Soaring the skies may include bearing with significant turbulence
We are all aware of the conventional types of short-term insurance as the majority of the industry is built off the back of motor and household insurance. There are a number of factors changing the face of the specialist insurance industry, and brokers need to be aware of these factors before consulting with clients.
In an effort to raise the profile of this, the Insurance Institute of South Africa, in conjunction with the South African Underwriting Managers Association, held its first insurance forum of 2015 on 24 February which drew attention to this much needed area.
Soaring into the skies
For many years, air travel has always been the safest way to travel, and in many instances it still is. If we take the average incident ratio from air travel and we compare it to the number of accidents we see on our roads, we can see why this is still the case.
However, recent events in the world have changed the outlook of the public towards air travel. The Malaysia Airlines incidents involving MH370 and MH17, and the Air Asia QZ8501 are fresh in the mind of all and are making us think twice before taking to the skies. However, this does not deter travellers as 2013 statistics show that air travel accounted for 3.1 billion passengers in 2013.
Digging into the metallic dirt
While conventional short-term insurance is optional, insurance in the air travel industry is compulsory. Many regions in the world do not permit any air travel without insurance, and no company may operate in South Africa without relevant insurance.
Biko Meletse, Aerospace Practice Leader at Willis, points out that the world of airline insurance is complex and involves specialised skills. “Some of the challenges which plague the industry are that it is cut-throat and it is a commodity driven business. Therefore, pricing is the key to success in the industry. There is also a huge capital investment which is needed to be successful in the industry. The introduction of the A380 by Airbus has changed the industry as it has the capacity to carry 3 000 suitcases and 853 passengers on each trip. However, it costs a company over $400 million to invest in this aircraft,” said Meletse.
Other issues which plague the industry include volatile fuel costs which rise and fall as the oil price increases or decreases.
He adds that the catastrophic events of the past two years have posed a significant threat to the survival of companies which operate in this space. The reputational damage of these events can in itself be catastrophic to those employed by the industry. This has a significant impact because of the highly emotive nature of the events.
“It is complicated to predict where the risks lie in this industry because there are no patterns. The risk is spread over a large area and involves a number of different jurisdictional elements. There are significant legal costs associated with this industry which is typified by long tailed claims,” said Meletse.
Keep the claims at bay
The unpredictable nature of the types of the concentration of risk in this industry does cast a certain cloud of apprehension in the industry. Over the past five years, the majority of the risk has been concentrated on the Asian region. But if we had to go back five or ten years ago, we would see that the risk would be concentrated on another area.
But we can make precautions. Heather Manson, Director at Norton Rose Fulbright, pointed out that Africa had the second fastest growth in air travel in 2013 behind the Middle East. She added that this is important to note because one in every third passenger is an international traveller who are either wealthy tourists or influential businessmen. This increases the nature of the claims in terms of value, litigation and the duration of settling the claim.
Staring the legal framework in the face
The legal framework regarding the airline industry is also complex in nature. The first point of departure is to ascertain whether the loss occurred in the air or on the ground. Then it is a case of determining if the claim is against a loss to the aircraft or is the claim related to an incident involving a passenger.
“With regards to passengers, the first question that the insurer has to ask is if there has in fact been a loss. They then need to ascertain if they are liable for the loss from a direct liability standpoint or from a vicarious liability standpoint. These are important issues which need to be assessed in depth before approaching legal action or defence,” said Manson.
The liability in this industry is huge and airlines need to ensure that they are sufficiently covered. Manson pointed out that according to the Montreal Convention of 1999, an airline would be guilty until proven innocent and there are extended jurisdictional considerations to take into account. While this is hard to calculate, Manson felt that a safe rule of thumb is $2 million per passenger.
This is significant if we take into account that Airlines regularly fills an A380 on flights from to New York and other top tourist destinations. If we take Manson’s average coverage per passenger, then an air carrier is looking at $1.7 billion worth of coverage per flight. One would assume they would have more than one full flight a week.
Editors Thoughts:
While this is a specialised area of insurance, which requires a specific set of skills, brokers in this area need to keep abreast with changes in the industry as there are many mitigating factors which determine the price at which cover is provided, and the type of cover that is needed by companies. One advantage is that it is an industry where there will always be a demand. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
