• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

C. Shivkumar

Bangalore, Nov. 6 Public sector insurance companies’ liabilities are expected to shrink by about Rs 1,700 crore this year with the termination of aviation leases.

The sum insured on each of the aircrafts on lease to both Kingfisher Airlines Ltd and Jet Airways Ltd was about $29 million. Both these companies have already indicated in stock exchange notices that the leases of at least 12 aircraft would be returned to the lessors. Under the current contract arrangements, the ownership of the aircraft is vested with the lessors, insurance premium payments are to be made by the aviation companies. This comprised part of the operating expenditure.

Currently, aviation risk business is dominated by the four PSU insurers — New India Assurance Company Ltd, United India Insurance Company Ltd, Oriental Insurance Company Ltd and the National Insurance Company Ltd. High level officials of the public sector insurers said that the return of the aircraft would actually result in further improving their respective solvency margins.

The insurance regulator prescribed solvency margin is currently 150 per cent. This implied that the capital and value of the assets would have to be at least 150 per cent more than the insured liabilities. PSU insurers are however operating at solvency ratios of close to 200 per cent. The lease termination and the consequent cancellation of the risk contracts would push up the solvency ratios to at least 210 per cent, the sources said.

The flip side is that there would be some premium losses. Currently, the average premium paid by aviation companies is about Rs 1 crore per aircraft. Aviation risk comprised three components — aviation hull, passenger liability and third party liability. Premium on the hull, which is the aircraft itself, was close to about Rs 50 lakh, the sources said. The premiums are normally paid out in the form of four instalments per year.

This implied that the aviation companies would not be liable for payment of remaining premium, once the aircraft are surrendered.

However, the sources said, the loss of the premiums would have little impact on their respective incomes. This was because, the improved solvency allowed the companies to increase the growth in other assets, especially non-aviation segments, including industrial and retail. PSU insurers are looking to expand their respective retail lines of business. Retail lines are currently dominated by private sector insurers.

The only advantage with the aviation business is that claims ratios in the sector have remained low. Loss ratio in aviation business is currently about 40 per cent, making it a profitable sector. Insurers, though, said a large component of the aviation risk was reinsured. As a result, despite the low ratios, profits were also low in view of the low ceding commissions from reinsurers.

Retail lines also had low loss ratios, implying high retention premiums. Since there was little ceding to reinsurers, the shift to retail lines would contribute to improving profits, the sources added.

More Stories on : General Insurance | Airlines

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line