THE INSURANCE INSTITUTE OF LONDON
“THE EVOLUTION OF THE
TECHNICAL ASPECTS OF
AVIATION INSURANCE –
THE CHALLENGES AND
PETER J C VICCARS FRAeS
(formerly Chief Operating Officer,
Aviation Division, Marsh Ltd)
BEING AN ADDRESS DELIVERED TO THE INSTITUTE ON
THURSDAY 15 MARCH 2001
NOTE TO READERS: PUBLICATION OF A PAPER BY THE INSTITUTE DOES NOT NECESSARILY IMPLY
AGREEMENT WITH THE STATEMENTS MADE OR OPINIONS EXPRESSED FOR WHICH THE WRITER ALONE IS
THE EVOLUTION OF THE
OF AVIATION INSURANCE
– THE CHALLENGES
a paper presented by
PETER J.C. VICCARS, FRAeS
formerly Chief Operating Officer
at the Insurance Institute Of London
Lunchtime Aviation Lecture
held at the Old Library, Lloyd’s
1 Lime Street, London EC3.
Thursday, March 15th 2001
THE EVOLUTION OF THE TECHNICAL ASPECTS OF AVIATION
INSURANCE - THE CHALLENGES AND OPPORTUNITIES AHEAD
Good afternoon, Mr Chairman, Ladies and Gentlemen.
Firstly, I would like to express my thanks to the Institute for extending to me
the opportunity of addressing you today. Secondly I must also express my
thanks to my erstwhile colleague, Tony Medniuk, for chairing this gathering
and his (I hope) kind words of introduction.
It was over a year ago that it was first suggested that I should speak during
the 2000/2001 season. Although at that time I was still gainfully employed
and it seemed a very long way off, I hesitated to accept. Over the years I
have been a regular supporter of these lunchtime events and indeed I have
had the pleasure of being chairman for two or three of them. I believe that
this annual programme has a very real value to the industry, so I was
concerned as to what issues I could usefully address, especially after I had
retired from active involvement in the industry.
The title for today was given to me – it is: “THE EVOLUTION OF THE
TECHNICAL ASPECTS OF AVIATION INSURANCE - THE CHALLENGES
AND OPPORTUNITIES AHEAD”. This, I thought, afforded me quite some
flexibility. Often, to best identify the challenges and opportunities that may lie
ahead, it can be useful to look at history. In this case I think it is useful to
examine how our industry has evolved, to note the key developments, to see
how these were assessed and the manner in which they were responded to.
Before I start I should say that the views I express here today are very much
my own; they are based upon my personal experience with a result that they
may not necessarily be shared by any others in the industry, not even my
For the benefit of those here today who do not know my history, I trust that
those who do will forgive me if I briefly explain how that history has served to
influence my particular viewpoint.
I took early retirement last October, after thirty and a half years in Aviation
Insurance Broking with C.T. Bowring & Marsh. Before that I worked in the
previous “Room” for Syndicate 707. But it was in the building that formerly
graced this site that I began my career, with the Corporation of Lloyd’s.
Today, I stand here, about thirty feet below and thirty feet back from where I
started my insurance career over thirty-six years ago. I joined the Agency
Department (Communications & Guarantees Branch), here at 3-4 Lime Street
on the Ground floor.
Many things have changed in the intervening years, not least the Viccars
waist and hairlines. As our chairman has already mentioned, whilst I started
here, at the Corporation in 1964, it was on March 3 rd 1970 that we both
started in the direct policy department of C.T. Bowring and were positioned
opposite each other. Whilst Tony would soon move on to pastures new and
the excitements of broking; I developed a great interest in the technical
aspects of Aviation and remained deeply involved in those aspects until the
summer of 1999. Then for my final thirteen months I accepted an opportunity
to be involved in the integration of the support offices of J&H Marsh &
McLennan and Sedgwick. This took me right back to where I began in
insurance broking - the technical department, but this time not just aviation,
but also marine and non-marine. This last role reminded me how far our
industry had come, but perhaps too how little we had travelled, but now I am
getting ahead of myself.
