Air India seals fleet insurance deal with $24.23 mn premium

Air India seals fleet insurance deal with $24.23 mn premium

Mumbai: The debt-ridden National Aviation Co. of India Ltd, which operates Air India, has managed to seal an insurance deal worth $8.9 billion (Rs42,720 crore) for 153 planes for a premium of $24.23 million a year with a consortium led by Anil Ambani’s Reliance General Insurance Co. Ltd after the contract ran into rough weather with the insurers asking for about 20% increase on the premium, citing a “material change" in the circumstances of the contract.

The existing contract expired on midnight, 30 September.

The cover is an increase of nearly 35% from $6.39 billion in 2008-09.

“Air India has already paid its first quarterly cheque towards premium as per the original tender price. The placement of the same has been completed and the certificates have been issued," an Air India executive said, speaking on condition of anonymity.

The group led by the private general insurer, a wholly-owned subsidiary of financial services firm Reliance Capital Ltd (R-Cap), had emerged the lowest bidder for the contract—a first for the state airline that had so far been covered only by state-run general insurers.

R-Cap’s chief executive Sam Ghosh declined comment on the issue.

Failure to get insurance cover would have, according to Indian regulations, made it impossible for Air India to fly any of the planes beginning 1 October.

On 16 September, a week after it was awarded the contract on 9 September, Reliance General Insurance wrote to Air India saying that a “new loss situation" had led to the requirement of “additional premium" over and above the $24.23 million it had specified, said an industry official close to the process, who declined to be named.

The demand placed Air India in a delicate situation, where paying the additional premium would have flouted norms prescribed for a state-run entity but not doing so would have grounded the entire fleet. All public sector undertakings in India are governed by the norms of the Chief Vigilance Commission, which stipulate that such firms can only entertain the lowest bidder for any purchase. Had Nacil raised the premium, it would have ended up paying more than what the state-run insurers were asking for.

New India Assurance Co. Ltd, which had held the Air India account for a long time and placed a bid of $24.99 million for the deal, was the second lowest bidder for the contract.

Air India was asked to increase in the premium on the grounds that reinsurers were demanding more in the international market after an Air India Boeing 747 caught fire on a Mumbai runway on 4 September. The accident was the “material change" that Reliance General Insurance quoted in its letter to the carrier, according to both people quoted earlier said.

“One of reinsurers pointed out that there was material change in the policy as an Air India plane met with an accident on 4 September," the Air India executive said. “Reliance was asking for an increase in the premium from Air India to avoid the losses that it may have to take in the international reinsurers’ market."

A team of Air India representatives flew to London to make a formal presentation to reinsurers on behalf of Reliance General Insurance.

Nacil faces a Rs16,000 crore debt, accumulated losses of Rs7,200 crore and a group of disgruntled pilots who nearly grounded the government-operated airline earlier this week.

The consortium partners of Reliance General Insurance for the contract are IFFCO-Tokio General Ergo Insurance Co. Ltd, Bajaj Allianz General Insurance Co. Ltd and HDFC General Insurance Co. Ltd and the lead reinsurers are Mitsui Sumitomo Insurance Co. Ltd and the Liberty Mutual Group.