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Cyclone impact: Insurers will see rise in aviation claims, but reinsurance will offer cover

While there is a fear that premium refund would mean that insurers are exposed to higher risks, the reinsurance cover would come handy.

June 03, 2020 / 05:39 PM IST

With two cyclones hitting India in quick succession, it will lead to a rise in claims for insurance. Among those claiming would be the airlines whose planes have been parked at the various airports.

Insurers, however are not expected to take a big hit on their balance sheets due to adequate reinsurance support.

"Claims are coming in. However, since we have reinsurance covers to meet the needs there will be minimal impact on the books," said the head of claims at a large private insurer.

Also Read: Live updates from Cyclone Nirsarga in Maharashtra

Cyclone Amphan hit West Bengal and parts of Odisha on May 20 which caused severe damage to property. Airlines parked at the Kolkata airport were also damaged and a few submerged in water. Claims have started to come in for these damages and initial estimates indicate aviation claims of Rs 50-60 crore.

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Aviation insurance provides coverage for hull (aircraft) losses as well as liability for passenger injuries, environmental and third-party damage caused by aircraft accidents.

Depending on the type of company, there are various type of aviation insurance products available in the market. These include insurance for the crew members, passengers, spares (aircraft equipment), hull all risk cover for any damage to the aircraft.

The insurer in turn takes a reinsurance cover as a protection against high claims. This is proportional to the cover offered to the client. For example, if an airline has $10 million of insurance, a similar risk cover will be taken by your insurance company.

Also Read: Here's how Mumbai airport braced for the cylone impact

The way a customer pays premium to the insurer, the insurer in turn pays reinsurance premium to a reinsurer. For large risks like aviation insurance, usually insurers offer covers as a consortium with risk being divided based on individual capacities of the companies.

Due to the Coronavirus (COVID-19) outbreak, several aircraft are grounded even as domestic flights have slowly resumed. However, the cover for the grounded planes continues for theft/vandalism and physical damage due to natural catastrophes like earthquake, floods, cyclones among others.

Depending on the size of the cover, the premium ranges from 0.002 percent to 0.004 percent of the sum assured. But when the plane is grounded the risks are much lower.

Hence, what the airline companies get is lay-up refund. This depends on the amount of time that they are grounded. Typically, if an aircraft is laid-up for a period of 30 days or more, a proportion of premium is offered as a refund.

While there is a fear that premium refund would mean that insurers are exposed to higher risks, the reinsurance cover would come handy.

Also Read | Cyclone Amphan impact | Insured losses may touch Rs 350 crore

"We have handled events like the Chennai floods where there was a massive damage. Reinsurers have also handled bigger natural catastrophe claims including that in Nepal where damages were reported to aircrafts as well. Therefore the cyclone damages would be covered without major disruptions," said the Senior Vice-President of corporate claims at a mid-size general insurer.

Natural catastrophes, including the floods in Chennai (2015) and Kerala (2018) are estimated to have led to a Rs 700 crore of aviation insurance claims. Here, Chennai floods itself had Rs 400 worth aviation claims with several aircrafts and private jets being damaged.

Between 2014-2019, both air crashes and natural catastrophes have led to insured loss of Rs 2,500 crore in India's aviation sector. India's aviation insurance market is estimated to be Rs 7,000 crore.
M Saraswathy
first published: Jun 3, 2020 05:37 pm

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