In 1964 Jet aircraft were still a relatively new innovation, turbo-props were still
very much in evidence and wide-bodied jets had not yet taken off from the
drawing board. By the time I got deeply involved with Aviation Insurance, in
1970, things had moved on but the marketplace that existed was very
different to today. It was a much larger market by number of players not only
in both the Company and Lloyd’s markets but also amongst the brokers.
Risks were only placed on a subscription basis – all underwriters participating
on the risk at the same terms. The first Boeing 747’s were only just being
delivered and represented a huge hike in exposure at around U.S.$. 20 million
each compared with the typical value of a Boeing 707 or D.C. 8 at around
U.S.$ 5 to 7 million each.
Liability Limits then rarely exceeded U.S.$ 100 million. The major airline risks
were placed in layers in order to achieve the desired limit.
A major landmark had occurred when AVN48 had been introduced, in
November 1969, ushering in a totally new approach to defining of the so-
called war & allied perils. Until then the old marine language regarding “acts
of enemies of the Queen on the High Seas” had been used. Now the
language used was “War, Nuclear Weapons, Strikes, Pre-emption (which I
understand to mean a purchase before offer for sale – that is at a price fixed
by the buyer), Confiscation and Unlawful Seizure” - no mention of “Hijacking”
at this stage.
Hull rates were around 1.0% except for jumbos and they attracted between
3.00 and 4.00% (on those much smaller values that were required in 1970).
In the office there were no computers and the calculators we used to calculate
total premiums, allocate lines and calculate individual insurers’ shares of the
premium were about the size of a typewriter. Talking of typewriters those in
our offices then were not electric ones - everything was typed manually. I
visited the Science Museum just recently and there, exhibited, as museum
pieces were examples of the office equipment we used every day (a very
salutary reminder of one’s age if you like!). We worked on premium
calculations, debit notes and endorsements. Incidentally each added or
deleted aircraft was specifically endorsed not only to the placement slip but
also to the policy, by endorsement. In our firm, each technician was
responsible for producing the policy as well as the premium closing for those
risks he or she looked after.
Shortly after Tony had moved on to broking, I was offered the opportunity of
specialising in matters technical and policy wordings in particular. Again,
before computers, we operated in a different way. Wordings were drafted by
reference to the prior year or in the case of a new risk something of a similar
nature then physically copying and pasting clauses together until a draft was
No computers, so our wordings were produced using something called a
Flexowriter (a machine that was a cross between a typewriter and a telex
machine – it cut a paper tape which could be kept as a record and used
again). There was no separation of documentation from accounting in those
days - both had to be presented together for signing. This had two effects –
the documentation did not get left until later, but the need for speed probably
did not encourage a close review of the policy wording and historical errors
were often carried forward. Some of the first policy wordings I looked at were
for Dan-Air a U.K. charter airline that no longer exists. They operated three
types of aircraft – Comets, British Aircraft Corporation BAC1-11’s and one
lone Ambassador or Elizabethan (made by an English company called
Airspeed). These three fleets (using that term in its loosest sense) were
insured separately and, I discovered each had a different policy wording.
Another memory that sticks in my mind involved a wording I was given to
review that talked of the aircraft only flying from properly lighted airfield to
properly lighted airfield and being properly tied down at night. And this for a
policy to which two of the first delivered Boeing 747’s had just been added.
In August 1970 the first revision of the War, Hijacking & Other Perils Exclusion
Clause (General) -AVN48A was introduced. This consigned the term “pre-
emption”, which personally I am still not sure about, to the history books.
Then in September 1970, before AVN48 or AVN48A could be applied to all
policies, the Popular Front for the Liberation of Palestine took three aircraft –
A VC10 of BOAC, a Coronado of Swissair and a Boeing 707 of TWA to a
remote desert airstrip called Dawson’s Field, in Jordan. The taking of these
aircraft and their subsequent destruction ensured a further re-evaluation of
just what constituted “war and allied perils”.
