RISK MANAGEMENT IN

AVIATION INSURANCE

PROF. SHIV KUMAR SHARMA

 RISK MANAGEMENT IN AVIATION

• Risk management is a broad topic. It involves taking steps to minimize the

likelihood of things going wrong, a concept known as loss control. It also involves
the purchasing of insurance to reduce the financial impact of adverse events on a
company when, despite your best efforts, bad things happen.
• Risk management is the process of identifying, assessing and controlling threats
to an organization's capital and earnings. These threats, or risks, could stem from
a wide variety of sources, including financial uncertainty, legal liabilities,
strategic management errors, accidents and natural disasters.
• Traditional risk management, sometimes called "insurance risk management,"
has focused on "pure risks" (i.e., possible loss by fortuitous or accidental means)
but not business risks
 IMPORTANCE OF RISK IN
INSURANCE

• An important risk management factor is the balancing of insurance expenditures

against the risks which present the most significant negative impact on your individual
personal financial plan. In theory, we could insure ourselves against almost any risk but
go broke paying the premiums.
• Risk management helps to prepare for the unexpected. One cannot plan for everything
that will happen but can try to minimize the effects felt by such circumstances.
• It can protect your family. Should anything happen to; such as death, unemployment,
medical accident or disease; in such a situation family of the affected will be taken care
of and not left with extreme debts or financial hardships.
• It protects your financial status. Similar to the last, financial status will be safer if there
is a plan in place to handle unexpected situations. Many circumstances can impact
finances and risk management will help to drive out those changes
 Essential Features Of A Risk Management

• Tailoring
• Different departments and stakeholders in your company have different risk concerns, and
they’ll need to be able to review information quickly and easily to check for red flags. To be
useful, information needs to delivered in a timely fashion, updated in real time, and show
integration between different areas of risk – but bombarding colleagues with dense and
unnecessary information will likely kill its usefulness. You’ll need to think carefully about getting
the right balance for your team, and look for a flexible systems that can be tailored to your
needs.
• Tracking
• The technology that you opt for should be able to identify, assess and measure operational risks
automatically, providing information that allows for quantitative and qualitative analysis of the
risks that have been flagged up. The best systems now include options for risk control self-
assessment, as well as tools for establishing not only the existence of a risk, but also risk levels
and risk mapping, to help you prioritise the most pressing issues as they emerge.
 Contd…
• Identifying roots
• Spotting risks is all very well, but to improve operations in the long term you need to
know what instigating events and roots causes led the risks to emerge in the first place.
Your software should be able to track back through event time charts and cycles to
suggest where risks are originating from, allowing you to mitigate these in the future.
• Speedy notifications
• It’s no use finding out about a risk indicator once disaster has already struck.
Automated notifications should be delivered promptly, as soon as risk thresholds are
breached. You may find that software that provides a “heat map” of emerging risk at
the early stages gives you the necessary insights to nip these risks when they have
barely begun to bud; either way, make sure that your system is fast-acting enough to
prevent risks from turning into full-blown problems – otherwise, your ORMS is just for
show.
 Risk Management Strategies Increase Successful
Operations

• If all three risk management components are successfully completed

from the time the airplane leaves the hangar to the time it returns,
you can be assured of a safe flight.
• There are many ways to manage risks, just as there are many different
kinds of risks associated with any one flight. These risk affect the crew
in every phase of flight from preflight to shutdown. Having a proactive
mindset from start to finish will help you be prepared for the
unexpected.
 Methods of Risk Management

• By employing risk management strategies, we are better equipped to address unpredictable

scenarios that can wreak havoc. Risk is not necessarily a bad thing, so long as it is controlled. There
are a number of strategies which can be used to manage specific risks. All things considered, there
are five distinct strategies when it comes to risk management:
• Risk Avoidance  This entails attempting to avoid high-risk activities which could result in catastrophic
impacts. Speeding, extreme sports, or smoking are all examples of high-risk activities.
• Risk Retention  In this method, all the risks are assumed and choose not to mitigate the risk at all.
• Risk Reduction  Also known as loss prevention and control, this involves minimizing risk.
• Risk Sharing  In this strategy a limited degree of manageable risk is assumed and transfer the balance
of the risk to one or more organizations.
• Risk Transfer  As it sounds, in this strategy risk is completely transferred to a third party in
consideration of an insurance premium. Life, disability, and liability risks are often dealt with in this
way.
 A history of risk sharing
• As the aviation industry began to grow more rapidly after the First World War,
so too did demand for aviation insurance. Underwriting aviation risks was to
prove particularly challenging during the first decades of the 20th century, while
the increasing international reach of the industry necessitates new solutions
today.
• Aviation risk was generally considered too volatile for individual insurers,
leading companies to join together in a bid to share the risks – a model that is
still followed in the commercial aviation sector today. Key to the development of
the aviation insurance market over the subsequent decades was the
establishment of aviation pools.
•  “In the early days, aviation risk was considered so unpredictable and
extraordinary that it was almost impossible for a single insurer to underwrite
100% using its own capacity,”
 MANDATORY PROVISIONS

