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Transportation of Passengers

Plane crashes are shocking. How do insurance companies deal with this risk?

03.11.2015

Many are asking – is flying becoming more dangerous?

Statistically speaking, flying is still very safe. When you compare the number of people who travel in relation to the number of people involved in accidents, it is still true that the most dangerous thing about flying is driving to the airport in your car. Of course, the consequences are always very dramatic, as many people die when an aeroplane suffers an accident.

How is an aeroplane normally insured?

In aviation insurance, we make a distinction between

  • Hull insurance – for the aircraft itself
  • Passenger legal liability – if passengers are harmed
  • Third party liability – which covers damage caused by the operation of an aircraft, for example if it crashes on the ground.

There is also the aircraft hull war market, where special cover can be bought for losses arising from acts of war or terror against an aircraft. This insurance protection also covers civil war, sabotage, strike, civil unrest, internal commotion, hijacking, etc. Losses caused by nuclear weapons are always excluded. Liability policies generally exclude war, terrorism and similar situations. Cover can usually be restored in full with respect to passenger legal liability against payment of a corresponding premium, but sub-limits are set for third-party liability. Airline insurance policies usually cover the whole fleet and are typically concluded for a period of one year. The sum insured for an aircraft varies greatly – depending on type, age, and technical equipment. Coverage is also offered on the basis of an "agreed value" – this means the airline decides on the amount of the sum insured. This may reach US$ 250 million or more. Insured indemnity limits for personal injuries also vary greatly, and may reach up to US$ 2.5 billion.

How are aviation risks assessed?

Many factors play a part in our assessment of airlines. For example, we consider the size of the fleet, the age of the aircraft, and how much they are still worth. Other matters to be considered are: How often are they serviced, and by whom? What claims have there been in the past? What routes are flown and – above all – where will the aircraft be starting and landing? Starts and landings are the most risky part of a flight. But soft factors are also important. We want to know which pilot training an airline prefers; whether it sends its pilots to the simulator as often as stipulated, or more often; and whether the airline attempts to create an open culture in which it is possible that the pilot listens to the co-pilot when he tells him they are flying towards a mountain. There are varying cultures when it comes to dealing with risk. All of these things go into our calculation of the premium.

How important is the age of the aircraft?

Age is not at the forefront in assessing risk – the most important thing is how the aircraft is maintained, inspected, and the overall safety standards applicable at the airline in order to maintain the technical safety of the aircraft.

Aircraft accidents are very expensive. How are such large risks spread across the insurance community?

There are three main constellations:

  1. A primary insurer takes on 100% of the policy, and then divides that part of the risk that it does not wish to hold between other insurers, who all then technically act as reinsurers.
  2. Several primary insurers are involved in the policy, with one acting as lead insurer. When there is a loss claim, it is handled by the lead insurer.
  3. Some countries have a statutory requirement that insurance policies — such as for an airline – should be issued by a local insurer. When this local insurer has neither the financial strength nor the specific know-how to take on this transaction, the risk is passed on to the international aviation market in the form of reinsurance. A lead reinsurer then often takes over the administration and claims settlement.

Most primary and reinsurance policies are placed by specialist brokers, and the London market plays a major role in aviation insurance.

Statistics on aviation accidents can be found here:

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