A standard policy wording for “hull war risks” appeared. Whilst it was an
attempt to provide the coverage that the “all risks” exclusion denied there
were differences in language and this created potential grey areas. Brokers
started to develop their own “writeback” wordings. Later, for a while, there
was a re-inclusion of the war and allied perils into the all risks policy. The
“war risk” element could then be separately reinsured.
This was facilitated by the inclusion of a “hull loss definition” clause – although
this was never officially recognised and given an AVN number. The biggest
attraction of this approach was that it removed any grey areas from the policy
issued to the Assured. The combined hull and war coverage did not last long
but this and the brokers’ efforts did help to bring forward the introduction of
the standard “writeback” wording which was to become Airline One and lead
to the LSW555B form in use today.
Life was considerably simpler then. Most of the aircraft were owned, at least
in part by the airlines that operated them. Finance, if any, was most often in
the form of a bank mortgage or perhaps some export credit support. In either
case any insurance requirements were very limited. Airlines rendered
assistance or services to each most often on a reciprocal basis with limited
insurance implications or requirements. Third party contractors offered
contracts that often had no insurance provisions at all and very limited
indemnity requirements. The licensing and regulatory environment was not
nearly as complex and little or no interest was taken in insurance matters.
Just under two months ago, I was in this room listening to Martin Azzopardi’s
comments on “An Insured’s View of the Market”. Martin referred back to a
“comprehensive aviation liability policy” and a time when “Brokers threw in
literally anything and everything and it was all covered under this one big
blanket”. Certainly it was a time when the boundaries of the scope of cover
were tested to the extreme. Martin then commented that “the market found
out that they were paying for claims which they never intended to cover”.
I remember it somewhat differently, in my memory it was not so much claims,
as the fear of claims that caused the change. The industry had a problem in
that broad coverage in the area of general liability had given rise to the
possibility of providing coverage that stretched the word “aviation” beyond its
widest and most open interpretation. The professional reinsurers were
imposing limitations on the response they would provide. At about the same
time there were concerns about the blurring of the differences between
“Bodily Injury” and “Personal Injury”. These two issues needed to be
examined and a consistent approach adopted.
This was the first occasion that I remember that a working party of
underwriters and brokers was formed to grapple with such a problem.
Certainly it worked a treat. The personal injury definition that became AVN60
was very much driven by the underwriters and was the subject of much legal
advice, mainly due to stronger U.S. flavour and use of this term. The
definition of “aviation” that emerged as AVN59 – the Non-Aviation Exclusion,
on the other hand, was lead by the brokers who were working to ensure that
the coverage was kept as broad as possible. It proved very difficult to come
up with a good definition. The “double negative” approach of the clause with
its “this policy does not cover…..unless” language attracted much criticism.
However, along with the slip clause AVS104 that spelt out the general
exclusions, this approach seems to have worked. Certainly, no one could
improve on it at the time and the fact that it is still in use some fifteen years
after its introduction, to me, speaks for itself.
To many in the market and elsewhere, I suspect I am most remembered as
being associated with the field of financing and leasing. This had grown
enormously during the seventies and eighties and the only relevant standard
clause we had at the time was the Breach of Warranty endorsement, known
as AVN28. This was first introduced in January 1959 and provided that the
coverage continued in favour of the lienholder in the event of any act or
neglect by the Policyholder. The lienholder was assumed to have a charge
over the aircraft that diminished as each instalment (of a mortgage) was paid
off. This clause was often used in the context of financing and leasing along
with text taken from the actual agreement, as agreed by insurers. However, it
was hardly an ideal solution. More and more individually drafted (manuscript)
endorsements were prepared and presented to underwriters. Not surprisingly,
underwriters decided that a uniform approach, instantly available, was the
most desirable way to go.
To this end a committee of both Lloyds and London Company underwriters
was set up with a view to drafting such a clause. Much time and effort was
put into this task. In due course a clause was published: The Airline
Finance/Lease Contract Endorsement – AVN67, to be available for use on
and after 1st February 1991.
