MH17 a ‘disheartening way’ to learn that risk management plays key role

Talking exclusively to StrategicRISK, the chairman of the Malaysian Association of Risk and Insurance Management (MARIM) Mohamad Bin Mohd Zain (pictured) has said that the loss of flight MH17 was an “unprecedented incident of a Malaysia Airlines [plane] being shot down while cruising within a permitted flying zone”.

“From a risk control perspective, the carrier and the Malaysian government may want to review flying over airspace within an armed conflict area, which may increase the cost of operation due to a longer route,” he said.

Mohd Zain, who is vice president of group business assurance at Telekom Malaysia, said that the fact that MH17 was shot down made it quite different to the disappearance of Malaysia Airlines flight MH370 in March.

“From a risk management perspective, obviously the latest incident will dent the good track record that Malaysia Airlines has regarding incidents involving their fleet of airplanes,” he said.

“As a passenger, I will always look at carrier safety track records before deciding to board a plane.

“In this case, the likelihood of a Malaysia Airlines airplane going down has shifted from ‘rare’ to ‘possible’.”

Insurance debate

From an insurance perspective, Mohd Zain said that there would now be a debate about whether the shooting down of a commercial airliner within a conflict zone was an act of terrorism or a war peril.

“I believe most commercial carriers will have war and terrorism cover extended for their hull and cargo insurance, so this may have little impact to the insurance coverage,” he said.

“However, it may raise question marks on passenger liability insurance for both the carrier side as well as personal passenger insurance.

“If it is an act of war, then the definition of war exclusion under most personal accident policies and travel insurance needs to be further examined.”

The insurance market had yet to fully disburse the insurance payments for the MH370 incident, Mohd Zain added, so the MH17 disaster would prompt Malaysia Airlines’ insurance carriers to review their profit margin.

“Malaysia Airlines will definitely have to prepare to fork out more premium for renewal, whilst the insurer and reinsurer may now be undertaking a review under the current policy,” he said.

“It is also unknown whether Malaysia Airlines is buying insurance on a full value basis or on a first-loss basis, which may have an impact on their insurance recoveries.”

Mohd Zain said it would be “an interesting test of the way we structure our insurance procurement strategy”.

“[It is] a good but disheartening way for both insurance buyers and insurance providers to learn that risk management still plays a key role in determining what to do next once we understand what went wrong,” he said.