In the global aviation industry, including airlines, airports and aircraft makers, as well as ground operators and for specialized aviation companies, the insurers are interested to offer tailored cover for everything from hull damage & third-party liability – even to cover liability including war and terrorism. Most airlines arrange “fleet policies” for availing their seamless & continuous insurance cover for all the aircrafts they own or operate (under a single master policy, issued in a single go) after considering the entire Business Contingency Plan (BCP) & applying various Risk Management Strategies. The aviation industry is susceptible to a series of risks and threats, especially with respect to technical operations of an aircraft, and the consequent dangers. Aviation insurance is a specialized insurance which has been formulated to provide coverage to the specific operations of an aircraft and other possible risks involved therein. This type of insurance is quite different from other types of transportation insurance. The clauses, terms, limits in aviation insurance are quite unique.
Different aviation insurance policies provide a series of options offered tailor-made to suit the varied needs of each customer. The types of coverage provided are extremely specific to each plan, and it is of utmost importance to understand these nuances before choosing which Insurance Plan to be opted by the insured. There have been various instances of a customer assuming that his/her plan has a certain coverage, only to find out that they were never covered for that particular type of mishap. To avoid getting into such a situation, insured must consult qualified aviation insurance experts. They may help insured to identify and differentiate between different types of aviation insurance plans, and also clarify the clients’ doubts related to the terms, conditions, rules, regulations, clauses, warranties and endorsements that are attached to various aviation insurance policy.
The concept of aviation insurance has gained momentum of late. A series of aircraft disasters (especially the mysterious disappearance of Malaysia Airlines with 239 passengers on board on 8TH March, 2014) have not only prompted more and more entities to buy aviation insurance, but it has also increased the number of claims by a huge margin at the backdrop of heavy traffic & catastrophes’ risk like storms/super cyclones/tornados as prevalent in nature. As aircraft disasters continue and are on arise, it is being looked at as a very risky affair to fly. This has led to a lot of fear and consequently the need for aviation insurance.
Aviation insurance policy coverages:
Actually Aviation Insurance offers protection against a wide collection of perils, dangers, risks and damages sustained by the policyholders. Given that aircrafts are extremely prone to technical failures, accidents, terrorist activities, and such like, aviation insurance is extremely crucial. There are different types of aviation insurance policies available in the global market. Some of these cover the physical aircraft, any damage it could cause to property, aircraft crew, and passengers. The cost of aviation insurance policy does vary depending on the category and size of aircraft being offered for cover. The Aviation Insurance Departments of the insurers provide the following insurance covers, on annual basis, to the different customers involved in aviation industry (globally):
- Aircraft Hull Insurance
- Passenger Legal Liability Insurance
- General Third Party/Third Party Legal Liability
- Cargo Legal Liability Insurance
- Loss of License Insurance
- Personal Accident to the Crew of the aircraft
Case Study of some mysteriously missing planes:
INCIDENT NO. 1:
On March 8, 2014, Malaysia Airlines Flight 370 (MH370) vanished from the radar with 239 people on board while flying from Kuala Lumpur to Beijing. The disappearance of the Boeing 777-200ER is one of the world’s biggest aviation mysteries, as no conclusive evidence of its fate has been found despite extensive searches and investigations. The plane departed from Kuala Lumpur International Airport at 12:41 a.m. and was scheduled to arrive in Beijing Capital International Airport at 6:30 a.m. local time. However, at 1:07 a.m., the aircraft’s last automated position report was sent, and at 1:19 a.m. what turned out to be the final voice transmission from the cockpit of the doomed jetliner was relayed to air traffic controllers: “Good night Malaysian three seven zero,” a message that suggested nothing out of the ordinary. The plane was then over the South China Sea, about to enter Vietnamese airspace. At 01:21, the aircraft’s transponder, which sends out location and altitude data, was switched off. Military radar showed that the plane then turned sharply to the west, deviating from its planned route. The plane continued to fly for more than five hours, crossing the Malay Peninsula and the Andaman Sea. The last confirmed position was identified at 02:22, when it was detected by military radar, over the northern tip of Sumatra.
About an hour after Flight 370 was scheduled to land in Beijing, Malaysia Airlines announced it was missing. Prior to the aircraft’s mysterious disappearance, it had been flying seemingly without incident. There were no distress signals from the plane or reports of bad weather or technical problems.
