This article aims to examine the risk inherent in the insurance of the aviation industry, to take an outsider's look at those risks and to develop certain “capital market” pricing rules.
The aviation industry presents a classic low‐frequency/high‐limit insurance problem. Pricing such exposures is difficult because of the high degree of uncertainty involved. After a review of the considerations that an insurance underwriter traditionally brings to the problem, the author applies a simple pricing rule incorporating current thinking on risk evaluation.
The results of the author's approach are compared with the results of traditional pricing rules, generating interesting insights. The application of the new methodology to the analysis of current pricing and of alternative proposals is suggested.
The article will be of value to those interested in the aviation industry and in the pricing of insurance and reinsurance.
