policy is suitable for small aircraft operators belonging to flying clubs,
companies engaged in agricultural spraying operations, aircrafts especially
designed for VVIPs, business executives and for those engaged in industrial
aids. The policy scope includes all physical loss or damage sustained by the
insured aircraft including total loss, disappearance. All losses are paid subject
to deductibles.
Spares All Risk Insurance Policy
Covers loss or damage to spares, tools, equipments and supplies owned
by the insured or the property for which the insured is responsible whilst on
ground or in transit by land, sea, air including in own aircraft or whilst on the
premises of others for storage only.
Hull/Spares War Risk Insurance
Indemnity is provided to the aircraft as well as spares caused by
war, invasion, acts of foreign enemies, hostilities, civil war, rebellion,
revolution, resurrection, martial law, strikes, riots, civil commotion,
malicious acts, sabotage.
Hull Deductible Insurance
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Airlines at times have to bear a proportion of loss due to application of
a deductible under All Risk Policy, which may impose considerable financial
difficulty on the insured. Therefore the operators insure part of their
deductibles under this kind of insurance.
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Aviation Personal Accident (crew member) Insurance
This cover is designed to cover insured person againstinjury, disablement or death arising as result of an accident that is
generally granted on annual basis. The cover operates while
mounting or dismounting from and whilst travelling an aircraft
while the aircraft is being used within the Geographical scope as per
its permitted usage. This cover can also be on 24 hours basis.
The capital sum insured varies according to the status of the
insuredor earning capacity and fixed by the insurers.
Loss of License Insurance
Operating crews of the aircraft are required to have valid license.
License is liable to be suspended either temporarily or permanently onmedical grounds. Consequential financial loss is covered by the loss of
license policy. Cover provided is in respect of incapacity causing
permanent total disablement or temporary total disablement due to
bodily injury or illness.
ClaimsIn case of claims following are illustrative documents that are generally
called for from the insured.
o Documents in connection with aircraft & flight detailso Documents in connection with the accidento Certificate of airworthiness/registrationo Crew detailso Maintenance & engineering informationo Operational manual passenger documentation in case of claims
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EFFECTS OF 9/11 ATTACK ON AVIATION
INSURANCE
Following the September 11th attack in the United States, the
subject of aviation insurance attracted much attention in the media and
elsewhere after aviation insurers worldwide withdrew cover for the
specific acts of war and terrorism. As a result, many national
governments stepped in to provide temporary insurance cover to ensure
that airlines continued flying.
Short to medium term solutions
At the request of the airline industry the International
Civil Aviation Organisation established a special group on
war risk insurance ( SGWI
) which, as a short and medium
term measure recommended the setting up of an international
mechanism funded by insurance premiums to provide non cancellable
third-party aviation war risk coverage through a non- profit special
purpose insurance entity (GLOBALTIME) with multilateral
government backing for the initial years. As a long-term solution the
SGWI recommended that an international convention be developed
which would limit the third-party liability of the aviation industry for
losses arising from war, hijacking and allied perils.
Uncertainty ahead
Some four years on from 9/11, most governments have withdrawn
guarantees for hull and liability war cover to airlines and airport service
providers. Notable exceptions include the United States, China and
Singapore. The market has now responded with certain insurers offering
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major airlines limited no cancellable third party coverage. However,
with other classes of catastrophe business, there remain underlying
uncertainties in the aviation insurance market that could dramatically
change the environment. One of those uncertainties is the prospect of a
catastrophic event caused by dirty bombs, bio-chemical and
electromagnetic devices or weapons of mass destruction.
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The fear is that the use of adirty bomb at a major international airport
could not only lead to immediate multiple aircraft, passenger and third
party losses, but also long term contamination of sites preventing access
and the uncontrolled spread of diseases.
Convention and statutory limits
The Montreal Convention 1999, which governs the liability of airlines
in relation to passengers and cargo interests, requires airlines to
obtain adequate insurance to cover their liabilities under the
Convention. In addition, airlines are required by many states to have
minimum insurance limits to cover such liabilities including third party
surface damage.
