Does anyone know how this policy works?!

[dr.malone]

We got paid $30 mill to insure $9 BILL in risks?

 

How does this work? what would need to happen in a worst case scenario where we need to pay out the entire $9 bill? more importantly, how in the world would we be able to pay that?!

 

thanks,

 

dr. malone

 

 

 

Oct 12 2010 (AsiaPulse News) -- MUMBAI,

ICICI Lombard General Insurance has won the bid to insure

National Aviation Company of India Ltd's (NACIL) aircraft fleet

for US$9.1 billion, a top company official said.

    "We won the bid and completed the placement racing against

a tight deadline. We submitted the bid on September 15, the

bids were opened on the 16th and we got the final mandate on

September 21," ICICI Lombard's head of risk & reinsurance,

Rajive Kumaraswami, said.

    The national air-carrier had called for bids for a fresh

cover as its earlier one of $8.9 billion was to expire on

September 30.

    ICICI Lombard, a joint venture between domestic financial

services major ICICI (BSE:532174) and Canada's Fairfax

Financial Holdings, won the bid competing against a New India

Assurance-led consortium and another consortium led by Iffco

Tokio.

    "ICICI was a stand-alone bidder," Kumaraswami said.

    The new insurance cover by NACIL comes in the backdrop of

an air-crash at Mangalore recently which resulted in a loss of

158 lives.

    The premium cover stands at $29.9 million, up from the

earlier $24.3 million paid by the national air-carrier.

 

[Partner24]

Good question. We would need full details to better understand that (reinsurance, risks and % covered, etc.). But a priori, the odds of accidents that would imply full 9 billions coverage have to be extremely low to justify such a low premium.

 

Cheers!

[KFRCanuk]

My guess is 9B is the value of their fleet of planes and infrastructure.

 

http://en.wikipedia.org/wiki/National_Aviation_Company_of_India_Limited

 

Air India has 20 777's each cost about 200M+ new. Not to mention the value of the other company planes.

[Tommm50]

KF is right, the $9 billion is the estimated value of the entire fleet. Their risk is basically an individual plane crash. You can bet they buy reinsurance behind it because even an individual plane is worth a great deal more than the annual premium. The frequency of air crashes is low, hence the small premium relative to the value of a plane. It's analogous to buying fire insurance on your home. It may be worth $500,000 but you're paying $1,500 in premium.

[Uccmal]

It is analogous to home insurance.  My home insurance is roughly 1/350 - similar ratio to the fleet insurance.  It my be only property insurance, and not casualty.

[StubbleJumper]

Presumably Lombard bought reinsurance to manage some of the outlier risk associated with this?  As noted by others in this thread, the main risk is that a single plane could crash over the course of the contract and this would not come anywhere close to $9B.  But there is always some possibility of a series of uncorrelated events taking out 10 or 15 planes....