war risk insurance presentation education

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1. ASIBAS AMITY SCHOOL OF INSURANCE BANKING AND ACTUARIAL SCIENCE WAR RISK INSURANCE FACULTY MENTOR STUDENT Ms. Stuti Gupta Rathik Harsh Assistant Professor A2883117035

2. INDEX War risk ….3 Political risk ….4 War risk insurance ….5 Political risk insurance ….8 Impacts of terrorism on the insurance industry ....10 Aviation war risk ….14 Coverage under AWR ….15 Exclusions under AWR ….17 Features and figures (AWR) ….21 Insurance liability for specific aircrafts ….24 Marine war risk ….27 Bibliography ….30

3. WAR RISK War risk is the probability of loss of, or damage to, cargo, vessels and/or passengers from war. Specifically, war risks include derelict torpedoes, floating mines and events such as armed rebellion, revolution, hostilities and civil unrest . War risks like terrorism, insurrection, military coup and other events can create significant losses for personal and business property owners. Standard insurance policies do not always cover acts of war, in some cases it may be necessary to purchase separate war risk insurance .

4. POLITICAL RISK War risk falls under the broad category of political risk, which is one of several types of risk investors face. Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting  investment  returns could stem from a change in government, legislative bodies, other foreign policy makers or military control . Companies that operate internationally, known as multinational businesses, can purchase political risk insurance to remove or mitigate certain political risks. This allows management and investors to concentrate on the business fundamentals while knowing losses from political risks are avoided or limited. Typical actions covered include war and terrorism.

5. WAR RISK INSURANCE War risk insurance is an  insurance  policy that provides financial protection against losses from events such as invasions, insurrections, riots, strikes, revolutions, military coups and terrorism . War risk insurance makes the most sense for entities that are particularly exposed to the possibility of sudden and violent political upheavals. For example, companies operating in politically unstable parts of the world are exposed to an elevated risk of loss from acts of war. War risk insurance can cover perils such as kidnapping and ransom, sabotage, emergency evacuation, worker injury, long-term  disabilty and loss or damage of property and cargo .

6. Certain industries, particularly the aviation and maritime industries, may have more specific war insurance options tailored to meet their specific needs. For example, war risk insurance may compensate a ship’s owner for the full cost of a ship if the government of a foreign entity seizes the ship. If war activities force a ship into temporary detention, war risk insurance may cover that loss of time . War risk insurance generally has two components: War Risk Liability, which covers people and items inside the craft and is calculated based on the indemnity amount .

7. War Risk Hull, which covers the craft itself and is calculated based on the value of the craft. The premium varies based on the expected stability of the countries to which the vessel will travel .

8. POLITICAL RISK INSURANCE Political risk insurance provides financial protection to investors, financial institutions  and businesses that face the possibility of losing money because of political events. Political risk insurance protects against the possibility that a government will take some action that causes the insured to experience a large financial loss. Political risk insurance can cover many possibilities, such as  expropriation  (e.g., government confiscation of property), political violence (e.g., acts of civil unrest or insurrection), the inability to convert local currency and repatriate it, sovereign debt default and even acts of terrorism and war.

9. The underwriting of political risk insurance is a dynamic, growing business. As globalisation increases, there are more corporations doing more business in more places around the world with each passing year. Some of the changes occurring in the business are high growth, new product offerings, and a greater role for private capital.

10. IMPACTS OF TERRORISM ON THE INSURANCE INDUSTRY Terrorism has led to massive losses for the insurance industry. The attacks on Sept. 11, 2001 totaled $31.6 billion in costs for the insurance industry when taking all claims into account . No financial formula can perfectly gauge the risks of a terrorist attack in terms of the scope of damage . The September 11 attacks on the United States, in which four airliners captured by Al Qaeda suicide hijackers were used to attack targets on the ground. Approximately 3000 people were killed in total. The insurable damage from the event has been estimated to have cost $35.9 billion in insured in 2006 dollars . Only Hurricane Katrina has caused more insured damage from a single event.

