Aviation insurance losses touch an all-time high as claims hit Rs 3,700 crore

A series of major and minor air-crash incidents have led to aviation insurance losses touching an all-time high of Rs 3,700 crore. The insured loss of close to Rs 664 crore in the recent AI Express crash led to a further spike.

Insurance sources said that 2014-2020 has been the worst six years for the aviation insurance segment. The size of the Indian aviation insurance market is estimated to be around Rs 8,000 crore.

The last crash occurred in August 2020, when an Air India Express Vande Bharat flight with 191 passengers and crew from Dubai, skidded off the tabletop runway and fell into a 50-feet valley, breaking into two, while landing at the Karipur airport, Kozhikode, Kerala. “The crash led to a claim of close to $89 million, of which about 57 percent of the payout pertained to the hull loss and baggage claims, passenger deaths and injuries accounted for the rest. This is among the highest claims and will lead to a rise in premiums from FY22 onwards,” added a senior public sector insurance official.

What is aviation insurance?

Aviation insurance provides coverage for hull (aircraft) losses as well as liability for passenger injuries, environmental and third-party damage caused by aircraft accidents.

Depending upon the company, there are various type of aviation insurance products. Insurance for crew members, passengers, spares (aircraft equipment), and hull all-risk cover for any damage to the aircraft are the most common.

For small aircraft flying passengers for business or leisure, there are niche aviation insurance covers available for loss of life and aircraft damage. Helipads are also eligible for insurance cover under this category. Depending on the size of the cover, the premium ranges from 0.002 percent to 0.004 percent of the sum assured. There is a revision in annual premiums depending on the claims in the previous fiscal.

The aviation insurance is usually done in a consortium (by a group of insurers) due to the size of the cover.

Rise in air accidents

In India, the past few incidents include damage to aircraft parts of Jet Airways and SpiceJet in separate incidents, apart from a Su-30 fighter jet crash and KingAir C-90 crash, among others. They have also led to losses of around Rs 2,500 crore.

The Sukhoi Su-30 crash in July 2018 had led to insurance losses of Rs 250 crore. New India Assurance, which is the country’s largest aviation insurer, was liable to pay the losses.

The Chennai floods in December 2015, when several aircraft and private jets belonging to companies were damaged, saw insurance losses of Rs 400 crore. Due to a rise in air crashes and damage due to flights skidding from the runway, there has been a cumulative increase in the risk rating for airlines. At the time of renewal of insurance policies, this risk rating is taken into account. Higher the risk rating (directly proportional to past claims), greater is the insurance premium applicable. Reinsurers which provide risk cover to insurers against large risks, like aviation, also increase premiums when there are higher claims.

How will this affect airlines?

Whenever there is a loss due to a crash, reinsurance pays out the losses to the insurance company. However, the rise in claims would lead to reinsurance premiums increasing. This means that an insurance company would have to pay out a higher amount to get a risk cover against large losses.

This will directly be passed on to the airline companies in the form of higher premium amounts. So, the overall expenses for the airlines will go up, which will reflect in their balance sheets.