Aviation industry struck by high insurance premiums


By Shivanand Pandit

Pandemic has hit the aviation industry badly. Certainly the year 2020 looks like a miserable year for airlines with coronavirus infection, travel constraints, border blockages and quarantines grounding all airlines.

The International Air Transport Association (IATA) has already sketched the grim picture and according to its report worldwide airline companies are expected to lose approximately US $ 85 billion in 2020 with a net loss margin of around 20 per cent. In addition, the IATA report predicts revenues to fall from US $ 838 billion to US $ 419 billion. Passenger revenues will be about a third of 2019 level and passengers numbers will nearly halve to 2.25 billion which would equate to an average net loss of US $ 38 per passenger. Thus financially 2020 will go down as the nastiest year in the history of aviation industry.

To rub salt in the wound, a succession of plane crashes is made things difficult for both the airline companies and insurers. In January 2020, Iranian Islamic Revolutionary Guards shot down the Ukraine’s Boeing 737-800 after its take off from Tehran Imam Khomeini International Airport. In February 2020, Pegasus Airlines Boeing 737-800 skidded of the airstrip while landing at Turkey’s Istanbul-Sabiha Gökçen International Airport. In May 2020, Pakistan’s Airbus A320 crashed in a thickly in habited residential area of Karachi. Many people were killed and aircrafts were destroyed in all these ill-fated incidents.

Recently the Air India Express Boeing 737-800 skidded off the table-top airstrip of Calicut and fell into a gorge. Many people were killed and the aircraft was wrecked. Consequently, along with the public sector insurance conglomerate headed by New India Insurance that reinsured the risk overseas, global reinsurers will have to reimburse more than 90 per cent of the insured value of the plane that was destroyed in the catastrophe. Many insurance partakers sense that premiums may get elevated in the next fiscal year due to increase in the calamities. This is a grave concern for half-dead airline industry.

Aviation insurance is a dedicated insurance for coverage to the precise operations of an aircraft and other conceivable jeopardies. Although aviation insurance was first introduced in the early 20th century, the concept of aviation insurance has gained ground only lately. Numerous aircraft tragedies have not only encouraged more and more people to buy aviation insurance, but it has also amplified the number of claims by a gigantic margin.

The clauses, terms, limits in aviation insurance are different from other types of insurance. The nature of coverage and the amount of premium hinge on the type of aircraft that is being covered by the policy. Aircraft insurance provides protection against wide range of perils and shelters repairs to spoiled airplanes or other flying machines. Across-the-board coverage may also include impairment caused to airports, hangars, and other relevant land-based property.

New India Assurance, Allianz Global, AON Global India, Farsight India Wealth Management and Emedlife are the few companies offer aviation insurance. Though the claim process for aviation insurance is quick and hassle free, number of documents such as aircraft details document, flight details document, details of the crew members, documented proof of the accident, information on aircraft’s maintenance and engineering and documents of operational manual passenger have to be submitted for the settlement. In the present scene, there are many aviation policies that are making their presence felt with attractive features, viable cover plans and a lot more.  

According to a survey in London, as a result of the deadly coronavirus the aviation segment holds the greatest  risk of corporate default. Moreover, as major portion of the operating costs are paid in foreign currency of US dollar, Indian airlines are being squeezed at a time when rupee has devalued by approximately six per cent since January 2020.

To make the scene worse the burden of insurance premium is mounted. The insurance industry itself is in turmoil. Insurance companies suffered huge losses in 2017-18, because of hurricanes, wildfires and other natural adversities. They thought that aviation books are not burnt by these unlucky events and decided to increase insurance premiums on aircrafts. It is very difficult for the aviation companies to bear these sky-high rates with more strict underwriting guidelines. It is significant, however, for aircraft owners and operators to keep in mind that the long-term health of the aviation-insurance industry is at stake.

According to the a report of the insurance industry as a result of weak cash flows new policy purchases by many airlines has been postponed by three- twelve months. Airlines are also demanded waiver on renewal of insurance policies and 30 to 40 per cent lower premiums. They are also looking to better our terms and conditions with their insurers as well.

On the other hand during financial year 2019-20, the premium from sales of new pure aviation policies stood at approximately Rs.687 crore, which was roughly 24 per cent higher than about Rs.556 crore collected by the insurers in the previous financial year.

These higher insurance costs unfortunately came at a time when loss ratios were increasing, leading to a lack of profits.

Many insurers have tightened underwriting and are now refusing risks they would have insured in the past. Large number of aircraft owners will find that there is less elasticity on recurrent-training necessities, more unwillingness to over-insure hull values and offer high liability edges, and less attention from underwriters when there is any loss history on an account.

In 2015, the Directorate General of Civil Aviation made it compulsory for pilots to undertake psychiatric test before take-off. This has increased the burden for the airline industry.  Coming to Air India, the airline with 170 aircrafts is adequately covered by insurance that includes the aircraft or hull and liability for third party and passengers. The ill-fated Calicut flight has been reinsured for Rs375 crore and about US $ 30 million have been paid by the company while renewing the policy in April 2020.

Because of depreciation and related notional expenditures the ill-omened plane would be around or less than the original cost. Reinsurers will definitely consider this along with other details relating to the disaster before resolving the claim. Furthermore, Air India may have to shell out more insurance premium in future when it renews the cover.

To conclude, insurers should take into account the difficulties faced by airlines in  the current scenario and must be sympathetic towards the aviation companies.. They should also understand that airlines are trying to cut down on fuel, staff overhead, leasing and depreciation, maintenance and airport and other service provider charges by ending unprofitable operation routes.

Taking note of their financial well-being and cash reserves insurance companies should support airline companies. Nevertheless airline insurers have a commitment to their shareholders to undergo stern scrutiny in order to tackle a situation where they may face increased credit risk and debts. They should ease terms for the troubled and distressed aviation industry. They may have to accept a lower premium in 2020.

The writer is a tax specialist,

financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com