Aviation Insurance

KDU
Week Six
 What is Insurance?
• Form of risk management

• A promise of compensation for specific potential future

losses in exchange for a periodic payment.

• Insurance is designed to protect the financial well-

being of an individual, company or other entity in the
case of unexpected loss.
 Basic Terms used
• The Insured – The policy holder
• The Insurer – The underwriter
• Insurable interest - exists when an insured
person derives a financial or other kind of
benefit from the continuous existence,
without impairment or damage, of the insured
object (or in the case of a person, their
continued survival).
 Basic Terms used
• Insurance policy – the contract between the insurer and the
insured

• Premium – financial cost of obtaining an insurance policy

• Loss - A loss is the injury or damage sustained by the insured in

consequence of the happening of one or more of the accidents
or misfortunes against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured.

• Compensation
 Types of Insurance
• Some insurance types are required by the law
• Some optional
• Health insurance
• Motor insurance
• Life insurance
• Fire insurance
• Etc. etc…
 Aviation Insurance
• Aviation insurance is an insurance coverage
geared specifically to the operation of aircraft
and the risks involved in aviation

• There are differences between aviation

insurance and insurance relating to other
modes of transportation
 Aviation Insurance
• Differ from other insurance types on both
premium base and customer base

• Small number of insureds – IATA membership

• Potential exposure of each airline is huge

Aviation Insurance is a Big Business
• Total premium is around US$1.4bn
• Hull values up to US$225m
• Liability payments can be over US$3m per
passenger
• The total cost of a single incident could exceed
US$3bn
• Over 5000 airlines with ICAO Codes
• War risks are covered separately
 Claim Size Variation
• To a large extent caused by differing liability
payments
• Liability payments up to $10m per passenger
in US ($3m average)
• Claims often split with products insurers
• Highest overall claim $800m (Swiss Air)
• Largest hull claim $150m
• Will only rise in the future
 Features of Aviation Market
• Rapidly increasing exposure
• Rapid technological change
• Dominance of small number of insured,
insurers & brokers
• Alliances and code sharing arrangements
• Variability of claim sizes
• Availability of reinsurance
 History of Aviation Insurance
• First ever aviation insurance policy was written
by Lloyd’s of London 1911
• Full insurance
• Bad weather at an air show led to crashes
• The company accumulated losses
• Lloyd’s stopped underwriting insurance
policies
 History of Aviation Insurance
• The specialist aviation insurers emerged in 1924

• The British Aviation Insurance Group (BAIG) was a pool

consisting of the White Cross Insurance Association and
the Union Insurance Society of Canton.

• In the US – Chubb & Son and the Continental

Corporation together formed Associated Aviation
Insurance Underwriters to underwrite simple airplane
insurance
 History of Aviation Insurance
• Dramatic expansion of aviation technology after
WWII
• Higher insurance policies required to meet up
with developments in aircraft technology
• The jet age
• Insurance had to keep pace with the
developments
• In 2001, BAIG and AAU merged to make Global
Aerospace
 Types of Insurance
• No insurance company could undertake the total
risk on an airline or even a substantial part of it….

• Airlines arrange fleet policies to cover all aircraft

they own or operate

• Therefore aviation insurance is divided into few

types.
 Types of Insurance
• Public liability insurance
• Passenger liability insurance
• Combined single limit (CSL)
• Ground risk hull insurance not in motion
• Ground risk hull insurance in motion (taxing)
• Inflight insurance
 Public Liability Insurance
• Third party insurance
• PLI covers aircraft owners for damage that
their aircraft does to third party property, such
as houses, cars, crops, airport facilities and
other aircraft struck in a collision.
• Does not cover the aircraft or passengers
• Mandatory in many countries
 Passenger Liability Insurance
• Covers the passengers who get injured or
killed in an accident

• Its mandatory for commercial or large aircraft

in most countries
 Combined Single Limit
• Combination of Public Liability Insurance and
Passenger Liability Insurance

• More flexible

• Single coverage paying claims for liability

Ground Risk Hull Insurance not in Motion

• Coverage for the insured aircraft against

damage when it is on the ground and not in
motion

• Provide protection for the aircraft for such

events as fire, theft, vandalism, flood,
mudslides, animal damage, wind or hailstorms,
hangar collapse or for uninsured vehicles or
aircraft striking another aircraft
Ground Risk Hull Insurance in Motion (taxing)

• Provides coverage while the aircraft is taxiing,

but not while taking off or landing
• Coverage ceases at the start of the take-off roll
and is in force only once the aircraft has
completed its subsequent landing
• This coverage has been discontinued by many
insurance companies
 In-flight Insurance
• This coverage protects an insured aircraft
against damage during all phases of flight and
ground operation, including while parked or
stored.

• More expensive than other coverage as many

accidents occur when the aircraft is in motion
 Travel Insurance
• Cover medical expenses, trip cancellation, lost
luggage, flight accident and other losses
incurred while traveling, either internationally
or within one's own country.

• Exclusions – pre-existing medical conditions,

war, terrorism, injury or illness caused by drug
use and alcohol.
 War Risk Insurance
• Insurance that covers damage due to acts of war
including invasion, insurrection, rebellion, use of
weapons of mass destruction and hijacking.

• All insurance coverages exclude war risk insurance

(through the exclusion clause AVN48B)
 War Risk Insurance
• Two basic types

• War risk hull – The aircraft itself –insured in a separate

war risk insurance market

• War risk liability

• People and items in the aircraft - added to the principal liability
policies by an extension clause known as AVN52. This cover (with
limits as high as US$2bn for each and every occurrence for each
insured) was traditionally provided at nominal cost, given the
absence of major loss.
 Product Liability
• Product liability refers to a manufacturer or
seller being held liable for placing a defective
product into the hands of a consumer.
Responsibility for a product defect that causes
injury lies with all sellers of the product who
are in the distribution chain.

• Product liability laws differ from State to State

 Product Liability in Aviation
• Pilots are blamed for accidents
• Technical faults could contribute to accidents
in such cases the manufacturer of the aircraft
including the manufacturer of a component
part will have to share the legal blame with
the pilots for accidents.
 Product Liability Insurance
• Private insurers offer a wide range of coverage
including,
– Air navigation equipment
– Airframes
– Airport ground equipment
– Ancillary equipment
– Engines
– Major components
– Sub-components
 Post 9/11 Developments
• Insurance companies stopped issuing coverage
for war risks

• FAA designed a project for helping airlines with

war risk insurance

• Recent incidents (MH 310, MH 17, AH 5017, GE

222…) almost tripled the insurance premium