‘When the losses start decreasing, the premium will come down’

What is your company’s stake in the aviation insurance portfolio?

We are moving very selectively in the aviation insurance in Nepal. Previously, Guna Air was 100 per cent with us and now Simrik Air has taken it over. There are some airliners which are having reinsurance support from our corporate office in India- like Buddha Air. We have around five percent market share in the aviation portfolio. Agni Air is co-insured with Shikhar Insurance – 60 percent with them and 40 per cent with us. Another airline in Pokhara has insured 49 per cent with us and 51 per cent with Shikhar. We are now negotiating with Simrik because Guna was with us.  

We are the direct branch of a reinsurance company in India governed by the Indian Government. We have high retention capacity. We reinsure the portion to other reinsurance companies that is beyond our financial strengths. This is a worldwide phenomenon in insurance business. It depends on portfolios and varies from risk to risk. Sometimes, we retain 20 per cent and sometimes 90- depending on the risks.

Is it true that the insurance companies in Nepal have not been able to make profits from aviation insurance? Why?

Yes it is true. And the reason is there are a number of airliners which are very small in size. It may be also because of the weather and terrain of Nepal. Small airliners and aviation companies do not afford expertise and there are few airliners where I have seen the full expertise – this is the biggest challenges for the Nepali aviation sector. Many of the aircraft are also very old.  

Some of the insurance companies have retention capacity of 0.4 per cent and rest is reinsured. These companies are getting only the reinsurance commission.  

Some insurance companies are trying to form a pool to collectively handle the aviation insurance claims. What is your view on this proposal?

It is still in the pipeline. Nothing concrete has come out so far. But if such a pool is formed, it will help both the aviation insurers as well as the airliners. After the formation of the pool, they don’t have to run around different countries trying to find out the lowest rate. Once the pool is formed, they know that they have to approach only one office which will organize everything. And the office will be the consortium of a number of insurance companies. 

What future do you see for aviation insurance business in Nepal?

The future is good because there is a tremendous growth in the tourism sector in Nepal. The tourism sector has a tremendous scope and the more this sector grows, the more the aviation sector expands. More people prefer to travel by air in Nepal considering the time taken in travelling by roads. By air you reach Pokhara in 20-25 minutes.But if you take a bus, it takes 5- 6 hours. And the growth of airliners has paved the road for growth of the aviation insurance companies. 

Almost whatever the insurance companies earn from the aviation segment goes to the reinsurance companies abroad. Some are even said to be making losses in the aviation segment. It is said that the companies know that they are not going to make profits from the aviation segment. But they do aviation insurance just to show high insurance premium collection. What do you say?

It is not like that. The premium is based on the past losses. If you see the statistics, almost every year there is an air crash and some years, there are around two air crashes in Nepal. And the rate of premium is governed by the reinsurance market. Because of the air accidents, some of the reinsurers were hesitant to do business in Nepal. The aviation summit last month also put forth lots of similar issues in the aviation industry- the dos and the don’ts. Beyond that, the aviation business has a very bright future. 

Aviation insurance premium in Nepal is said to be one among the highest in the world? Why is it so high?

Yes. As I already said, insurance premiums are based on the past losses. Because of the crashes, the premium has been rising. The recent crashes of Sita Air and Agni Air were a serious concern for the reinsurers. 

Are those high premium rates justifiable? 

The loss is calculated based on the coverage offered by the insurance companies. Suppose there is a loss. You pay some percent of the loss. You pay for the hull losses and the machinery parts or you pay for the passenger liabilities. Passenger liability losses are much higher than the hull losses depending on the kind of passengers. The liability losses are much higher if the passengers are from the US or Canada, and lower if they are from the SAARC countries. The liability losses vary from people to people because of theirs living standard. While finalizing the rates, reinsurers study these things. 

Airliners not only fly Nepali people or SAARC people but also other foreigners. For example, most of the people in the mountain flights are from European countries. Furthermore, airliners have different premiums depending on their types, aircraft, and management facilities they have. 

How can we lower the high insurance premium?

It’s a million dollar question. It has to be high, otherwise it won’t be viable. We are not totally dependent on our own companies. We may not have the capacity, so we need to approach other markets for reinsurance. When the losses start decreasing, the premiums will simultaneously come down. For example in India, the fire premium rate was very high in the past. Many studies were conducted. And when they calculated the total premium over a period of time, and how much profit they generated- then the premium started coming down. Likewise, though the premium is high at the moment, it will definitely go down every year if the risk is reduced. In the present scenario, you don’t have any choice. Until the reinsurer accepts the business, how can you reinsure?

The country’s first-ever aviation insurance summit was organized in the capital recently. How helpful was this summit?

I think it was helpful. We got to know the perspectives of different reinsurers present there. It was the first of its kind event in Nepal and was helpful for everyone involved in the aviation industry.