IndiGo in for a crash course in surge in insurance costs

IndiGo airlines, the country’s largest carrier by fleet and market share, may see a surge in aviation insurance cost when it renews its policy next month, likely driven by increased geopolitical risks and decline in reinsurance capacity after the Air India plane crash.

As of March, IndiGo was operating a fleet of 437 aircraft, primarily narrow-body Airbus A320 and A321 models, each insured for a hull value of $30-45 million. It has a total insurance cover of around $20 billion for its 437 aircraft, with an annual premium estimated between $14 million and $15 million, according to insurance industry sources.

On the liability side, a narrow-body aircraft is typically covered up to $750 million, while wide-body aircraft are insured for as much as $1 billion.

Last year, IndiGo’s risk was placed in the Indian insurance market with New India Assurance as the lead underwriter, supported by multiple domestic insurers, including ICICI Lombard. The policy was heavily reinsured in the London market, where global capacity providers continue to dominate the aviation war and liability space. The Air India plane crash in Ahmedabad on Thursday could result in hull and liability claims of $120-$200 million, becoming one of the costliest aviation insurance payouts involving an Indian carrier, according to industry sources. They said global reinsurance markets could harden due to mounting liability claims.

“Such losses, generally, affect multiple reinsurers, as airline fleet policies are often placed on facultative basis involving several participants, and since the liability claims take time to quantify, it is currently difficult to assess the impact of the incident on future pricing,” said N Ramaswamy chairperson and managing director of GIC Re.

“With regards to the liability losses to Air India under their aviation all risk policy, while the basic compensation will be governed by Montreal Convention, the range will greatly vary, depending upon the nationality of the passengers as well as future court rulings,” said Amit Agarwal chief executive officer and managing director of Howden Insurance Brokers India.Another factor that could influence aviation premium is the geopolitical situation. For instance, on Friday, several Air India international flights were diverted after Iran closed its airspace following an attack by Israel.War risk rates are likely to rise when airspace becomes restricted and conflict zones expand. Generally, aviation war covers have a seven-day cancellation clause. If tensions escalate in the war zones, insurers can issue a seven-day notice of cancellation. After seven days, unless withdrawn, the policy ceases to provide cover for affected regions.

During the India-Pakistan conflict last month, insurers had issued notices to general aviation operators. The notices were later withdrawn as the situation stabilised.