In this write up, JOSEPH INOKOTONG highlights the complexity and nuances of offshore aviation insurance and emphasises the importance of careful risk assessment,policy selection, and claims handling.
INSURANCE is a way to manage and reduce financial risk. It is a contract between the policyholder and an insurance company. The policyholder pays a premium (a set amount of money) to the insurer, and in return, gets promise to be paid for certain expenses or losses if they happen.
Insurance provides financial protection and peace of mind, helping the policyholder to prepare for unexpected events or emergencies.
There are many types of insurance including Aviation insurance, also known as aircraft insurance. This is a type of insurance policy that provides financial protection to aircraft owners, operators, and passengers against various risks associated with aviation activities.
Aviation insurance typically covers hull damage or loss, damage or loss of the aircraft itself; liability, third-party claims for bodily injury or property damage. Passenger liability: Injuries or fatalities to passengers; Cargo liability: Loss or damage to cargo, and Ground risks: damage or loss while the aircraft is on the ground.
Aviation insurance policies can be customised to cover various types of aviation activities, such as: Private flying -Commercial aviation (e.g., airlines, charter companies); Business aviation- Flight schools; Aircraft rentals, and drone operations.
The cost of aviation insurance depends on factors like the type of aircraft, usage, pilot experience, and location.
To write insurance policies for the aviation sector, an insurance firm typically needs to meet specific requirements and have specialized expertise. Key factors include, specialized knowledge – understand the aviation industry, including aircraft types, operations, and risks. Licensing: obtain necessary licenses and approvals from regulatory bodies, such as state insurance departments or aviation authorities or the National Insurance Commission (NAICOM).
Capacity: An insurer must have sufficient financial resources and capacity to assume the unique risks associated with aviation. Expertise: Employ underwriters, claims adjusters, and other professionals with aviation expertise. Risk assessment: Develop specialised risk assessment tools and processes to evaluate aviation-related risks. Actuarialsupport: Have access to actuarial expertise to price policies accurately. Reinsurance: Secure reinsurance coverage to manage catastrophic risks and limit exposure. Industry
Connections: Establish relationships with aviation organisations, airports, and industry associations. Regulatory compliance: Stay up-to-date with changing regulations, such as those related to safety standards, security, and environmental concerns. Claims handling: Have a specialised claims handling process to address the unique needs of aviation claims.
In addition, insurance firms may need to meet specific requirements, such as minimum capital and surplus requirements; appointment by the Federal Aviation Administration (FAA) or other aviation authorities like the Federal Airport Authority of Nigeria (FAAN). Compliance with international aviation insurance standards (e.g., those set by the International Air Transport Association) is necessary. By meeting these requirements, an insurance firm can develop the necessary expertise and capacity to write insurance policies for the aviation sector.
The amount of money an insurer needs to underwrite a policy in the aviation sector can vary widely, depending on several factors such as type of aviation risk (e.g., commercial airline, general aviation, helicopter, drone); policy limits (e.g., liability, hull, passenger); aircraft value and type; operational scope (e.g., geographic area, number of flights) and insurer’s risk appetite and capacity.
However, there are some rough estimates of theminimum capital and surplus requirements for an insurer to underwrite aviation policies, which requires huge sum of money. Experts say small general aviation risks (e.g., private planes) may require $500,000 to $2 million, while medium-sized commercial risks (e.g., regional airlines) may need $5 million to $20 million; large commercial risks (e.g., major airlines) could require $50 million to $200 million, and specialty risks (e.g., helicopters, drones) may gulp $1 million to $10 million.
In terms of premium volume, an insurer may need to generate $250,000 to $1 million in annual premiums for small general aviation risks; $1 million to $5 million for medium-sized commercial risks; $10 million to $50 million for large commercial risks, and $500,000 to $2 million for specialty risks.
According to experts, these estimates are rough and may vary depending on the specific circumstances, stressing that insurers may also need to maintain additional capital and surplus to meet regulatory requirements, such as minimum capital requirements (e.g., $10 million to $50 million), and solvency margins (e.g., 100 percent to 200 percent of net premiums written).
It is important to note that these figures are estimates, and actual requirements may vary depending on various factors, including the insurer’s business plan, risk management strategies and regulatory environment.