After the September 11, 2001, terrorist attacks on the United
States, the insurance costs for commercial airlines and college aviation
programs rose sharply. The prevailing assumption is that increased
aviation insurance costs are the result of an increased risk of life and
property loss from additional terrorist attacks. This project questions the
assumption and posits that the September 11,
2001. Attacks were a catalyst for and not the cause of increased
insurance costs. Two alternative explanations for the increasedcosts are offered. First, after September 11th, insurance managers
became aware that they had not been making the incremental rate
increases necessary to maintain acceptable profit margins.
Second, sharp declines in the value of the insurance company
stock portfolios eroded profits. Increases in aviation insurance
cost will be compared to increases in other types of insurance,such as medical insurance, to determine if the rate of increase in
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aviation insurance cost is significantly higher than in other
sectors of the economy. The impact of these insurance rate
increases on domestic and international air transportation and
commerce is presented.
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FUTURE OF AVIATION INSURANCE
As the industry enters into the millennium, the insurance industry must
look at several problems that also face the aviation industry. Survival
for the small FBOs is getting harder each day; the threat of financial
devastation is real when it comes to lawsuits. General aviation may be
forced to change its way of doing business and become more like the
military and commercial airlines. One can only hope that society willchange their attitude towards the aviation industry and the litigation that
surrounds the industry. We all hope for a positive future for the
community.
The aviation industry, as it is known today, has grown into a set of
definable industries. Modern aircraft range from military to commercial
airlines to the most diverse group, general aviation. Aviation has come a
long way the last 100 years. The industry is still developing. With
growth comes a problem that must be solved before the industry can go
to the next level.
Because of modern technology, well never again have the numbers that
we once had. The ageing fleet and pilots cant help the situation that the
industry is facing; the average aircraft age is 15 to 20 years, and the postIndian pilot is now 50 to 60 years of age. The underwriters are very
worried about the age of both the pilots and the aircraft.
The future of the industry could hold a brighter outlook. The industry
hopes that with the use of simulators at all levels of training will
increase the number of better-trained pilots and hopefully lower
insurance cost at the same time. Insurance can be one of the most
expensive elements in the fix cost of owning an aircraft. To keep
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insurance cost under control in this difficult environment, aircraft and
aviation business owners are going to have to make some changes in the
way they purchase and think about insurance.
There are ways to reduce your insurance cost, buying cheap insurance
isnt always the best way to go, and its not heavily regulated by our
government. Companies can write policies pretty much the way they
want to, you must pick the right company for you and your aircraft.
Aviation has come a long way the last 100 years, and the future could
hold a brighter out-look for the industry. One can only hope that society
will change their attitude towards the aviation industry and the litigation
that surrounds the industry. In the future, this could drive cost down and
make liability insurance affordable to the private owners, and to the
FBOs. Aviation insurance business is a high severity loss business and
in the future you could see a lot of Indian insurance companies joining
hands to manage airline accounts.
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CONCLUSION
I started this Project by asking the question Why Aviation Insurance is
required? In the course of the analysis various trends and developments in
the aviation industry were discussed that provide partial answers to this
question.
Airlines employ a wide variety of businessmodels while taking an aviation
insurance contract. For example, some companies like Kingfisher Airlines
take policy with high premium
while others like Air India take an aviation insurance contract with low
premium.The aviation insurance market is highly volatile due to the
inherent nature of the risk andthe underwriting cycle of insurance . Historically,the market wide
premium appearsto be almost as volatile as the claims, suggesting a lack of
consistency in underwriting this business.The major caveat to my conclusion
is that there is significant amount of public
data available to assist in underwriting and pricing
aviation insurance. This data canbe used to develop more effective
underwriting rating models for aviation insurance and this should result in
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better selection of risks and
more consistent profits for theinsurer.The aviation insurance market, by its
own nature, is highly volatile. There are many causes including the overall
insurance underwriting cycle, the major accident risk, the short-term memory
of the insurance market, and the long tailed nature of determining responsible
parties. However, the increasing involvement of analytical professionals
such as actuaries should introduce more effective methods for pricing airline
insurance and this should help stabilize the premium component of the loss
ratio equation.
BIBLIOGRAPHY
www.wikipedia.com
www.google.com
www.businesstoday.com
www.aviationnews-online.com