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12 12/18 M97/February 2018 Reinsurance
Chapter

Today, while full war risks cover remains readily available for hull and passenger liabilities, such cover
for third-party legal liability is expensive and limited. In general, cover of US$50m is obtainable, more
typically sub-limited up to US$150m; however, commercial options exist for up to US$1bn for service
providers and manufacturers, and up to US$2bn for airlines.

Activity
Take a moment to review the war, hijacking and other perils exclusion clause (AVN 48B) in appendix 12.4 on
RevisionMate.

C2B Underwriting considerations
Claims experience in aviation is strongly influenced by the incidence of total losses and the numbers,
Claims experience in
aviation is strongly age, and nationality of the passengers involved, resulting in possible substantial fluctuations in the
influenced by the experience of the account. The use of statistical evaluation over longer periods may also not be feasible,
incidence of total
losses as changes in aircraft sizes and passenger liability would impact greatly on any predictions. Therefore,
airline rates would, ideally, reflect the international market but this information might not be available to
a domestic insurance company. What such an insurer might do is to make use of facultative placements
in order to take advantage of such international reinsurance market knowledge.
Reinsurers are always particularly cautious in subscribing to any aviation reinsurance treaty without first
obtaining considerable detailed information, as there is always the possibility that the insurer may
abuse the facility by ceding poor quality business. Often, reinsurers commence business with a company
on a purely facultative basis, in order to establish contact and to have the opportunity of examining each
piece of business in detail. Thereafter, if the results warrant it, a form of treaty may be established.
In the case of large or medium-sized airlines, it is common practice to reinsure the hulls and the
liabilities together in one contract.
The premium is calculated on the total fleet value and the amount of flying expected to be done by those
aircraft during the policy period. No additional premium is charged or return of premium made unless
there is a substantial divergence from the figures given at the initial quotations, say, plus or minus 5%.
Other methods may be more appropriate in certain instances, especially when the risk operates for only Reference copy for CII Face to Face Training
short periods, and facultative reinsurance applies.

Example 12.5
Prototypes and machines in the course of development would either be rated on a flying-hour basis or a rate or
premium in full for a specified number of flying hours or number of days on risk.
Delivery flights from a dealer to the customer may involve a premium being charged for the flight involved rather than
pro rata of an annual amount. Long transoceanic flights in small aircraft are especially hazardous.

An alternative method of rating makes a charge for each take-off and landing or an amount per hour or
proportion of the hour that the aircraft flies, the theory being that the bulk of the risk occurs during
landing and take-off and therefore this is where the premium is earned. However, most privately owned
light aircraft do not accumulate many flying hours, meaning that a charge for take-offs and landings may
be most appropriate in this case.
Accumulations
The nature of passenger liability claims is that a number of passengers are likely to be affected by the
same event.
As we have seen, the limits applied to the carrier’s liability under the Warsaw Convention will be of little
assistance in dealing with passenger claims in most developed countries. Provided that the contract of
carriage is valid and the passenger was killed or injured on board an aircraft or while embarking or
disembarking, the liability of the carrier is indisputable. The onus of proof tends to be reversed and the
operator is considered liable unless it can prove negligence by the claimant. There are many instances
where the courts have set aside limits set out in Conventions but not the liabilities imposed, effectively
leaving the carrier with unlimited liability.
A tragic example of the manifestation of accumulations of passenger liability risk is where two
passenger-carrying aircraft are involved in a mid-air collision.