Indian aviation & insurance

Updated: Jan 22 2008, 22:55pm hrs
THE Aviation Sector in India is making headlines these days not only owing to the glamour attached to the industry but also due to the significant spurt in growth of passenger traffic. Aircraft acquisitions are happening at a pace that was unexpected even in the wildest of imagination a couple of years back. Earlier, infrastructural constraints were part of economic dis-cussions but stories of aircrafts hover-ing for 30 minutes before getting a landing slot at metros are now a reg-ular occurrence.

Following Jet Airways takeover of Air Sahara, we now have yet another merger, of Air India and Indian, creat-ing a new behemoth which would emerge as a force to reckon with in the regional market. International pas-senger growth, too, is expected to be in double digits for the merged entity with domestic passenger growth pegged at higher than that for the in-ternational passenger traffic at least for the next 5 years. Such a merger usu-ally results in better bargaining power in the hands of the merged entity vis--vis the insurance industry. But then, on the other side, merged operations, owing to economies of scale, create greater focus, concentration of re-sources and expertise resulting in im-proved risk management culture and concomitant improved loss experi-ences and expectancies.

National Aerospace Laboratories is also perhaps ready with plans to launch Indias first indigenously built 70-seater civilian aircraft by 2015. In-dia Post emboldened by the competi-tive pressures from the private courier companies opts for wet leasing of an aircraft. Not to be left behind, corpo-rates are in a race to acquire aircraft, particularly business jets which now also fly over European and American skies. Flying into and over these coun-tries require higher insurance covers as regards third party liability limits are

concerned.

While growth in countrys aviation sector is now common knowledge, what is not equally well known by the observers is the fact that GIC of India has emerged as a significant aviation (re)insurance underwriter in the years following WTC oss. Among the fra-ternity of about 40 underwriters worldwide, GIC of India perhaps ranks statutory cessions of 5% on each and every policy of Indian airline operators for all types of insurance covers while simultaneously offering significant ca-pacities for major airlines of the world. On the general aviation side, GIC Re capacities are INR 50 crore for hull and USD 150 Mln for liability. This high liability limit facilitates absorption of liability limits of the business jets fly-ing into and over European Union air-space. GIC Re has also significant ca-pacities for Hull War Cover (excluded from the Hull All Risk Cover) going right up to USD 40 Mln for Indian and SAARC aviation accounts.

Following the WTC loss and result-ant re-assessment of threat percep-tion, the premium rates in the aviation class saw a gigantic increase. This also created a period of very good prof-itability for the aviation class which had till then seen the down-cycle and booked losses during the previous half decade. This unprecedented harden-ing of the aviation insurance market also attracted significant capacities. This was alongside improvement in safety record witnessed by the Aviation sector which was unprecedented. This culminated in correction of hard mar-ket post-WTC with 2006 witnessing airline claims perilously close to pre-mium figures. The rates have now re-turned to pre-WTC loss levels and air-line insurance market is now incurring losses. The downtrend is continuing but there are unmistakable signs of capacity withdrawal owing to uneco-nomic rates at which business is now written.

Owing to expansion of capacities for general aviation in the regional mar-ket, Indian domestic general aviation sector has also tnessed softening trends. In the recent past, there was creation of significant capacity by ICICI Lombard General Insurance Company. Alongside the general op-timism generated by the Indian econ-omy, everyone is gung ho about avia-tion sector resulting in efforts to build aviation portfolio at possibly quite un-economic rates. This is sometimes re-flected in aggressive rating, de-ductibles lower than standard market deductibles and dilution of pilot expe-rience warranties. Given the signifi-cant capacities with Indian players, any general aviation account can now

be readily absorbed in the Indian in-surance market, with really large ac-counts possibly requiring sharing of risks. Insurance markets world-over have tended to respond to two basic factors: capacity changes & losses and accompanying changes in threat per-ception. The current downtrend is more a reflection of the expansion of capacities than loss trends. The number of airports in the coun-try is expected to go up from the pres-ent 80 to 100 by 2008 with many pri-vateairports being given licences such as Jamshedpur and Puttaparthi. New Aviation Policy by the Government of India is expected in the first quarter of 2008 and is expected to go beyond the earlier initiatives like privatization of airport to new path-breaking inno-vations like merchant airports by way of green-field projects. In short, excit-ing times are ahead for the flyers as well as insurance providers.