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Mon 16 Jun 2008 04:00 AM

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Going global

Since the terrorist events of September 11th 2001, the aviation insurance industry has changed.

We all know that the aviation industry is growing in the Middle East, so when it comes to insurance it is important to look beyond the region and plan on a global scale.

Since the terrorist events of September 11th 2001, the aviation insurance industry has changed. As a result of the significant loss of life, premiums rose significantly across the entire market, whether it was airline, aerospace or any other sector.

Airport insurance in terms of the type of cover that is bought however has remained relatively unchanged and the emphasis is shifting to the issue of limits.

According to insurance broker, Willis Aerospace, the industry is currently experiencing an increase in limits and exposures in terms of passengers and movements. Post September 11th 2001, there was a contraction of cover and the coverage limits available to airports were significantly reduced.

At this time big airport developments were beginning in the Middle East and huge passenger capacity projections were announced. Today insurance coverage continues to increase as demand from airports continues to grow.

There are bigger and more expensive aircraft landing and more people passing through the region. It is for these reasons that Willis Aerospace sees the Middle East as a catalyst for shaking up the industry.

Divisional director Steve Lodge explains: "The capacity growth in the airports that are being built way outstrips any normal growth in GDP projections in terms of passenger throughput because you have a hub and spoke strategy.

Each emirate has the ability to develop its own flag carriers and airports to support global growth. You can fly anywhere in the world as long as you can fly through the Middle East somewhere, so you have a passenger throughput that is, so far, dramatically increasing.

The other advantage the region has in terms of conditions is space. The whole scale of what can be achieved is unlimited, bringing with it greater provisions from airport operators and authorities. But undoubtedly, with more services and transport on offer, more insurance coverage is required so the cost of insurance for each airport development will rise.

"More is being provided by the airport authority with a specific desire to attract more people," Lodge continues. "The more services and transport on offer the greater the risk. As the risk grows more coverage is required. It's one of the big drivers in the Middle East, certainly where we have seen an increase in passenger numbers.

It is not just the risk profile that is changing, but the complexity of it. Insurance will cover staff, airlines, property damage, car parks, terminals, retail outlets, bars, hotels, places of worship and medical facilities, as well as all ground ops equipment and vehicles.

However, as Stephen Doyle, executive director of Willis Aerospace explains, Middle Eastern airport developments are moving beyond the base case.

"The passenger experience of relaxation and shopping compared to the reality under the surface of facilitating the movement of baggage and aircraft is complicated.

At the same time keeping the region's airports as a gateway into the culture of the country signifies the scale of what the operators are trying to do. This is becoming consistent across the world. Airports are recognising they have to uphold a national prestige.

As risk profiles become more complex the identification of risk is the key issue.If you dramatically improved the risk profile of your airport in the early part of 2001 and then September 11th happened would your premium reflect that saving? Only relatively, Doyle explains.

"Market forces play a pivotal role. You have to have a large volume of capacity to accept the risk, then it's the level of claims that have occurred in the market, so the insurance cycle goes up and down in terms of premium volume."

Making an extra effort to improve risk profiles can mean the increase in premiums could be reduced.

"Detailing and improving risk doesn't just reduce the cost of insurance, it can improve the overall operations cost to an airport - and therefore profit," Lodge adds. "It can reduce any self-insured retention or deductible that they have been carrying because they are a better risk."

It is for this reason that Willis Aerospace believes risk management calibre within the industry has improved over the past few years as a good risk management discipline has translated into improved insurance pricing. "The significance of the whole operational impact is being realised now," Doyle says, "and this is important as the market cycle changes."

Aviation is one of the most highly regulated industry's in the world, due to the sheer catastrophe nature of aircraft operations. For this reason, there is an underlying bedrock of quality, but how can this be enhanced in the future?

Despite the short term credit crunch there are long term predictions of continued aviation growth and the capacity that is available in the Middle East is playing a pivotal role in this.

Geographical distribution of growth is subject to change. The capacity that is available in the Middle East is significant and the potential diminishing influence of North America will have an effect.

According to figures from the Airports Council International (ACI), Asia by 2026 is projected to be the largest region in terms of aircraft and passengers and as Doyle stresses the industry is on the up.

"In the Middle East it's all good news and positive growth. Lots of new equipment and excellent safety experience is being utilised. You then have the environmental issues and the Middle East is a good region to tackle this in terms of reducing the industry's carbon footprint, certainly on the ground at airports and perhaps more.

Also relevant to the region's airports is the growth of Very Light Jets (VLJs). These aircraft fly to areas of significant wealth and this will affect the risk profile of airports in terms of passenger movements and aircraft movements. But how will this effect insurance coverage?

"Airports will buy the limit that covers the aircraft and passengers flying into that airport. If you have appropriate cover for large wide-bodied aircraft this should also cover general aviation type aircraft despite the value of some of those individuals on board," Lodge explains.

According to Willis Aerospace the one question any operating airport or airline should be asking is not how much is our insurance cost, but if we experience a catastrophe, do we have enough cover?

"The real issue is to understand the risk that you face and buy adequate cover," Doyle says. "Insurance is not specific to a region, the industry is globalised and you have to understand your risk profile.

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