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Chapter 12 Marine and aviation reinsurance 12/15 Chapter

Question 12.6 12
When allowing aircraft to be covered on an agreed value basis, why does any moral hazard presented by the insured
become a consideration?

Generally, reinsurers allow agreed values in a hull policy if the aircraft is new and of a type which is in
demand. The market value of the aircraft is unlikely to fall markedly during the initial period of the
insurance and the reinsurers are not, therefore, likely to be at any financial disadvantage in the event of
a total loss. As aircraft become older and their market value declines in relation to their original new
value, it becomes difficult to establish a realistic agreed value. Another difficulty may arise where an
aircraft is old or is insured for less than its replacement value.

Example 12.2
The cost of repairing a given amount of damage to a Cessna Citation Mustang is the same irrespective of the insured
value. To rebuild a wing will always cost the same, whether it is for a brand new aircraft or one that is older. The cost
of a new wing is a small proportion of the value of a brand new aircraft, but will be a larger proportion of the value of
an older model.

So, the lower the value of the aircraft in relation to its original value the more easily, with any given
The lower the sum
amount of damage, that aircraft will become a total loss. The lower the sum insured, the higher the total insured, the higher
loss risk and this must be taken into account when the premium is calculated. In many branches of the total loss risk
insurance this problem is dealt with by an average clause. The aviation market’s version of the average
clause was called a component parts clause AVN 4. However, this clause is rarely used and only on
vintage-type aircraft or those of Eastern European manufacturers, as most aircraft are now insured on an
agreed value basis.
The majority of aircraft are rated for hull damage at an amount per cent of the insured value of the
machine, the rate varying particularly with the type of flying and past experience.

C1A Extent of cover and exclusions
For facultative placements, the reinsurer often imposes the aviation reinsurance underwriting and claims Reference copy for CII Face to Face Training
control clause, AVN 41A or AVN 41B, if the Insurance Act 2015 applies (see appendix 12.3 on
RevisionMate).
Be aware
Under its terms, the reinsurer is able to control claims negotiation and settlements, determine the scope and details
of the original policy wordings and, most importantly, discover the original policy rates or premiums.

Question 12.7

Why might a reinsured be reluctant to agree to the terms of AVN 41A?

Air cargo and specie can be the object of a reinsurance treaty, the latter usually at special conditions.

C1B Underwriting considerations
All the factors and general information that would be material to the negotiation of property and liability
risks that we have looked at in previous chapters apply equally to aviation risks. These include:

• details of the reinsured;
• the nature and composition of the portfolio to be insured;
• claims experience showing paid and outstanding losses;
• original policy sums insured or limits of liability; and
• scope of original cover given and exclusions.
In aviation, excess of loss reinsurance does not have the same inadequacies as surplus reinsurance and
there is no distinction between working layer and catastrophe covers. However, due to the potential
variety of individual risks within any one class, other specific information should be available. The
coverage required under an excess of loss programme depends on two factors:
• the reinsured’s retention per aircraft; and
• the extent to which the reinsured must anticipate unforeseen accumulations as a result of shares
accepted from various sources.