Sadly there was no consultation with brokers this time. Almost as soon as the
clause was published, the criticisms started to appear in articles or at
conference papers not from the brokers, but the leasing and financing industry
and their legal representatives. Happily, in May 1992 a meeting was
organised in Shannon by the lessor, GPA, to which underwriters, brokers and
some bankers and lawyers were invited. Following this meeting a joint
underwriter / broker working party of four underwriting representatives and two
brokers was formed. After many hours of discussions and a considerable
amount of time and effort spent in collecting the comments and criticisms of
the original clause, a revised edition of the clause, AVN67A published in May
1993. Later, in October 1994 a further revision, AVN67B, was published
which broadened the application of the clause to not just whole aircraft, but
also engines and other equipment.
I like to believe that the brokers were invited to take part, because it was
recognised that the brokers probably had a greater awareness of the
problems that leasing and financing presented, in insurance terms. Perhaps it
was also recognised that if you involve somebody in something they are more
likely to support it and sell it. This coming together of professionals is, in my
view, the only way to get the best solution to an industry technical problem.
Those who took that view in May 1992 were not wrong, nor I would suggest
were they disappointed. As I have said a lot of time and effort went into the
task of revising AVN 67 to make it a more user friendly clause, to more closely
reflect what the industry needed. Most importantly, it didn’t stop there with the
production of a new clause - promotion of it was taken seriously - by meeting
the recipients - the banks, leasing companies, and their legal representatives.
Other meetings with underwriters and brokers, a press conference, writing
articles, giving papers at conferences and all to make sure there were no
misunderstandings about how the whole thing would work and the intentions
underlying it. I know I shall be accused of being boring, but I am not going to
apologise because I am very proud of AVN67B and my part in it. To me it
represents the aviation insurance industry at its best.
It must have saved literally thousands of hours of time and effort for
underwriters and brokers alike, not to mention the financiers and lessors and
their legal advisors. It replaced uncertainty with consistency and a very good
set of words that works.
These then were my personal highlights in the Technical evolution in aviation
insurance during the last three decades. To see what else happened in this
time frame we need only look at the index of the standard clauses that have
Linking AVN51 and 52 with 48,A and B we have seen political change has
necessitated the revision of what constitutes the Five Great Powers. We have
also seen a move away from automatic termination upon a nuclear detonation
as it was realised and accepted that such an event did not necessarily mean
the end of civilisation as we know it.
The growing role of manufacturers in supporting their products after delivery
brought us AVN53 for liabilities to add to the existing AVN29 for hull risks and
the growth of Non-ownership liability brought us AVN54.
AVN55 along with AVN50 has already disappeared from view – another two
“war” related clauses, the need for which has been superseded by time and
the revision of other clauses and wordings. Why AVN56 has not suffered the
same fate is beyond me, as I do not believe it serves any useful purpose.
AVN57 and AVN58R now appear in several different guises applicable to the
USA, Canada, and Switzerland – reflecting the growth of interest in Insurance
by the regulatory authorities. Italy and Australia are two other countries
whose regulation has required a formal response from the market.
By and large, these clauses have been introduced as a reaction to changing
events rather than to develop or improve the definition of the coverage that is
provided. I suppose I have to mention the Millennium and the Y2K fears and
the clauses that this gave rise to AVN2000, 2001 and AVN 2002. I was
disappointed that this opportunity for true industry-wide co-operation was not
Looking to today what are the challenges and opportunities that exist in 2001.
The dynamics are certainly different to those I first encountered in 1970:
- the number of players is considerably reduced (brokers and underwriters).
- It certainly looks to me as if verticalised marketing is here to stay
- the unit values and liability limits are up to ten times what they were three
- the impact of electronic commerce is being felt, albeit slowly.
But not all of the dynamics have changed:
- The production and agreement of a policy wording still takes as long as it
did, possibly longer.
- There is still no single industry technical committee - a truly joint technical
body in the London market that includes not just Lloyd’s and company
underwriters but also brokers as well.