The only clues to the plane’s possible whereabouts came from satellite data. The aircraft was equipped with a satellite communication system that automatically sent hourly “handshakes” or pings to a satellite operated by ‘Inmarsat’, a British company. Based on the timing and frequency of these pings, ‘Inmarsat’ was able to calculate two possible arcs or corridors where the plane could have flown: a northern corridor stretching from Thailand to Kazakhstan, and a southern corridor from Indonesia to the southern Indian Ocean. The analysis also indicated that the plane was likely flying at a constant speed and altitude, suggesting that it was under absolute human control.
The search for MH370 initially focused on the South China Sea and the Gulf of Thailand, where the plane was last seen by civilian radar. However, as the satellite data became available, the search area shifted to the two corridors. The northern corridor was soon ruled out by the authorities, as it would have required the plane to fly over several countries with active military radar, which did not report any sightings of the aircraft. The southern corridor, on the other hand, was vast and remote, with little radar coverage and deep waters. The search efforts involved dozens of countries, ships, aircraft, and underwater vehicles, and covered more than 120,000 square kilometers of the southern Indian Ocean. The search was officially suspended in January 2017, after failing to locate the main wreckage of the plane.
The ensuing search for Flight 370 initially was centered on the Gulf of Thailand, where the plane was travelling when radar contact was lost. Investigators looked into the possibility of terrorist involvement in the plane’s disappearance after it was discovered that two passengers had been using stolen passports; however, this theory, at least in relation to the two men, soon was determined to be unlikely. The people onboard Flight 370 represented 15 nations, with more than half the passengers from China and three from the United States. Investigators confirmed that satellite transmissions indicated Flight 370 had turned sharply off its assigned course and flown west over the Indian Ocean, operating on its own for five hours or more. On March 24, 2014, Malaysia’s prime minister announced the flight was presumed lost somewhere in the Indian Ocean, with no survivors. As the search for the aircraft continued, with more than two dozen nations, including the United States, participating in the effort, the mystery of how a commercial jetliner could vanish without a trace received global media attention.
Meanwhile, some authorities suggested one of the pilots of Flight 370 could have deliberately flown the aircraft into the Indian Ocean on a suicide mission, although there was no conclusive evidence to support this theory. Throughout 2015 and 2016, debris from the aircraft washed ashore on the western Indian Ocean, but the fate of Flight 370 remains a mystery. Underwater search was conducted for searching the debris and Malaysia, Australia and China launched this underwater search covering the area of 1,20,000 square km (i.e., 46,332 square miles) area in the southern Indian Ocean, based on data of automatic connections between an ‘Inmarsat’ satellite and the plane. The search, which cost about A$ 200 million ($143 million), was called off after two years in January 2017 with no traces of the plane found. More than 30 pieces of suspected aircraft debris have been collected along the coast of Africa and on islands in the Indian Ocean, but only three wing fragments were confirmed to be from MH370. Most of the debris was used in drift pattern analysis in the hopes of narrowing down the aircraft’s possible location. The Investigation Report was published in July 2018, a 495-page report into MH370’s disappearance that said the Boeing 777’s controls were likely deliberately manipulated to take it off course, but investigators could not determine who was responsible for the same. The report also highlighted mistakes made by the Kuala Lumpur and Ho Chi Minh City air traffic control centers and issued recommendations to avoid a repeat incident. The inability to locate MH370’s crash site has fuelled numerous conspiracy theories, ranging from mechanical error or a remote-controlled crash, to more bizarre explanations like alien abduction and a Russian plot.
In recent years, some aviation experts have said the most likely explanation was that the plane was deliberately taken off course by an experienced pilot. Investigators, however, have said there was nothing suspicious in the background, financial affairs, training and mental health of both the captain and co-pilot.
INCIDENT NO. 2:
On July 17, 2014, four months after Flight 370 vanished, tragedy struck again for Malaysia Airlines, when one of its planes was shot down over eastern Ukraine near the Russian border. All 298 people being aboard the aircraft (actually a Boeing 777), got simply perished. European and American officials believe Flight 17 on 17.07.2014, which took off from Amsterdam and was en route to Kuala Lumpur, was downed by a Russian-made surface-to-air missile fired from territory controlled by Russian-backed separatists battling the Ukrainian government. The rebel leaders and President Vladimir Putin of Russia denied any responsibility for the incident.
Malaysia Airlines Flight 17 (MH17/MAS17) was a scheduled passenger flight from Amsterdam to Kuala Lumpur that was shot down by Russian-controlled forces on 17 July 2014, while flying over eastern Ukraine. All 283 passengers and 15 crew were killed. Contact with the aircraft, a Boeing 777-200ER, was lost when it was about 50 kilometers from the Ukraine–Russia border, and wreckage from the aircraft fell near Hrabove in Donetsk Oblast, at Ukraine, 40 km away from the border. The shoot-down occurred during the war in Donbas over territory controlled by Russian separatist forces.
