Risk Management and Insurance Issues in the Middle East Business Aviation Market
A soft insurance market is a time for buyers to be selective as insurance markets are hungry for business and therefore more flexible in their offerings. It is also a time when brokers are more conscious of competition as they bid to seek the best deal with the constant downward adjustment of pricing. On the other hand, loyalty pays over the longer term, so shopping around too much will only provide short-term gains. It is therefore, a good time for buyers to seek coverage enhancements and not just competitive pricing.
Aviation insurance is not any different; in fact, the characteristics of a soft market are very pronounced in aviation insurance due to the specificity of this coverage, and its large premium volume. Prices are lower, competition is fierce, and the aviation insurance buyer is at this point simply seeking basic indemnification whilst remaining compliant.
The purchase of insurance is however a complicated and often tedious process and rarely, in corporate aviation, is there dedicated personnel to handle all issues related to insurance, safety, compliance and risk management. Brokers and insurance carriers in the region have recognized this fact and demonstrated the need to facilitate the process for buyers, and to educate them on such issues. From forming different alliances with major aviation insurance players, to offering risk management solutions and perfecting crisis management, the aviation risk and insurance management process is evolving and here is what you need to know to stay updated.
About a year ago, in the Middle East aviation insurance arena, the Middle East Business Aviation Association (MEBAA) launched a scheme by the name of MEBAA Aviation Insurance Scheme (MAIS) to provide broad coverage at a discounted price for all operators who are members of the association. This scheme provided coverage through a leading aviation broker, insurance and reinsurance company for the region. The market is continuing to grow at higher than expected speed, which coupled with changing regulations, caused additional coverage needs to emerge for the region. The scheme has since developed to offer that same ease of purchase and competitive edge to cater to other types of members such as MRO facilities, ground handlers, re-fuelers, fuel sales agents, and the like. The development of MAIS provides a reliable, cost conscious one stop shop for insurance buyers in the region and allows them access to a pool of similar risks which drives down the premiums further and allows insurance carriers to broaden their coverage offerings. This also provides for a great way to build loss histories and other data that may be used for other purposes in the future.
By partnering with an impartial association, the insurance industry promotes flight safety, which goes hand-in-hand with compliance and risk management. As a consequence it is helping the organic growth of business aviation.
For example, the insurance industry has been recently called upon to help tackle the issue of illegal flights. Though the definition of what an illegal flight remains vague, it has been established that an illegal flight, otherwise known as a grey market operation, is when a charter operator breaches any law, rule or regulation imposed by the relevant authority, government body or aviation authority which may include, without limitation, the possession of certain pre-determined documents, licenses, permits and certificates (i.e. Air Operating Certificate (AOC) or specific flight permit).
The truth is, unbeknownst to passengers, what may look like a usual flight performed by an operator may actually be illegal and potentially subject to criminal prosecution for safety violations. In practice, once the flight is purchased and the passenger transported from point A to point B safely, both the passenger and the operator would have successfully accomplished both ends of their commitment. The risk, however, lies in the event that an accident happens because safety measures were not taken and the insurance company opts to deny coverage, for both the operator and the passenger, on the grounds that the flight was performed illegally.
It is important to note that until a clear definition is given for what qualifies as an “illegal flight”, it is difficult for an insurance carrier to deny coverage on the basis that the flight was performed “illegally”. Once the authorities officially define what an illegal flight is, insurance companies may welcome the idea of amending their policies to exclude coverage for claims relating to such flights. After all, operators’ lack of compliance and safety pre-screening may be an indicative of how accident-prone they are.
In addition, one of the most highlighted issues during the most recent MEBAC (Middle East Business Aviation Conference – in Jeddah, KSA), is that regulatory authorities are not doing much to proactively reduce such illegal activity either, and accountability vis-à-vis losses resulting from these operations is clearly in jeopardy. To remedy the issue, it has been suggested that a collaboration between the regulatory bodies and insurance companies should set both a warning and a penalizing system vis-à-vis operating in a grey market. For example, part of an insurance contract could specify that any flights flown illegally, (in conform with a pre-established definition of what an illegal flight is, as agreed upon by both the insurance market and local regulations) would not only void the insurance for a reported loss, but may also be fined by the authorities, and void all coverage or flag the account upon renewal so it is reflected in the renewal premium charged.
There is indeed a great need to educate the passenger on the matters of illegal lights. Though the passengers can be just victims, they also can contribute to the reduction of the occurrence of such flights. Theoretically, the entire blame should fall on the hands of the operator, but it may not work out that way when a major loss has occurred and all parties are questioned about their due diligence regarding how such an accident may have been prevented.