11. After 9/11, premiums have risen as actuaries are more aware of this risk, especially in high-traffic areas that are more vulnerable to an attack, even though legislation has kept this increase manageable. Due to the lack of a major terrorist attack since 9/11, insurance companies have actually done well. They are receiving higher premiums but not paying out as much due to the lack of a major attack . Before the September 11 attacks, private insurers offered war risk policies essentially for free. It was easily available along with all their other coverage like hull loss and general liability. This ease of availability changed after the September 11 attacks .

12. Existing war risk policies were canceled one week later. Private insurers have refused to offer war risk policies for aviation at the same levels of coverage that they offered in 2001. In short, private insurance markets are no longer willing to provide the insurance airlines need for the fleets of aircraft they currently have and prefer to use .

13. AVIATION WAR RISK War risk insurance, which includes coverage for terrorist incidents, is absolutely essential for modern airlines. Airliners cost tens of millions of US dollars or more, as we will see below, and insurance is a precondition for financing. Buyers unable or unwilling to obtain adequate insurance for airliners, including war risk insurance, will be unable to obtain financing for the purchase of an airliner. An owner of an existing aircraft faces loan default and aircraft repossession if it allows its aircraft insurance coverage to lapse. In particular, airlines need war risk coverage for aircraft, passengers, crew, and third-party liabilities similar to what they have for ordinary accidents. 

14. COVERAGE UNDER AWR H ull insurance - which provides cover against loss of or damage to the aircraft itself and passenger and third party liability insurance. Cover for the airline’s liability will normally be arranged alongside the hull cover in a single policy with the same insurers insuring both the hull and liability risk. Hull cover is affected on a so-called all-risk rather than a named-peril basis with, broadly, the policy responding to the loss of or damage to the aircraft as the result of any accident.

15. Similarly, passenger/third party liability insurance will provide cover for all sums (up to the policy limit) the airline is legally liable to pay for damages arising from bodily injury (or death) or property damage to passengers or third parties caused by an occurrence and arising out of or in connection with the insured’s operations. An occurrence is frequently defined in airline policies as an accident, which results in bodily injury

16. EXCLUSIONS UNDER AWR S pecific exclusion clauses are always added to aviation policies, which introduce limits to what circumstances or events they will actually respond to. When the events of 9/11 unfolded in September 2001, most aviation policies included clause AVN48B , the war, hi-jacking and other perils exclusion clause (aviation). Very briefly, the clause states that the insurance policy does not cover claims caused by deliberate acts of violence, hi-jacking, seizure, etc.

17. In respect of the aircraft’s hull, part of the cover excluded by AVN48B was regained – written back into the policy – by the incorporation of clause AVN51 , extended coverage endorsement (Aircraft Hulls). However, this clause was normally only used for general aviation and was usually not included in an airline policy. Although AVN51 did reinstate cover for damage resulting from hi-jacking or any unlawful seizure of the aircraft, it did not reinstate cover for all of the war risk perils excluded under AVN48 and therefore did not provide airlines with the cover they needed.

18. Cover for full war risks needed by airlines could be affected under the Aviation Hull War and Allied Perils Policy (LSW555B) written in the London war market, i.e., generally by a different set of insurers. LSW555B provided cover for loss of or damage to the aircraft ‘…against claims excluded from the insured’s hull all-risks policy…’ by AVN48B except for any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.

19. LSW555B also excluded losses, damages or expenses resulting from war amongst the great powers – the UK, the USA, France, the Russian Federation and the People’s Republic of China – unless the aircraft was in the air at the outbreak of war, in which case, it was covered until it had completed its first landing.

20. FEATURES AND FIGURES (AWR) There are a number of features that set aviation insurance apart from other classes of insurance. The three most significant are the limited number of risks available to insure, the comparatively small size of the insurance class and the industry’s exposure to catastrophic events. At the end of 2003 - there were 765 airlines worldwide operating about 16,400 Western-built jet aircraft having a total fleet value of around $560 billion as compared to $580 billion in 2000 (before 9/11) Between 2003-2006, airlines grew at 2.5% (well below the average 8.2% between 1992-2000).

