Insurance Article, The Insurance Times 2022, The Insurance Times August 2022

A STUDY ON INSURANCE SYSTEM OF AVIATION SECTOR IN INDIA

The aviation industry consists of almost all aspects of air travel and the activities that help to facilitate it. It includes the entire airline industry, aircraft manufacturing, research companies, military aviation, flight operations, air traffic and much more.

India is the 7th largest civil aviation market in the world and is set to become 3rd largest by 2025. The industry has grown significantly over the last two decades and even after getting hit by the pandemic the industry promises to bounce back to its normal by 2023 end. There are seven scheduled airlines, four reginal airlines and three cargo airlines in India with a more than two dozen charter airlines owning small business jets in their fleet. These airlines have 722 aircrafts of all types- narrow and wide body.

Domestic and International passengers ferried in the last 6 years by Indian Airlines.

Fiscal Year Domestic International
FY16 168.89 54.72
FY17 205.68 59.29
FY18 243.28 65.48
FY19 275.22 69.48
FY20 274.5 66.54
FY21 105.25 10.13

Advantage for the sector:

  1. Robust demand
  2. Increasing investment
  3. Opportunities in MRO – Maintenance, Repair and Operations
  4. Policy Support

Aviation insurance

Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the risks involved in aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.

Factors that determine aviation premiums are-

  • Type of aircraft
  • Value of the aircraft
  • of engines in the aircraft
  • Seating capacity of the aircraft
  • Parking slot of the aircraft
  • Use of the aircraft

Indian Insurers have come a long way in developing the market capacity for aviation insurance business and as India’s growth story continues, Insurers have kept pace with the growing demand from buyers in India. Today the Indian market is playing a key role in supporting not only buyers in India but also buyers in the sub-continent, including major support to the SAARC region.

On the Airline front, pricing continues to be driven by leading international markets especially in London, as Indian Insurers continue to off load major risks to international companies mainly in the European sub-continent, with insurance brokers playing a very important role in the entire process.

Types of Insurance policy offered-

  • Public liability insurance
  • Passengers’ liability
  • Hull all risk
  • Hull total loss only
  • In-flight insurance
  • Liability only

Challenges for the insurers

Aviation as an industry itself is a challenge let alone the insurance related to it. The industry is so volatile and unpredictable that having a farsightedness is nothing but being hypothetical. The market is cruel due to heavy taxes, tough competition and unprecedented events such as pandemic. When the industry suffers an economical hit, the insurance takes the collateral.

In India, not every general insurance company provides the aviation cover. Therefore, there is a lack of aviation pool. The claims are very rare and happens once in a while. Still some insurers fear to enter the segment where claims have a potential to bankrupt the entire company. And that is why the insurers who are active in the segment goes for the reinsurance cover.

General Aviation claims in 2008 exceeded ₹500 million and started 2009 on a bad note with claims in first five months exceeding ₹350 million. As against this, past 10 years average general aviation losses are hovering around ₹400 million. When we compare these claim figures against the total general aviation premium in India, one may come to a conclusion from the insurer’s perspective that general aviation is profitable over the last 10 years period. This may not be true for all insurers, especially considering the fact that 10 years average loss figure consists of two or three major losses in each year.

Claims figure of three biggest aviation insurer in India for the last 2 years

Claims Incurred (in ₹ ‘000)
  BAGIC HDFC ERGO NEW INDIA
  FY20 FY21  Change (%) FY20 FY21   Change (%) FY20 FY21   Change (%)
Claims Paid Direct 155704 222513 42.9 132705 51289 -61.4 1022400 2600473 154.3
Reinsurance ceded 93454 99653 6.6 126177 51193 -59.4 693139 2059193 197.1
Net Claims Paid 62250 122860 97.4 34313 15864 -53.8 335166 553163 65.0
Change in Claims outstanding 90940 68768 -24.4 88080 86863 -1.4 121029 272217 124.9
Total Claims 153190 191628 25.1 24052 14647 -39.1 456195 280945 -38.4

Reinsurance claims- GIC Re and Munich Re Claims schedule

Claims Incurred (₹ ‘000)
  GIC Re Munich Re
  FY20 FY21 change % FY20 FY21 Change %
Reinsurance Accepted 10218839 9628835 -5.8 20439 53564 162.1
Net Claims Paid 8158622 7580103 -7.1 10232 27132 165.2
Total Claims Incurred 7872111 12016301 52.6 13007 56254 332.5

Conclusion

With excessive insurance market capacity and increased level of competition the gap between General Aviation premiums and claims is narrowing very fast and it remains to be seen which direction the market will move in the near future. The Airline market worldwide is witnessing rate hardening and airline buyers in India are expected to follow the international trend and treatment of their peers globally.

The unbridled growth in the aviation sector has come as a bonanza for the insurance sector. Thanks to capacity addition and the entry of new aviation players, a host of insurance companies are eyeing this growing market to offer insurance cover to new planes that are being brought to India.

India is expected to become 3rd largest civil aviation market by 2025. The insurers and reinsurers need to improve their strategies and diversity of products offerings.

Though India’s contribution to the total global insurance premium paid by airlines which stands at US $5.86 billion is miniscule, the growth in aviation premium pay-out is highest in China followed by India.The aviation sector is enlarging its scope and scalability and therefore, the entry of more numbers of insurers is a must to balance the growing market.

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