During my final year working for Marsh, before I retired, I was pleased to be
involved in just one of the many joint working parties that were created in
support of the Forum Initiative to explore ways of taking the market into the
twenty-first century. Some great ideas came to the fore as a result of those
many meetings. Insurers and brokers alike need this kind of progress to
deliver the service levels and economies of scale that are vital to the future
success of the industry. Sadly from what I understand, LMP2001 as the
successor to the Forum Initiative is not moving forward as much or as quickly
as might be hoped.
Whilst LMP2001 as a whole market initiative is certainly very pertinent and
relevant to the Aviation sector, it seems to me that there are even more
compelling reasons for change – the client’s requirements. I have already
referred to Martin Azzopardi's talk in January. I listened very carefully and as I
had already begun putting together my thoughts for today.
I was very interested to hear Martin mention: “additional areas are included in
the coverage only if your Broker negotiates them or you get to know other
airlines have them”. “Perhaps a more uniform approach would serve both
insured and the market better”. “Timely issuance of Policy Wordings”. These
three things encapsulate the main technical challenge and opportunity in my
There must be an improvement in the standard wordings and clauses
available, both in number and in content. The review in 1996 revealed not all
the clauses in the blue book were in regular use. Perhaps an even more
stringent review might identify those still included that are hardly used at all – I
have already identified one and could suggest a few more. There are
certainly some that with revision might become more useful and there are I
am sure areas where a new clause is really needed or could be extremely
helpful. In my view, it is unlikely that the evolution of the aviation industry will
call for the same level of change in coverage we have seen in last three
decades. As experience grows there are less truly “new” events to think
There has been a long held belief that only “manuscript” wordings are good –
Why, because all too often the standard clauses have been lowest common
denominator and people have sought how to avoid them rather than use
them. AVN67B has, I believe, been a great example of the other way. I don’t
think if you had asked the airline industry in 1991, “Do you want a standard
endorsement for financing and leasing” that you would have been
overwhelmed with enthusiasm for the concept. However with the benefit of
hindsight (a well-recognised attribute in aviation insurance) we can say that
although the banks, financiers and lessors all had different expectations and
requirements, one standard clause has worked for all of them. More
importantly it has served to improve immeasurably the service the insurance
industry has been able to deliver.
Most of the world’s airlines hull war insurance is arranged on LSW555B. I
have not heard any airline complain about this fact.
Everyone knows the deductibles for airline jet and turbo prop aircraft are
market standards – yet we don’t have a market “AVN Clause”.
We have a universal definition of “Personal Injury” but not for “Bodily Injury”.
We all know what a mechanical breakdown clause should say, but we do not
have an industry standard.
If there is a desire to be more consistent, and the acceptance of the need for
greater transparency then it seems to me that what can be standardised
should be standardised.
In that way what I call “a Reader’s Digest” approach could be used. I am
sure that you like me receive numerous communications from this body –
unwanted they may be, but they are always personalised – family name,
street name, town and county are all mentioned liberally through the
communication. Whilst we may all despise and detest such mailshots could
they not offer a good model for aviation policies. However, to adopt such an
approach you first need the “standard” material to which the “personalisation”
can be added.
Before those in the audience engaged in writing or reviewing manuscript
wordings walk out in disgust at my suggestion – please let me explain.
Instead of both brokers and underwriters employing people to keep writing
and reviewing manuscript wordings, assuming they can find them. [It appears
to me that there is still a serious lack of talent or enthusiasm or both for this
role]. Would it not be better for the best minds from the whole of the London
market to brought to bear on some standardisation which could reduce the
area for individual drafting and checking on each and every wording. This
might also make it easier to agree that only one leader needs to see a
wording. A concept very much in line with LMP2001.
Perhaps in this way we might be able to revert to signing the policy at the
same time as closing the premium, just as was required in 1970 when I first
came into the market.
As I said at the beginning of my comments, I was concerned what I could
usefully address, especially after I had retired from active involvement in the
industry. However, perhaps not having an employer either current or
prospective means that I can express a strongly held personal view without
fear or favour. I hope that at least some of my thoughts and ideas may have
struck a chord.
Thanks for listening.
Peter J. C. Viccars, March 2001