21. Airline fleets have only recently exhibited some significant expansion, with growth rates in 2007 estimated at around 11% bringing total insurable fleet values to approximately $670 billion. In addition, the exposure, in terms of fleet value, is dominated by a few very large airlines or groups of airlines, with the 20 largest accounting for well over 50% of the total value at risk. The 100 largest airlines account for 90% of the exposure as measured either by value or passengers carried. The aviation insurance market is very small in comparison to most other classes of non-life insurance. For the year 2007, the total gross annual premium for the entire aviation insurance market (including all airline, products and services, space, general aviation and hull war policies) was approximately $7.36 billion. These aviation premiums represent only about 0.1% of the worldwide insurance market.

22. W hile aviation as a class has one of the smallest premium bases in the insurance industry, it has one of the highest exposures to potential catastrophes. Some new Boeing 747s are insured for over $250 million and many wide-bodied jets will be insured for more than $100 million each, while for liabilities (passengers and third party liabilities), a combined single limit of $1.5 billion or $2 billion will be bought.

23. INSURANCE LIABILITY FOR SPECIFIC AIRCRAFTS VEHICLE TYPICAL PASSENGER CAPACITY FUEL CAPACITY (LITRES) ESTIMATED DAMAGE POTENTIAL (BILLIONS) Bombardier CRJ700 75 11028 2.74 Bombardier Q400 78 6526 1.62 Boeing 717-200 106 16153 3.45 Embraer 195 122 26020 4.01 Airbus A320-200 149 30190 6.46 Boeing 767-200ER 181 63000 15.65 Boeing 747-8 467 229980 57.13 Airbus A380-800 525 323546 80.37

24. Airline insurance spendings are a relatively small percentage of the total operating costs of airlines, all airlines combined paid approximately $2.3 billion for basic airline insurance in 2011. This translates into about $60 per flight or $0.80 cents per passenger. The price of insurance varies significantly from airline to airline, depending on the location of the airline, its size, fleet age and maintenance, safety record, the geographical spread of its network, and the level of deductible. Although, the capacity of the private market for aviation risk insurance seems adequate, this could change in the case of a major terrorist incident A series of airliner losses in 2014, however, may lead to increases in aviation insurance premiums. These losses include the disappearance of Malaysia Airlines flight 370 with 239 people on board over the Indian Ocean in March, followed by the shooting down of Malaysia Airlines flight 17 over eastern Ukraine in July, which killed 298 people on board.

25. Further unsettling the aviation risk environment is damage to aircraft in recent attacks on airports, including Taliban attacks on Karachi airport in Pakistan in June 2014 and fighting at Tripoli airport in Libya. Some aviation insurers have reportedly estimated that the industry could see insurance premiums rise as much as 50% and that premiums for war risk insurance could treble, the biggest jump since 9/11.

26. MARINE WAR RISK A charter party may include a war risk clause under which a vessel may be prohibited to be used in war zones or to carry goods which will expose her to the risk of capture.         War risk cover is normally excluded from the H&M cover, so it is necessary for the assured to buy cover separately against war risk. Similarly Institute cargo clauses A,B,C also exclude the cover against war and strike. War risk clause covers the following perils:- 1) War or war like situations, including civil war, use of arms in course of military exercise in peace time. 2) Capture at sea, confiscation and other similar intervention by a foreign state power.

27.     3) Riots, sabotage, act of terrorism or other social, religious or politically motivated use of violence or threat. 4) Piracy and mutiny. However insurance does not cover:- 1) Insolvency 2) Damage due to any nuclear weapon, chemical, biological or electromagnetic weapon. For the cargo insurance cargo owners buy cover against war risk and strike. This covers the loss occurred during above. But the coverage provided by war risk clause do not operate during the entire course of transit. Marine underwriters only offer cover for war risk whilst waterborne. There is no war risk cover for any of the goods up to the time they are loaded on to the ship and the cover terminates immediately after the goods are discharged at the destination port. Marine war policies also automatically terminates following  outbreak of war between major power.      

28.  A 12 month war policy gives cover for vessels whilst trading worldwide but outside certain excluded areas which are deemed areas of increased risk. Cover can be obtained for these areas but underwriters need to be informed and underwriters can ask for additional premium for the call which is set no earlier than 48 hrs before entry. Either party can give 7 days notice of cancellation at any time during the policy period.

29. BIBLIOGRAPHY Insurance information institute ( www.iii.org ) International maritime organisation ( www.imo.org ) The journal of transport literature ( www.scielo.br ) www.aon.com www.fas.org www.researchgate.net