The Hindu Business Line : Aviation sector’s reinsurance premiums may climb 5%

In the event of claims, the primary insurers would be expected to meet the liabilities out of their balance-sheets. They are later compensated by the reinsurers.

More turbulence: There are inherent risks in aviation risk placement stemming largely from the possibility of claims.

C. Shivkumar

Bangalore, Oct. 15 The domestic aviation sector may have to face more turbulence as reinsurance premiums are expected to escalate by 5 per cent.

The possibility of further increases was hinted at by one of the world’s largest aviation reinsurers, AXA Group.

The Chief Executive Officer of AXA’s Asia-Pacific General Insurance, Mr Jan Van Den Berg, said, “Aviation risk premiums will go up by another 5 per cent and will continue to rise till losses are recovered.”

That premium increases were inevitable was highlighted in a report by global aviation reinsurance broker Aon Aviation and Aerospace. “Even premium increases of 20 per cent are unlikely to make 2009 a profitable year for underwriters,” the report states.

Global insurers’ losses are estimated at $1.86 billion this calendar year, against $962 million for the whole of last year. The report said, “The losses also affect the reinsurance programmes that protect and underpin their (reinsurer) business plans.”

Apart from underwriting losses, Mr Den Berg said, “The losses have also been compounded by investment losses.”

Mounting Losses

The combined underwriting and investment losses imply that global aviation reinsurance capacities are still shrinking. As a result, Mr Den Berg added, there was little alternative other than increases in aviation risk premiums that could continue well into 2010.

Air India faced the situation of escalating premium despite using the bid process as aviation insurance is entirely reinsurance driven.

A consortium led by Reliance General Insurance, an Anil Ambani group company, won the mandate for Air India risk cover despite stiff competition from public sector insurers.

Private sector insurers, led by Marsh, had quoted a premium of slightly less than $24.9 million. The Reliance-led consortium had quoted a premium of $24.3 million for a sum assured of $8.7 billion for 134 aircraft.

Despite the bid process, the premium was up from the previous year’s $19.5 million for 140 aircraft. The cover included hull, liability and third party liabilities.

Sources said the reinsurer for the private sector consortium was Mitsui Sumitomo. But the sources said the retention with the lead insurer would only be about 7 per cent. The remaining was spread out among 30 reinsurers. Domestic retention is only 10 per cent. The rest is ceded to the reinsurer.

Sources said there were inherent risks in the aviation risk placement stemming largely from the possibility of claims. In the event of claims, the primary insurers would be expected to meet the liabilities out of their balance sheets. They are later compensated by the reinsurers.

However, in the event of even a single reinsurer default, the liability would accrue to the primary insurers’ net account, the sources added, with potential capital implications.

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