Recent tragedies involving airliners, several terrorist attacks at airports and the specter of global instability has the market for War Risk insurance reeling, observes Stuart Hope.Back to Articles
Recent tragedies involving airliners, several terrorist attacks at airports and the specter of global instability has the market for War Risk Aviation Insurance reeling, observes Stuart Hope.
March 8th of this year, Malaysia Airlines Flight MH370 disappeared with 239 fatalities. The aircraft, a Boeing 777, was insured for a hull value of $100m, 50% of which was paid by the War Risk underwriters after adjusters determined that although not conclusive, there was enough evidence the crash may have been caused by some deliberate action. Passenger liability claims associated with MH370 are still to be settled. In addition, there is an ancillary provision under most aircraft insurance policies that provides coverage for search and rescue expenses.
The coverage limit for accidents such as MH370 normally is a specified maximum sub-limit per occurrence. Whether by mistake or negotiation, however, the sub-limit provision was left off the Malaysia Air policy, thereby exposing the airline to the entire liability limit of $2.25b. By tradition, governments do not seek recompense from airlines for search and rescue expenses, and Malaysia, Australia and China would normally share the costs of the search efforts, but now those governments may look to Malaysia Airlineâs insurer for reimbursement.
June 9th, Taliban militants stormed Pakistanâs Karachi Airport, killing 27 in an alleged attempt to hijack an airliner. At least one aircraft parked in the cargo area was destroyed.
July 13th, Libyaâs main airport was shelled by militia, damaging or destroying 20 aircraft. Earlier the control tower was damaged by rockets. The resulting liability for bodily injury or death claims and property damage are to be settled.
July 17th, Malaysia Airlines Flight 17, also a Boeing 777, was shot down over Ukraine killing 298. All of the preceding losses occurred within five months of each other, and all involved claims resulting from a War Risk peril. Therefore, most of the burden of the losses falls on the War insurers.
First, letâs understand the size of the market we are discussing. The War Risk market specifically provides coverage for approximately 25 war-related perils that are universally excluded under all aviation hull & liability and airport liability policies. These perils include war, acts of foreign enemies, malicious acts, riots, political or terrorist acts, sabotage, confiscation and hijacking. The coverage is offered by the War Risk insurers in the form of a âbuy backâ, which deletes the exclusions from the aircraft or airport policy (all except those defined as nuclear are removed).
War Risk is quoted separately as a line item of the overall aviation insurance premium. From a War Risk coverage perspective only, the total estimated claims for the above losses are north of $600m, with premiums of $65m taken in this year by War Risk insurers to cover the cost.
Airline insurance premiums are generally negotiated annually and the resulting insurance contract is set for a year. However, after the events of 9/11, War Risk underwriters inserted additional language in the War Risk coverage that allows them various review and cancellation options. Those options include:
1) The ability to review and amend the premium or geographical policy limits with seven daysâ notice to the insured;
2) The ability to cancel all, or certain parts of the War Risk coverage with 48-hoursâ notice;
3) The ability to cancel all War Risk coverage with seven daysâ notice to the insured.
While the insurance mechanism is sound and will provide coverage for the +$600m in potential claims, with a thin premium pool exhausted in a very short period of time, it is only reasonable to predict the War Risk insurers will either exercise their rights under the policy contract language and take action now (i.e., raise rates), or wait until the annual renewal of each aviation policy.
This rate action affects all aircraft owners, not just the airlines since we are all considered a part of the same small insurance pool. As I tell my wife, rarely I have been known to be wrong. But if nothing else, at least be aware of the potential of a rate increase when budgeting flight department costs going forward. How much? Thatâs anyoneâs guessâ¦
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