Aviation insurance: coverage and regulatory developments

aviation insuranceWhile accident risks are inherent to all the means of locomotion that man has invented to move from one place to another, air travel remains the one with the highest rates of exposure to risks.

For, if the traveller's major objective is to reach destination in due time, each flight requires the synchronization of a series of simultaneous operations whereby the aircraft reliability, command of air traffic, pilots and crew competence, the efficiency of the multiple land services (reception, check-in, security, police and customs formalities, luggage management, related services) all combine.

The extreme complexity of air travel makes aviation insurance a very particular class of business that has to take into account problems attendant upon a multitude of actors, countries and legislations.

Aviation insurance: the coverage

Among the wide range of guarantees offered by aviation insurance, we can traditionally distinguish three big kinds of policies, which, themselves, could be divided into several variations that are accommodated to the different needs of the insured.

Aircraft hull insurance

It covers material damage affecting the operating aircraft during take-off, flight and landing as well as the damage on the ground. The policy can cover total or partial losses.

The insured value, per aircraft, ranges from 1 million USD to 200 million USD and more for the most recent aircrafts.

We estimate that the worldwide-insured values for this kind of coverage currently amount to about 600 billion USD.

Liability insurance

It proposes different guarantees that cover the liability of the charterer and or the owner and or the pilot whose liability could be reconsidered following an accident and because of the bodily and material damage caused to a non-traveling third party, to passengers as well as to merchandise or luggage, whether they are checked in or left to the custody of the traveler.

The amounts of the underwritten guarantees per policy vary according to a large bracket comprised between 250 million and 2 billion USD and often more for the very big policyholders.

Liability insurance for delivered goods

It is destined to manufacturers, aircraft manufacturers, and motorists, and covers the liability of the already-mentioned parties following an accident that affects goods delivered to a customer pending evidence pertaining to manufacture defect, latent defect or information failure.

As an example, 60% of the 2004 underwritten premiums for this type of guarantees come from the North American market against 36% for Europe.

In addition to these main policies of aviation insurance, there are more specific covers: service station Liability, airport manager Liability, guarantees against acts of terrorism or war,...

Aviation insurance: Problems inherent to passenger liability

For the insurers, passenger liability losses depend more on the nationality of the victims than the number of accidents, deaths and that of the wounded.

The «price» of a passenger is based on the criteria of nationality, address, age, marital status, income standard, and especially on the jurisdiction to which victims relatives made recourse in case of an accident.

The legal framework of this policy is defined by an international regulation in continuous evolution. The compensation scale has been revised upwards under the growing pressure of passengers, associations of the victims' relatives, the public opinion and also the lobbying of large lawyers firms that deal with compensation cases.

Aviation insurance: Evolution of regulation

  • It is the Warsaw Convention which defined, in 1933, the first liability framework as regards passengers or goods air travel. The initially-set benefit amounted to 125 000 gold French francs per passenger (equivalent to 10 000 USD).
  • In 1963, this figure was reevaluated to 250 000 gold French francs or 20 000 USD following the adoption of the La Hague Protocol.
  • In 1966, for companies going to, coming from or flying over USA, the amount was increased to 75 000 USD per passenger.
  • Between 1991 and 1995, the average benefits allocated to a victim passenger amounted to 0.17 million USD in Europe and 1.6 million USD in USA
  • Between 1996 and 2002, these damages have reported a new increase to reach 1.1 million USD in Europe and 2.9 million USD in USA.
  • 2003 marked the end of the limits to the liability policy for passengers with the entry into force of the Montreal Convention.

New initiatives are underway in order to increase the scale of damages by including ground losses. Insurers and reinsurers are concerned the increasing rise of the sums for victims compensations could lead to the uncontrollable soaring of liability risks exposure.

Main international conventions regulating air travel

The Warsaw convention

This convention unified certain regulations pertaining to international air travel. Warsaw, October 12, 1929. It entered into force on February 12th, 1933.

The Rome Convention

A convention about damage caused to a third party on the ground by a foreign aircraft. Rome, October 7th, 1952.

The Hague Protocol

The protocol for the amendment of the Warsaw Convention. La Hague, September 28th, 1955. It entered into force on August 1st, 1963.

The Montreal Convention

The convention for the unification of the regulations pertaining to international air travel. Montreal, May 28th, 1999. It entered into force on November 4th, 2003.

