I felt sort of priviledged having experienced underwriting some aviation risks over the last couple of years. So it is a feel good thing for me to pen something about aviation risks…..(by the way, that’s not me!) hopefully getting them in the correct order here! It is good to mention here – Air France disaster compounded by Air Yemeni crash tipped the aviation markets over the edge. “Ambulance-chasers” are pushing up liability claims awards to figures nearing those of US / Canada. Helicopter losses amounted to USD 350 million in the first half of 2009 bringing a half year total aviation losses to USD1.8 billion against an annual projected aviation premium of USD1.2 billion. All these sounds serious BAD!
What are the important ingredients for getting those important underwriting tasks done efficiently? Firstly, international reinsurance brokers (having the necessary presence in the London markets) are important for developing the rates, terms and conditions, and in completing the necessary overseas reinsurance placement. It is best to work with an experienced foreign broker with enough exposure (I would look for something more than 10 years aviation exposure…. for comfort) as well as the right networking within the London markets. Their claims handling experience is indeed very important, especially most aviation claims are extremely sizeable that run into hundreds of millions USD, especially those concerning third party liability.
While a good capable reinsurance broker is important, the retail broker whom you work with is equally important to ensure a smooth flow of information and striking an optimum level of technical understanding. Unfortunately, we do not have many capable aviation underwriters and broker around town capable of providing the right advice and proficient with the airline and general aviation industry, in order to articulate well with their aviation clients. With the gradual hardening of rates around the world aviation insurance markets, the broking fraternity must do more in order to ensure the customers’ interests are well provided for.
Generally for mid-range aircraft, there are two main types of policy – (1)Hull, Spares & Third-party liability (usually in combined single limit), and (2) War & Allied perils.
The Placement process – Caution should be exercised as placement at overseas markets require compliance with JPI/GPI 22 – Optimisation of Malaysian local retention and capacity. In Malaysia, we have the Malaysia Aviation Pool (MAP) (Main capacity supplier – Catlin and manage by MNRB) with some USD25 million capacity follow by Asia Capital Re (M’sia) with a small line value of ~ USD12 million. Since substantial shares ended up overseas, it is best to keep proper records for monitoring of all these foreign reinsurers – you do not want some non-rated foreign companies based in Russia or unknown places taking a share of it. A trusted “A” rated securities (of reinsurers) are inportant for RBC computation of Supervisory CAR. Ensure that the alloted % for placement are completed by the broker, and watch out for those currency exchange rate; you don’t want to miss out a 0.05% of 100% which may leads to unprotected hundred-odd thousand of USD losses to the bottomline. Before I forgot, Scheme Manager of the Malaysian Large & Specialised Risks (LSR) Scheme must be notified and approval granted before the commencement of any market placements.
During placement, it it worth the while to monitor carefully for differential in rates as applied by the various particiapting reinsurers. Normally in the hard markets rates given by reinsurers in Asia are lower than those insisted by Lloyds or the London market facility; although the core slips are the similar. Care must be taken where this differential rates are averaged out to more than 4 decimal points.
Next are the Cover-note’s details – Will not touch on the actual subject of Interests insured. However, it is good to note here that the “Combined Single Limit” mentioned above also provides sub-limit covers for personal injury for non-passengers (AVN60A), medical expenses, cargo/freight/mail legal liability and baggage/personal effects as well. The following clauses and conditions are worth noting:
The security details with the signed line % denoted and all participating reinsurers having stamped their company’s position with a written line %.
Reinsurance Underwriting & Claims Control Clause – AVN41A
Premium Payment Clause – AVN6A
Profit commission on Renewal – AVN88
Jurisdiction – Malaysian courts and laws
Subject always to Airworthiness Regulations
Additional Insureds, waivers of subrogation, hold harmless and indemnification agreements, breach of warranty endorsement (AVN28B), lease agreement (AVN67B), loss payees, and cross liability clauses (AVN63)
Cut through clause – basically apply in event the original insurer is insolvent, and the reinsurers shall pay to the person(s) named as loss payee (s) under the original insurance….
It is good to get your reinsurance broker to provide you with a AVN handbook for references.
Having gone through the main details, the underwriters’ checking process would have been completed…. of course we cannot be checking for and on behalf of the retail broker! A point to note, it is not uncommon for the reinsurance broker to request for the underwriter’s policy number(s) during the signing down process – basically is for compliance reason.
Ultimately when the sign down process is completed, the policy must be issued mirroring those of the placement slip (or cover note) so that coverage “gaps” do not exist.