In fact, this was discussed in much detail last month, during a panel discussion comprised of business aviation organizations leaders from around the world at the European Business Aviation Convention and Exhibition (EBACE). MEBAA’s Chairman Mr. Ali Al Naqbi participated in that discussion and made an announcement regarding the upcoming launch of a new initiative promoting passenger education as well as mitigation of the risks associated with taking illegal flights.
As of today, a passenger cannot know if his/her flight is being flown legally or not until after the loss occurrence and MEBAA is working hard to change that. Though the operator is to blame, in addition to potential injury/death or other damages, an aircraft owner who had handed over the responsibilities of managing his aircraft to a management company, has now unwillingly exposed himself to a long-tail liability exposure, potentially beyond the value of his asset. At the end of the day, certain safety measures, which are pre-requisites for operators to obtain the adequate pre-approvals and certifications, may have prevented the accident. By that same token, they would have also avoided the risk of a claim being denied on the grounds that the flight in question was illegal.
A particular characteristic of aviation related losses is in their infrequency but high severity. In other words, though aviation related accidents are uncommon, their impact can be catastrophic in nature, with great financial and human losses. From a risk management stand point, MEBAA is a firm believer that though having adequate aviation insurance coverage provides a peace of mind, there still is much awareness that needs to be done to help prevent or reduce the severity of these losses. In fact, one of MEBAA’s many pragmatic ambitions for the region is to shift the focus from being reactive to proactive in the matters of safety, risk, and insurance.
This initiative led to a recently announced partnership with Kenyon International, which is an Emergency Response Plan (ERP) provider specializing in the aviation industry. Through MEBAA, Kenyon addresses continuous education in the areas of safety and compliance in addition to helping operators design their own ERP manuals that are to be followed in the event of a crisis. Provided adequate training is given to the operator throughout the year, the staff will be better prepared to make decisions under pressure, to handle medical emergencies and human losses in a timely and efficient way, and maintain it’s public image during a catastrophe. Business aviation is more widely understood and used more today than ever before. It is no longer perceived as just a luxurious means of transportation, but also as solution for areas difficult to access or potentially risky.
For example, business aviation can even be a key resource for a Disaster Risk Reduction (DRR) strategy by delivering emergency assistance and supplies to such areas in distress in the event of a major natural disaster. Hence, MEBAA has recently partnered with the United Nations’ World Food Programs (WFP) to help finance and deliver food to difficult areas to reach and areas in crisis through operator donations. It is true that insurance can help in the recovery process after a loss, but proactive risk management thinking is how MEBAA turned a potential risk into an opportunity to be better prepared to serve the community in a time of need. The focus now is not just to transfer a risk exposure to an insurance company, but also to act early (be prepared before an accident happens), and to act in time.
Proper risk management is key to the success of a company in any industry, particularly one where losses are difficult to predict due to their infrequent occurrence and the absence of monitoring capabilities within the region. It becomes even more crucial when those same infrequent losses are catastrophic in nature because the way a company manages such a loss will determine its survival. Aviation insurance is a primordial component of post-loss recovery but falls short with regards to protecting the interests and safety of all members of the industry. Proactive thinking is then necessary in trying to avoid losses when possible, or mitigate them otherwise and a close tie between safety, compliance, risk management and insurance, is necessary for the the business aviation industry to prosper.
The Middle East Business Aviation Association (“MEBAA”) is the official representative of the business aviation industry in the Middle East and North Africa (“MENA”) region and is a member of the International Business Aviation Council (“IBAC”).
MEBAA is a non-profit association established in 2006 with the mission to provide a platform for members of the business aviation industry in the MENA region to gather, understand and communicate the needs and benefits of the industry.
As part of its current growth strategy, MEBAA seeks to implement operational safety and efficiency by providing best in-practice training, lectures and conferences, establishing codes of conduct, and providing industry data.
Today, MEBAA represents over 250 companies within the MENA region and provides a number of products and services to its members, including the MAIS insurance scheme for operators, the World Food Programs partnership and the collaboration with Kenyon International. In addition to various networking events, MEBAA hosts the MEBA Show, which ranks as the third largest business aviation show in the world. For more information on any of the above, please visit www.mebaa.com.
Contact the author:
Ms. Melissa Aoun
Risk Management and Strategy Consultant - MENA Strategies