Aviation insurance and terrorism risks

aviation insurance terrorism risk© Robert J Fisch, CC BY-SA 2.0

Henceforth, it is no longer the losses due to plane crashes that insurance companies fear most but the ones related to terrorism risks.

Already particularly high in the last twenty years, the risk pertaining to acts of war and terrorism reached its full swing with the nine eleven attacks in 2001 in the United States. This unique and unprecedented event in the history of aviation pushed the governments to act as substitutes for insurers to provide the capacity and the guarantees that airliners crucially failed to fulfill.

The current features of the aviation market and impact on insurance industry

The constant increase in the traffic

According to a recent report published by Swiss Re, the worldwide size of air traffic is reaching new peaks: one take-off per second throughout the world, that is, 3600 take-offs per hour. The 21 400 aircrafts manufactured only in Europe and North America and operating at 400 commercial companies, are transporting 2 billion passengers a year.

Yet the scale of the phenomenon is still to come. Forecasts report a growth pace of the world traffic of 5.2% per year and 7.3% for China alone. Boeing and Airbus are assessing China's needs to be between 1600 and 2000 new aircrafts for the upcoming twenty years.

The remarkable decrease of loss ratio

The frequency of the overall losses has gradually gone down in recent years. This remarkable reduction is accounted for by the bigger planes that are endowed with more efficient and reliable systems in terms of collision prevention and in-flight and on-ground alarm systems.

The figures have gone down from an average of 72 serious accidents in 1972 to an annual average of 50 at the beginning of the 1990s and to an average of 35 in the 2000s. The number of deaths has collapsed from 2 539 in 1972 to 700 in 2003.

Capacity needs

assurance avion

While the statistics of the aviation class of business show a remarkable decline in the number of accidents and deaths in the course of the last 10 years, insurers are confronted with a new problem: capacity.

The imminent commercialization of Airbus A380 with a capacity of 550 to 800 seats should break the limits for both aircraft hull insurance and liability.

In the light of the traffic increase and the considerable volume of last generation jets, insurance companies will have to bear the exorbitant charges related to liability, which will considerably thrust the limit of the traditional aviation market.

The 20 most murderous aircraft disasters during the last 10 years in Africa and the Middle East

RegionDateCompanyAircraftLocationNumber of dead
Africa08/01/1996African AirAntonov AN-32Kinshasa, Zaire227
Africa31/10/1999Egypt AirBoeing 767Atlantic Ocean (Nantucket USA)217
Africa23/03/2001Luxor Air EgyptBoeing 707Monrovia, Liberia182
Africa30/01/2000Kenya AirwaysAirbus A310Abidjan, Côte d'Ivoire169
Africa25/12/2003Union des Transports Aériens de GuinéeBoeing 727Cotonou, Benin151
Africa04/05/2002EAS AirlinesBAC One Eleven 525FTKanos, Nigeria149
Africa03/01/2004Flash AirlinesBoeing 737Sharm el-Sheikh, Egypt148
Africa07/11/1996Aviation Development CorporationBoeing 727Imota, Nigeria143
ME*23/08/2000Gulf AirAirbus A320Manama, Bahrain143
Africa18/12/1995Trans Service AirliftLockheed L-188CKahengula, Angola141
Africa08/05/2003Ukrainian Cargo AirwaysIlyushin IL-76MDKinshasa, Congo140
Africa13/11/1995Nigeria AirwaysBoeing 737Kaduna, Nigeria137
Africa21/08/1996Egypt AirBoeing 707Istanbul, Turkey128
Africa23/11/1996Ethiopian AirlinesBoeing 767Comoros Islands125
ME*12/02/2002Iran Air ToursTupolev TU-154MKhorramabad, Iran118
Africa08/07/2003Sudan AirwaysBoeing 737Port Sudan, Sudan116
ME*10/03/1997Gulf AirAirbus A320Abu Dhabi, U.A.E.115
Africa12/04/1997Ghana AirwaysMcDonnell Douglas DC-9Abidjan, Côte d'Ivoire104
Africa06/03/2003Air AlgérieBoeing 737Tamanrasset, Algeria102
Africa26/07/1995ADC AirlinesMcDonnell Douglas DC-9Monrovia, Liberia91
* ME: Middle East
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