The responsibility for investigation was delegated to the Dutch Safety Board (DSB) and the Dutch-led joint investigation team (JIT), who in 2016 reported that the airliner had been downed by a Buk surface-to-air missile launched from pro-Russian separatist-controlled territory in Ukraine. The JIT found that the Buk originated from the 53rd Anti-Aircraft Missile Brigade of the Russian Federation and had been transported from Russia on the day of the crash, fired from a field in a rebel-controlled area and the launch system returned to Russia afterwards.
The findings by the DSB and JIT were consistent with the earlier claims by American and German intelligence sources and claims by the Ukrainian government. On the basis of the JIT’s conclusions, the governments of the Netherlands and Australia held Russia responsible for the deployment of the Buk installation and began pursuing legal remedies in May 2018. The Russian government denied involvement in the shooting down of the airplane, and its account of how the aircraft was shot down has varied over time. Coverage in Russian media has also differed from that in other countries.
On 17 November 2022, following a trial in absentia in the Netherlands, two Russians and a Ukrainian separatist were found guilty of murdering all 298 people on board flight MH17. The Dutch court also ruled that Russia was in control of the separatist forces fighting in eastern Ukraine at the time.
The incident is the deadliest airliner shootdown incident till date. All 283 passengers and 15 crew died. By 19 July 2014, the airline had determined the nationalities of all 298 passengers and crew. The crew were all Malaysian, while over two-thirds (68%) of the passengers were Dutch. Most of the other passengers were Malaysians and Australians; the remainder was citizens of seven other countries.
Importantly it was noticed that the flight crew team here included the captains Wan Amran Wan Hussin (49) and Eugene Choo Jin Leong (44), and first officers Ahmad Hakimi Hanapi (29) and Muhamad Firdaus Abdul Rahim (26). Captain Wan had a total of 13,239 flight hours, including 7,989 in Boeing 777s. Captain Choo had a total of 12,385 flight hours, including 7,303 in Boeing 777s. First Officer Ahmad had a total of 3,190 flight hours, including 227 in Boeing 777s. First Officer Muhamad Firdaus had a total of 4,058 flight hours, including 296 in Boeing 777s – all together it’s a real loss of highly skilled pilots with enormous liability claims.
CURRENT ISSUES OF AVIATION INSURANCE:
According to global broker Willis Towers Watson (WTW) that has been stated in their recent “General Aviation Insurance Market Review Q3 2023 Report” – the world economic events are currently the drivers of the general aviation insurance market. The report found that increasing aircraft values, inflation, the Russia/Ukraine war crisis, Environmental, Social and Governance (ESG) programs and emerging technologies – all are impacting the premium of current Aviation insurance.
Pricing challenges are echoed in various quarters. “Consistent pricing to sustain profitability, there is always a balance between market share, premium pool and losses/expenses,” said Sydney-based Mr. Parington, Sterling’s Director. He said the hard market had both driven and demonstrated the benefits of coinsurance to help manage claim losses versus exposure. However, he also mentioned that earlier COVID-19 pandemic also played into aviation issues by reducing full flying exposures due to the number of grounded aircraft. He suggested that an array of rising costs is a big challenge for stakeholders in the aviation space, including insurers. Repair costs have significantly escalated due to the effects of COVID-19 and transport costs have been increasing for a long while with delays in product supply and having to source parts from overseas along with shipping damaged equipment for repairs offshore. He also said currency exchange costs and inflation have added to these challenges. Parington said his insurance offerings and risk management haven’t changed as a direct result of climate concerns. “Typically, we are reactive and see no real changes because the aviation industry is highly regulated, both locally and globally with set standards and authorities,” he said.
Here an important aspect is Climate Risks. Mr. John Rooley, CEO of Willis Towers Watson’s (WTW) Global Aerospace division, was very clear about what he saw as the biggest risk facing the aviation industry. “It’s climate, climate and climate to be honest. It’s such a big issue,” said London-based Rooley. Despite the ongoing threat of COVID-19 to the industry, Rooley said climate risk has dominated Airport Risk Community (ARC)’s discussions. “We’re at the forefront of how climate impacts the insurance industry,” he said. “We’ve got some great colleagues in our climate group who help analyze the future of risk and we’re seeing a lot of airports and a lot of airlines looking to assess the impact of climate change on their business.” Four years ago, WTW formed the ARC to help manage the airport risk landscape by connecting industry professionals and facilitate knowledge and data sharing.
