Why does aviation insurance require special risk management? | The Financial Express

Why does aviation insurance require special risk management?

Passengers also have the choice to select insurance protection for their air travels, as all air carriers now offer this option with claim benefits of varying degrees.

Why does aviation insurance require special risk management?
The insurance industry has come a long way in supporting the growing demands of the aviation industry in India, including Airlines, Airports, Aerospace Manufacturing, Space and other supporting segments.

By Anant Pawar, Executive Director, Global Insurance Brokers Pvt. Ltd.

The insurance industry has come a long way in supporting the growing demands of the aviation industry in India, including Airlines, Airports, Aerospace Manufacturing, Space and other supporting segments. Currently, India is the 3rd largest domestic civil aviation market in the world, and passengers now have multiple choices to select from. Passengers also have the choice to select insurance protection for their air travels, as all air carriers now offer this option with claim benefits of varying degrees. Technology is playing a big role in offering the convenience of buying such insurance, and there is an upward trend of passengers opting for such insurance cover at a nominal premium. On the regulatory front, the government has enacted various regulations which give relief and benefits to passengers when flights are delayed beyond certain hours or cancelled.

However, all the airlines, as well as the industry as a whole, face a distinct set of business risks and challenges that continue to be shaped by changing economic conditions and evolving consumer preferences. Many other unpredictable and malicious threats persist that could potentially inflict damage on the airline industry, such as cyber-attacks, data breaches, and supply chain disruption. So, spotting strategies for risk management in the aviation industry is essential and unavoidable.

How aviation insurance started and the current industry scenario

Since the liberalisation of the insurance industry in 2000, Indian insurers, especially GIC Re and four PSU Insurers (the Oriental Insurance Company Limited, National Insurance Company Limited, The New India Assurance Company Limited and United India Insurance Company Limited), have consistently grown their capacity to underwrite aviation insurance. They have supported not only Indian clients but also served aviation clients around the world. Selected large private players joined hands subsequently. However, as we complete two decades of liberalisation, there are only a handful of private insurers who are active in the aviation insurance space. Some exited this space following unpleasant experiences of large claims. International reinsurance markets, especially London and Europe, have played a major role in adding to the capacities of Indian insurance that supported building the domestic capacities.

Why does aviation insurance require special risk management

Aviation insurance being a catastrophic class of insurance, distribution of risks is the key to a stable and consistent flow of insurance capacity for any part of the world. Insurance intermediaries in India are playing an important role in risk distribution apart from providing all the required support in day-to-day servicing requirements. Whilst PSU insurers have been leading the efforts to support the aviation industry, it has not been without challenges that follow the growth trajectory. The Indian Aviation Insurance industry is not isolated from the effects of global events such as the Financial Crisis of 2008, the 9/11 WTC claims and now the Russia-Ukraine war and its potential impact due to large-scale perceived losses within the aircraft leasing and financing industry.

We have also seen the US and Chinese governments’ interventions internationally in providing insurance solutions for terrorism and related risks to airlines when commercial insurance carriers found it unviable and challenging to cover aviation risks. Whilst in India, we have not seen such a scenario yet. However, the possibility in future cannot be ruled out if something of catastrophic nature happens.

It is not only Indian Air Carriers that are creating enhanced demand for large insurance limits and complex insurance coverages, but also leading the pack are aerospace manufacturing units spread across various parts of the country. With the Government’s focus on domestic manufacturing, large international companies, including aircraft, engine, and other critical component manufacturers, are either setting up shops on their own or tying up with Indian businesses to scale up their domestic presence.

One of the critical aspects of the aviation industry is that it attracts risk, which can be catastrophic in nature. Every company, irrespective of its size and complexity of operations, needs to adopt carefully evaluated risk management and insurance purchasing strategies to mitigate the risks that can threaten the very existence of the enterprise.

Equally, insurance companies providing coverage for aviation need to carefully evaluate their underwriting considerations and the associated financial risks to their balance sheets when offering aviation insurance products. Insurance carriers need to invest in building capabilities and skilled underwriters who can understand the nuances of the growing complexities of airline and aerospace enterprises and build a healthy and sustainable portfolio that will not only maintain the steady flow of insurance capacity at a competitive price but will also generate healthy returns on capital deployed in covering such risks.

To conclude, as India is aiming to achieve its rightful place in the international aviation arena, it is expected that demand for aviation insurance will grow substantially. Indian insurance market and the supporting ecosystem – be it insurance intermediaries, loss adjusters, legal, or other technical advisors associated with servicing insurance placements and handling insurance claims need to gear up for the next level of growth.

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