Financing Risk for Products in Use: An Aircraft Industry Example

• Published in: Risk management Vol. 35; no. 12; p. 28
• Main Author: Zatorski, Richard T
• Format: Magazine Article
• Language: English
• Published: New York Risk and Insurance Management Society, Inc 01.12.1988
• Subjects: Aircraft; Aircraft industry; Financial accounting standards; Insurance premiums; Liability; Loss reserves; Products liability insurance; Risk management; Unfunded
• ISSN: 0035-5593

In most airline accidents, the focus of attention generally is on whether mechanical malfunction was the cause of the accident. Lawsuits will inevitably result if the crash investigation finds this to be so. Manufacturers will then file claims under their aircraft product liability (APL) policies, and the potential liability will be accounted for in one of 2 ways. At one time, a guaranteed-cost basis was used for most APL policies, but recently, manufacturers have been forced to accept sizeable deductibles or quota share retentions. Reserves are necessary for any claims within the manufacturers' retention. Generally accepted accounting principles do not provide for showing these liabilities for future claims in current financial statements. Rolling the unfunded liability forward is possible as long as the manufacturer's operations and the insurance marketplace remain relatively stable. Firms are not allowed to set up a fund for potential liabilities, but theoretically, several insurance alternatives are available. For example, a long-term policy could be written on an occurrence basis.