One section of WTW’s aviation insurance market update looked at emerging technologies.“There is also an increased focus on sustainable aviation initiatives and products such as sustainable aviation fuel (SAF) and electric vertical take-off and landing (eVTOL) vehicles,” stated a WTW report. However, from an insurance perspective, WTW opined that SAF is unlikely to present a significant hurdle given that it is in the main a modification to existing fuel types. The insurance sector is adept at supporting new forms of aviation through the market as long as their testing and safety regime is transparent and well documented.
The WTW review also discussed the impact of aviation claims apart from those connected to the Russia-Ukraine war. “Towards the end of 2022, the aviation reinsurance markets saw substantial increases to the Boeing Max losses, the majority of these claims will flow through into the reinsurance market because the retained aspects of the claims have already absorbed the direct insurance proportion.” said the WTW report. The update said the size of the claim means that those claims will inevitably impact all sub-sectors of aviation insurance.
Despite the challenges, WTW found that general aviation market capacity has increased. Their update reported that this increase is “driven by fresh insurers looking to capture market share, and existing insurers looking to maintain their positions.” As a result, in the hull and liabilities market, “capacity and competition,” said the report, has outweighed any negative impact upon pricing from the Ukraine war and also the Boeing Max losses. However, as flight activity increases, the report said, across the market, the loss ratio, i.e., Incurred Claim Ratio (ICR) “may” tip from positive to negative. The World Economic Forum’s (WEF) Global Risk Report 2022 identified climate action failure as the most severe risk facing the world. In the short term, the WEF said extreme weather is the greatest threat.
Surprisingly, while general aviation showed a 9.65 percent average increase over the past four quarters, the Marsh report showed a 2.16 percent decrease for general aviation hull and liability premiums in the second quarter of 2023. The report suggests that this decrease could be a result of new entrants into the general aviation insurance market that are infusing new capital and increasing capacity and competition. If this decrease is truly the start of a trend and not a statistical anomaly, it would signal welcome relief for general aviation operators.
All aviation policies include some form of the war, hijacking, and other perils exclusion clause — clause AVN48B — which excludes coverage for war perils. In this context of aviation coverage, war perils are not limited to armed hostilities between nations, but typically are broadly defined to include many types of conflict, including strikes, terrorism, rebellion, pilot suicide, and malicious acts. This exclusion applies to physical damage, or hull, coverage and third-party liability coverage, but not to passenger liability. When aviation insurance buyers purchase war risk coverage, they are generally adding back coverage for all of the perils excluded under the endorsement, with the exception of coverage for the use of nuclear/radioactive weapons. There is no commercial insurance coverage available for claims arising from the detonation of atomic or nuclear weapons/perils. Typically, the write-backs are included within these “all-risks” aviation policies, with separate add-on cover with the payment of extra premium, for hull war and third-party war liability. For airlines, large manufacturers, and other major aviation risks, war risk coverage is generally written back via standalone hull war and excess third-party war liability policies.
The war risk pricing and coverage available in the current market varies significantly between aviation market segments and clients. That said, it is anticipated that the cost of aviation war coverage in 2024 will increase, barring unforeseen changes in conditions. Changes to coverage and limits are also anticipated in the current market. The aviation war marketplace is often discussed as two separate markets; the hull war market and the excess third-party war liability market. Combined, we estimate that the two represent several hundred million dollars in annual premium globally. These niche markets typically are invariably subject to more volatility than the broader aviation market; the hull war market in particular has been challenged recently by potentially large loss activity.
WHILE SUMMING UP:
Aviation is the integral part of transportation systems around the world and its contribution to the entire global economy is evident. The aviation sector has already made significant progress in cutting emissions over several decades. In fact, the newest aircraft in service today are over 80% more fuel efficient per seat and kilometer than the first jets in the 1960s, this was possible due to massive investments in research and development areas. But far more needs to be done for the industry to meet its pledge of cutting greenhouse gas emissions by half by 2050, compared with a baseline of 2005’s levels. It must also be stressed that policymakers have been prompted to place the development of zero-emission planes at the heart of the industry’s support packages, and manufacturers are working to produce new greener prototypes (including electric aircrafts) which could enter into service in about a decade. So in all sense, aviation insurance sector is having enormous scope, but is subject to so many changes to be incorporated therein, in underwriting & claim settlements norms & processes of the insurers, as the ‘change’ is always omnipresent in this Aviation Insurance.