• The passage of the federal regulatory legislation such as the Civil Aeronautics Board and
the Federal Aviation Administration have made mandatory safety measures that might
otherwise be disregarded.  Control is exercised with respect to the certification of pilots,
and regulations covering aircraft flights in the United States.
• With the cost of the aircraft itself combined with the liability limits carried on each plane,
one might logically wonder if adequate insurance facilities exist.  The Concord is valued at
more than $50 million which is almost double the cost of the Boeing 747. 
• The desired liability limits on an aviation policy can be as high as $300 million or higher
which illustrates the large and increasing exposures in the aviation insurance field.  There
are insurance facilities that adequately handle most aviation risks.  With the increasing
risks and costs, adequate market capacity for aviation insurance often requires many
insurers and reinsurers throughout the world.
• 
 BASIC NATURE & DIFFERENCE

• Aviation insurance is closely related to ocean marine and

automobile insurance in that the aircraft owner needs both physical
damage (hull) and liability insurance.  They can be divided into two
classifications:
•  1.   Direct Loss; and
• 2.   Liability Coverages.
• The major difference would obviously lie in the threats covered. 
Aviation insurance threats are very distinct.
 DIFFERENCE

• Another difference between aviation risks versus automobile risks is that aviation
insurance involves primarily a total loss business, and much larger sums of
money.  A jet liner equipped to carry more than 300 people can easily cost $30
million or more. 
• Direct loss insurance, depreciation, and obsolescence are factors of tremendous
importance.  Losses in many instances are much greater than and totally different
from those attached to the automobile.  One of the most important of the factors
influencing aircraft losses is the physical condition, training and experience of the
pilot.  Although it is true that inexperienced drivers of automobiles are
responsible for many accidents, incompetence of a pilot can be disastrous. 
Airplanes are equipped with warning systems to try to reduce pilot error of many
kinds.  Some of these warning systems include radar and ground proximity
warning systems.
 CLASSIFICATION OF AIRCRAFTS

•   Airplanes are classified into five different categories by the plane's use.
•  1.   Air Carriers:  this applies to large scheduled and nonscheduled air carriers.
• 2.   Private Business or Pleasure:  this applies to individually owned aircraft.
• 3.   Industrial Aid:  this applies to corporate owned aircraft used to transport
employees, executives and guests.
• 4.   Commercial:  this applies to charter aircraft operated by a fixed base
operator.
• 5.   Special-Uses:  this applies to a number of risks involving unusual conditions,
such as flying clubs, crop dusting, photography, law enforcement, and dealers.
• 
TYPES OF CONTRACT

• The following contracts and a comprehensive light plane policy which combines many of the
below coverages are each discussed separately later in the chapter.  The basic policy forms
include:
•  1.   Hull Policies:  this covers the risks of loss or damage to the insured aircraft itself.  This
type of insurance is available on a specified-peril basis (or named-peril) or all-risk basis and
may cover the plane while:
•  a)  Stationary Only,  
• B)   Stationary Or Taxiing, Or  
• C)   On The Ground Or In Flight.       
•    Hull policies generally contain a deductible of five to ten percent of the covered value. 
Some policies are issued on a participation form in which the insured pays a percentage of
each loss.  
• 
CONTD….

• 2.   Aircraft
Liability Coverages:  this is written to cover public and passenger liability and
property damage liability.  The pilot needs protection against liability suits arising from
operation or ownership of the plane.  Basic aviation policies do not automatically cover the
passenger bodily injury hazard, although that coverage can be purchased by endorsement.  A
pilot who flies planes belonging to others may buy liability insurance to cover the exposure
while flying these planes.    
• 3.   Admitted Aircraft Liability Coverage:  this provides for voluntary settlements to injured passengers.   
• 4.   Passenger Liability Insurance:  this provides medical expenses regardless of liability.  Medical
payments coverage for the pilot and passengers is available with passenger liability insurance.
• 
SPECIAL FORMS
•1.   Hangar Keeper's Liability:  covers the bailee's liability with respect to
aircraft stored for safekeeping or repair.  This coverage protects these
operators from claims arising from losses that occur to planes left in their
custody.  This coverage is similar to the garage keepers' Liability policy.
•2.   Airport and Air Meet Liability:  this provides protection similar to the
owners', landlords' and tenants' forms generally written for property owners.
•3.   Product Liability:  covers manufacturers and sales or repair organizations
against liability claims attributable to defective products or works.
• 
CONTD…

