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Chapter 12 Marine and aviation reinsurance 12/17 Chapter

Any treaty reinsurance will have the terms and conditions available predominantly determined by the 12
Surplus treaties are
underwriting performance of the treaty. Surplus treaties are regarded as unsuitable for covering hull regarded as
risks. The values insured of the various aircraft covered under the original policy differ so significantly unsuitable for
covering hull risks
from one another that different cession amounts would be required and this would be an unreasonable
administrative burden. Usually, airline policies do not show separate premium rates but one uniform
premium rate for the entire fleet.
As in marine insurance, it is common for different treaty limits to be applied to the various types of
business covered under a quota share treaty. Sometimes the insurer will seek reinsurance at different
quotas for the various classes of insurance or risk categories. In such cases, the insurer would merely
promise variable quota cessions with a general framework of retention limits, maybe between 25% and
45%, which it chooses at its discretion. The wider the variability of its retention, the more freedom the
insurer has in choosing the composition of the portfolio ceded to the reinsurer.

Question 12.8
Why do reinsurers try to avoid writing variable quota shares?

Consider this…
Before you move on to aviation liability insurance, consider the effects that the events of 9/11 had on this market.

C2 Liability
In order to protect the new aviation industry from heavy losses for which they would be unable to obtain
Limit an airline’s
insurance cover, the Convention for the Unification of Certain Rules relating to International Carriage by liability to its
Air, commonly known as the Warsaw Convention, was signed in Warsaw on 12 October 1929. One of the passengers to a
reasonable figure
treaty’s main purposes was to limit an airline’s liability to its passengers to a reasonable figure. The
original limit was set at 125,000 gold francs, or approximately US$10,000.
Over the years, several amending protocols, supplementary instruments, rules and regulation have been
added which, collectively with the original Convention, are called the Warsaw System. Reference copy for CII Face to Face Training
Today, extent limits are usually too low, and governed by a series of fragmented rules and regulations
which are amended and implemented by various countries. In practice, parties typically agree to waive
all previously agreed limits on recoverable damages for passenger injury and death.
In addition to liability to passengers for death or bodily injury, the other principal liability coverage is
liability to third parties for death and bodily injury and property damage external to the aircraft. Aircraft
manufacturers may, for example, also be involved when action is taken against airlines. Arguments
raised against manufacturers are as follows:
• failure to exercise reasonable care in design of the product;
• negligence in the selection of material; and
• fault in construction or some shortcoming in the testing programme or in checking the finished
product.
Action can also be taken against other parties.

Be aware
Following the Lockerbie disaster in 1988, baggage security checks were deemed inadequate.

Therefore, other parties also have to purchase sizeable insurance cover, such as the products liability
already mentioned, hangar keepers’ liability and airport operators’ liability.

C2A Extent of cover and exclusions

The UK is a major centre for aviation reinsurance and a large volume of foreign reinsurance and
Large volume of
retrocession business is transacted in London. In recent years, this market has seen substantial foreign reinsurance
consolidation, with fewer insurers writing larger lines. Further, airline operators have continued to and retrocession
business is
increase in size, and ever increasing self-insured retentions and the use of captive insurance companies transacted in London
has blurred the distinction between what was traditionally classed as insurance and what is classed as
reinsurance within the current market.
In the immediate aftermath of 9/11, the withdrawal of third-party legal liability cover for war and
terrorists acts forced many governments to step in and effectively become guarantors of last resort to
ensure that their aircraft industry had sufficient coverage to continue flying.