Malaysia Airlines tragedy to impact aviation insurance

Premium rates in war-risk category likely to go up, say experts

The shooting down of a Malaysia Airlines Boeing 777 in Ukraine might lead to an increase in insurance premium rates in war-risk category, according to experts. They say insurers are likely to insist on riders or ask for higher premium for war risk from airlines flying to and over troubled areas such as Ukraine.

The aircraft that crashed over eastern Ukraine, MH17, killing all 298 on board, is the second loss for the airline in four months. In March another Malaysia Airlines aircraft, MH370, had mysteriously disappeared in the Indian Ocean.

In the latest incident, Malaysia Airlines’ lead reinsurer is likely to pay the claim arising out of the crash. This would mean an increase in premium going forward, said experts. However, the risewould be marginal as there are several reinsurers who can offer cover at competitive prices. Besides, insurance companies will need to discuss the measures and such riders could be introduced only after a consensus.

According to Anoop Verma, associate director at Alliance Insurance Brokers, while there will not be any immediate impact on the Indian market, there could be some instructions about flying over sensitive areas. Verma said the MH17 case is a one-off accident where hull war and allied perils insurance; legal liability to third parties; legal liabilities to passengers; and loss of licence policies of air crew would be invoked if the missile attack is proved.

Insurance for airlines also include cover provided to crew members against any injury, disability (partial/total) and death. Allianz is the lead insurer covering the aircraft, while Atrium provides war coverage.

A report by JLT said in the MH370 incident, both parties are believed to have paid the hull claim of just over $105 million equally (50:50) between the two policies, with the scope for an adjustment if the uncertainty is later resolved.

On the prospects of premium rates going up, Manik Nehra, senior manager (aviation insurance) at Bajaj Allianz General Insurance, said the age of the fleet, seating capacity, pilot’s experience, maintenance, and internal safety norms, apart from the increase in claim occurrence/frequency are crucial. In case there is an increase in the number of claims, this would imply the safety or maintenance norms have been compromised and it will affect the price.

At present, there are no specific norms to have additional premium for flights operating or flying more frequently to sensitive war-stricken or terror-attack prone areas. However, if such incidents continue, insurers said they would consider having such riders or restrictions for militant-attack-prone areas.

According to Nehra, a new fleet or an aircraft not older than 10 years is considered more favourable. Seating capacity is also an important factor while considering the rate since more number of passengers implies higher exposure towards passenger liability in case of an unforeseen event.

In the MH370 missing incident, a consortium led by Germany's Allianz was involved in paying the claims. Insurance markets such as Lloyd's of London are also said to be involved in this process, although the exact quantum of payment is not known.

The more experienced the pilot, the better the risk perception. Since it has been observed that a majority of claims are a result of human error, Nehra said this is a major component while determining the rates. Also, the track record of the maintenance agency responsible for the aircraft and their quality checks are also taken into account.

Airline internal safety norms are also considered. Nehra said airlines that have stringent safety norms or adhere to international standards are considered better risks. Further, loss track record of previous three to five years of a particular airline is also taken into consideration.

“In reinsurance, there are limited market players in aviation. Normally, the lead line would be approximately 10 per cent in size. Due to this limitation of aviation reinsurance, any major airline loss would impact most of the players. No new additional capacity would come in, which would result in existing capacity becoming more expensive as the reinsurer would charge higher rates which would then result increase in price on the direct side,” said Nehra.

Though international treaty renewals have been completed for this year, fleet insurance renewals are coming up in a few months. Sanjay Datta, head of underwriting and claims at ICICI Lombard General Insurance, said while in the MH370 incident the market absorbed the losses, the industry would have to wait for the next two or three months to see if there is any impact when the fleet insurance renewals come up. He added if rates are affected internationally, some impact would be seen in India, since Indian non-life players also get reinsurance capacity from abroad.

ROUGH ROUTE
Flight ban over Ukraine might lead to flight delay of 2-10 minutes

• Airlines select the route that is most economical, i.e., with shorter flight time and lower fuel consumption
• Flight route is selected taking into account —  enroute wind conditions, temperature, weather conditions, geopolitical factors and navigation charges collected by countries. Flight time depends on these factors. Route planning is automated and routes chosen by airline to operate a particular flight can vary daily based on these factors.
• The shortest geographical route need not be the most economical route (if wind or weather conditions are not favourable.)
• Air India and Jet Airways will not fly over Ukraine. Other international airlines, have taken similar measures. Air India's non-stop flights to the US largely fly  over Central Asia and Russia, but can also opt for routes over Iran, Turkey and Central Europe. The route to US over Russia could increase the flight time by 2-3 minutes, while routes via Iran and Turkey could mean additional flying of up to 10-15 minutes, depending on wind conditions