Allowing offshore insurance for a country’s aviation sector can have both advantages and disadvantages. The positive sides to consider is that it increased competition because offshore insurers can bring new capacity and competition to the market, potentially leading to better rates and terms. Regarding specialised expertise, offshore insurers may have specialised knowledge and experience in aviation insurance, which can benefit the local market, and in terms of access to global markets, they can provide access to global reinsurance markets, which can help manage risk and increase capacity.
Other potential advantages include diversification, where such insurers offer alternative risk management solutions, reducing dependence on local insurers.
On the flip side, disadvantages regulatory challenges abound. Offshore insurers may not be subject to the same regulatory requirements, potentially creating an uneven playing field and the lack of local knowledge as the insurers may not fully understand local conditions, laws and regulations. Currency and payment risks: Offshore insurers may not be able to provide coverage in local currency, creating exchange rate risks.
In terms of claims handling, offshore insurers may not have a local presence, making claims handling more difficult. Allowing offshore insurers to cover critical aviation infrastructure or military risks may raise national security concerns and they may not contribute to local taxes, potentially reducing government revenue.
However, it might be advisable to encourage offshore insurers to participate in the aviation sector due to capacity constraints as it is often noted that local insurers lack sufficient capacity to cover aviation risks, necessitating offshore insurers to fill the gap.
In specialised risks, if local insurers lack expertise in specific areas (e.g., drone insurance), offshore insurers can provide such coverage. Global operations: If local aviation operators have global exposure, offshore insurers can provide coverage that matches their international footprint.
It might not be advisable when national security is at stake. If aviation risks are critical to national security, local insurers may be preferred to ensure control and oversight. Regulatory concerns: If regulatory frameworks are not robust, allowing offshore insurers may create uneven competition or risks. Local market development: If the local insurance market is still developing, allowing offshore insurers may hinder growth and development. Ultimately, the decision to permit offshore insurance for a country’s aviation sector depends on careful consideration of these factors and the specific circumstances of the local market.
For seamless operations of aviation insurance, a combination of options is often considered the best approach. Local insurer with global reinsurance support, partnering with a local insurer that has access to global reinsurance markets can provide the benefits of local knowledge, regulatory compliance, and global risk management expertise. Working with Lloyd’s of London or other global insurance hubs can provide access to specialised aviation insurance expertise, global capacity, and a wide range of risk management solutions. A joint venture or partnership between local and offshore insurers can bring together local knowledge, global expertise and increased capacity, creating a seamless operation.
Also, a well-defined regulatory framework with clear guidelines for aviation insurance can ensure that all insurers operate on a level playing field, promoting fair competition and seamless operations. Leveraging technology-enabled insurance platforms can streamline operations, improve data management and enhance risk assessment, making aviation insurance more efficient and seamless. Working with specialised aviation insurance brokers can provide access to expert knowledge, global markets and tailored risk management solutions, facilitating seamless operations. By combining these options, aviation insurance operations can become more seamless, efficient and effective, ultimately benefiting the aviation industry as a whole.
Aviation insurance underwriters assess risk based on factors like aircraft type and age – pilot experience and training; flight operations (private, commercial, cargo); geographic location, safety record; Policy conditions often have conditions like: maintenance requirements, pilot training and experience requirements, flight restrictions (e.g., altitude, weather); Reporting requirements (e.g., accidents, incidents); Claims handling: Aviation insurance claims can be complex, requiring timely notification, detailed documentation, investigation and assessment, repair or replacement of damaged aircraft or components.
Regulatory compliance: Aviation insurance must comply with local and international regulations, industry standards (e.g., ICAO, FAA) and insurance laws and regulations.
Aviation insurers often reinsure with other companies to manage risk, increase capacity and reduce exposure.
Deductibles and Limits: Policies often have deductibles and limits, which affect premium costs, and impact claims payouts. Some policies offer additional coverage for war and terrorism, cyber risks and environmental damage. Insurance market trends: The aviation insurance market is influenced by industry growth or decline, technological advancements, regulatory changes, global events (e.g., pandemics, conflicts).
These points highlight the complexity and nuances of aviation insurance, emphasising the importance of careful risk assessment, policy selection and claims handling.
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