Understanding Aviation Hull and Aviation Liability

In Insurance Premium Tax (IPT) compliance, the Aviation Hull and Aviation Liability policy is defined under Annex 1, Classes of Non-Life Insurance, as described in DIRECTIVE 138/2009/EC (SOLVENCY II DIRECTIVE).

But there are variations and identifying which class the policy is covering can be a challenge.

This article will cover what insurers need to know about Aviation Hull and Aviation Liability policy and what IPT rate to apply.

Variations in the Aviation policy

Aviation can fall under Class 5, Class 11 or General Liability.

There are five different variations of an Aviation policy, either taken out individually or in combination. Although the descriptions vary, the most referred to are:

• Public and passenger liability insurance
• Ground risk hull insurance, whilst in motion or stationary
• In-flight insurance

Class 5 Aviation policies are focused on the hull and physical aspect of the aircraft, whereas Class 11 Aviation Liability mainly covers the public and passengers or damage to property owned by third parties.

Defining and applying the correct classification

Defining between Aviation Liability Class 5 and 11 can be a headache. As aviation policies can include a combination of liabilities, it can be difficult to know the correct classification to apply.

Some tax authorities have recognised this and applied similar rates for both, but there are exceptions.

For example, in Hungary Class 5 is considered CASCO , which stands for Casualty and Collision (automobile insurance). So, it has a higher IPT rate of 15% whereas IPT for Class 11 on Aviation Liability is 10%.

There are also parafiscal taxes to consider. These mainly come into effect when the policy includes a fire element. But as always there are exceptions – in Greece both classes are exempt from IPT, but TEAEAPAE (or Pension Fund) can be due on Class 5 Aviation when cover includes the maintenance of the aircraft.

Once the correct class of insurance has been applied to the policy, an additional reference to an AVN clause is made.

AVN clauses are additional to the main risk and more specific than some of the other coverages, which are also included in aviation contracts. There are over 214 AVN clauses and most fall under Class 13 General Liability.

Reporting

The last piece of the puzzle is how to report a policy document that could have up to three different classes.

The territory could have apportionment rules, meaning an insurer could benefit from some of those exemptions. Some insurers choose to take the prudent approach and apply the highest rate from the three classes to avoid noncompliance or penalties.

Easing the IPT compliance burden of aviation liability

For most insurers, classification of an aviation policy is only the beginning of the journey. There are other considerations such as location of risk rules outside of Europe, which can mean double taxation, or exemptions depending on the use of the aircraft.

To ease the burden on compliance, many insurers work with a managed service provider with IPT expertise.