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| Kingfisher, Air India, Indigo face rising insurance costs |
| Shilpy Sinha / Mumbai Jun 03, 2009, 00:08 IST |
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Kingfisher Airlines, National Aviation Company of India Ltd (Nacil), the state-owned company that runs Air India, and Indigo could face additional cost pressures, with reinsurance rates expected to harden following the accident involving the Air France aircraft that was flying from Rio de Janeiro to Paris with 228 passengers on board.
Vijay Mallya-owned Kingfisher’s cover is due for renewal on June 24, while Delhi-based Indigo will seek a renewal at the end of July. Nacil’s insurance cover lapses on June 30 but unlike the the two private carriers, it has the option to extend the cover by up to three months.
While the size of the insurance covers taken by Kingfisher and Indigo could not be ascertained, in 2008-09, New India Assurance had provided a $6.5 billion insurance cover to Air India’s 140 aircraft.
The premium depends on the aircraft and its size, and varies from 0.5 to 2.5 per cent of the aircraft value.
A higher insurance premium is, however, unlikely to translate into higher ticket prices or result in a significant increase in cost because the premium accounts for around one per cent of an airline’s operating cost, said Kapil Kaul, CEO, South Asia, at the Centre for Asia Pacific Aviation, an agency focused on aviation sector research.
“With the recent claims in aviation, premium rates may go up. Reinsurers who have suffered these losses are expected to increase the rates to recoup the losses. The rates, however, will depend on the record of airlines and the risk appetite of the insurer in offering capacity in respective geographies where the loss experience has been favourable,” said Bajaj Allianz General Insurance Head of Underwriting TA Ramalingam.
So far in 2009, there have been eight accidents in the aviation sector, which generated global premium of $1.4 billion during the year ended March. Insurers said with the latest claim arising from the accident involving an Airbus A 330-200 aircraft, up to 50 per cent of the premium income could be wiped out.
In addition, the Indian airlines are expected to face further pressure due to General Insurance Corporation’s (GIC) exposure to Air France.
GIC, which is the designated Indian reinsurer, had a 3.5 per cent share in the reinsurance cover, with Axa being the underwriter. The insurance included a $100 million cover for the hull and another $500 million for liabilities, including losses to passengers.
A senior GIC executive said the impact of the accident was still being worked out. Reinsurance brokers said the public sector player could take a hit of around Rs 85 crore. Axa did not respond to an e-mail sent by Business Standard.
Over the years, the public sector reinsurer has developed expertise in the aviation insurance business and is aggressively pitching for business globally. The accidents might put pressure on its underwriting capabilities though company executives said its reinsurance capacity was under-leveraged at present.
Typically, reinsurance rates harden following accidents. They shot up, for instance, after the 9/11 terrorist attacks in the US. But with no major losses over the past few years the rates have come down.
Partly due to the financial sector crisis, reinsurance rates have already hardened in the Lloyd’s reinsurance market, the main market in London. “Any incident of this nature is bound to show some knee-jerk reaction from reinsurance market to try and charge more premium from clients. However, risks which are good deserve better rating and risk which is already price high requires price adjustment,” added an insurance broker.
In India, underwriting capacity is restricted to Rs 150 crore for hull and liability, so the coverage of larger aircraft is placed with other insurers abroad.
Insurers in India retain only one per cent of the risk in the aviation sector, while they pass on the rest to a group of reinsurers.
During the last financial year, the general insurance industry mopped up Rs 31,000 crore premium income, with aviation generating Rs 343 crore.
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