• 4.   Aircraft Workers' Compensation and Employers' Liability

• 5.   Aviation Personal Accident Insurance
• 6.   Cargo Liability:  covers legal liability for loss or damage to cargo or baggage. 
Insurers against liability for damage to another's cargo which is distinguished from
property insurance covering the insured's own cargo.  Cargo insurance is not classed
as an aviation line, but is written by inland marine departments.  Cargo liability is
written as a separate form and covers the aircraft owner for loss or damage to
merchandise for which the airline may be legally liable.  Passenger baggage liability
covers aircraft owners' liability for loss or damage to passengers' baggage.
 Basics of Risk Management in Aviation
Insurance
• When growing a business, you face a number of potential risks that
can threaten your business in a number of ways. The loss of assets,
income, liability to others, financial liabilities… among others.
• Risk management is the process utilized to control and limit loss. That
process includes identifying, analyzing, and mitigating risk. In general,
there are four primary ways or a combination thereof, that is used to
treat and control a risk: To Avoid the risk (stop doing the risky activity
or dispose of the asset) To Reduce the risk (limit risky activity and/or
take proactive actions to limit risk) To Transfer the risk (via Insurance
or Contractual Agreement) To Retain the risk (in-whole or in-part)
CONTD…

• In the process of risk analysis, most risks can be assigned to one of

four categories based on the frequency of losses and the potential
severity of potential losses. For each category, there is a standard risk
management treatment typically utilized to mitigate the risk:
• Low Risk + Low Severity = Retain the risk Low Risk + High Severity =
Transfer the risk (to an insurance company) High Risk + Low Severity =
Reduce the risk (or transfer) High Risk + High Severity = Avoid the risk.
 Contd…..

Most aviation exposures fall into the Low Risk, High Severity category, so aircraft
owners typically address their aviation risks by transferring the bulk of the potential
(pure) financial loss to an insurance company by purchasing an insurance policy.

The insurance policy is a legal contract set to indemnify you in the event of a direct
loss. To indemnify (indemnification) is to restore the insured to the condition they were
in prior to the loss.

That means that an insured is not meant to benefit from a loss, but to be brought to
the status they would have been had the loss not occurred.

Risk management is a simple process in nature but can be much more involved and
treated in more complex ways as operations get larger and more complex. However,
the majority of aircraft owners and operators will find this concise information will
provide a general understanding of their benefit.
Aviation Premium Rates

•    Aviation insurance provides no common rating schedule for insurance companies

showing rates applicable to different classes of aviation risks.  This is a contrast to other
property fields.  Rates, therefore, are not standard and are to a large degree based on
judgment.  The final rate quotation is made only after the underwriter has been given an
opportunity to appraise the planes:
•  1.   Physical Condition,
• 2.   Age,
• 3.   Weight,
• 4.   Flying Characteristics, And
• 5.   Value.
•    If the plane is used in connection with a business operation, the operator with good
equipment, a good reputation and a good loss experience secures the most favorable
premium rate consideration.
ALL RISK & BASIC POLICY

• When a policy is written on an all-risks basis, the policy includes such

perils as fire, crash damage, windstorm, earthquake, flood and every
other conceivable risk which may damage the plane.  The more
normal all-risks hull coverages include:
•  1.   all risks while the aircraft is not in motion,
• 2.   all risks except while in flight, including taxiing, and
• 3.   all-risks ground coverage extended to include all risks while in
flight.  This last form is the most comprehensive. 
• 
CONTDD.

• The usual exceptions are wear and tear, deterioration, conversion (taking without
authority) by a person in possession of the aircraft and loss due to mechanical
breakage or structural failure.
•    Fire is essentially a ground hazard.  The insured plane is covered against fire from
any cause, as well as against explosion and lightening, while not in flight.  The fire
hazard in aviation is particularly great not only because of the plane itself but also
because of the conditions usual to the hangars in which planes are stored.  There
can be many causes of fires, which include backfiring engines, short circuits and
the development of static electricity.  All airplane fire rates are loaded because of
the conflagration hazard.  A hangar fire, once started burns furiously because of
gasoline and the chances of saving planes stored inside are very low.
• 
 CONTD…

•   Windstorm is strictly ground coverage and covers no loss occasioned by flight, which is covered
under crash insurance.  The aircraft is covered while in the hangar or in the open for damage
caused by hail, storm, rain, sleet, snow, earthquake, flood or water.  Windstorm insurance is an
essential coverage for airplanes.  Planes are carried into the air on strong winds and completely
wrecked.  An airplane safely housed in its hangar may also be seriously damaged by collapse of
the hangar.
• Crash Insurance covers loss or damage that may occur to the insured aircraft by collision with the
ground or another object during flight.  The policy provides that the insurance company will pay
the insured value of the plane, including its equipment, in the event of total loss.  The rates for
hull insurance are based on the assumption that the aircraft is insured for 100 percent of the
value.  No coinsurance clause actually appears in the insurance contract, but the practice of
requiring insurance 100 percent to value is similar to the inland marine business.  Total loss
payments are reduced by depreciation.  In the case of partial loss, the liability of the insurance
company is limited to the cost of repairing the damaged property with material of like kind and
quality.
THANK YOU VERY MUCH