Flights of fancy

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Aviation insurers have recently agreed to cover terrorist attacks such as dirty bombs. Rachel Gordon asks if this will improve the market outlook

Fear of flying affects a fair proportion of air passengers. However, it seems fear of talking to the press is an affliction affecting most of the aviation underwriting market.

As one source says: "Since the sector was hit by an European Union investigation over alleged cartel practices - which are thought to have occurred after 11 September - hatches have been battened down and most underwriters are refusing to speak to the press."

Attempts were made without success to speak to Global Aerospace, Atrium, Cathedral, Aspen and QBE, which, among others, are understood to write this business, while others such as Beazley and Omega said they were not carriers. However, it was recently revealed that aviation insurers will now provide cover against terrorist attacks involving weapons of mass destruction or dirty bombs - but only with a limited write-back - which means many insurance buyers will most likely be seeking clarity in what they purchase. Whether they will meet a wall of silence as well is unknown.

This war cover has been completed by the Aviation Insurance Clauses Group, a group of market experts, and drafts of the new clauses are on its website, from which it is also requesting consultation from interested parties. The group was set up following the European Commission investigation. In 2005, its launch statement said: "Leading European aviation insurers have undertaken to reform their practices as regards the operation of aviation insurance in order to promote more competition and transparency. The reforms foresee inter alia greater transparency in key industry committees based in London, including one that establishes standard wordings for aviation insurance policies and clauses."

Inclusive working

The AICG has been busy producing the new war clauses, which appear complex to outsiders. However, according to Nicolas Hughes, senior partner with Barlow Lyde and Gilbert's aerospace department, who is also on the AICG, this group has promoted a more inclusive way of working.

"Representatives of buyers and the London Market Brokers' Committee have effectively 'sponsored' draft clauses for consideration and participated in a detailed review with AICG," Mr Hughes comments. "This has provided a more transparent way for the development of standard form aviation insurance clauses than was previously the case."

He adds: "The clauses may, from the viewpoint of third parties, represent something of a landing point for buyers and insurers for the purposes of distilling what cover is likely to be available in the market. The clauses can define the risk in standard form but not the financial limit or sub-limit of cover. The clauses, therefore, do not provide for any particular financial limit or sub-limit of liability, this being a matter for the parties to negotiate, but clearly the implementation of these clauses may define any requirement for government schemes of insurance or other indemnity or for further industry solutions.

"There will also have to be acceptance, subject to the limits of cover available with these clauses, of the terms of write-back by those providing excess third-party war cover. The availability of the wording will ascertain insurers' appetite for financially limited cover for WMD risks, whether at all or for any of them, and if so whether in a capacity sufficient for buyers."

If the AICG is a plus point for transparency, many of the goings on in the industry remain opaque. However, Steve Doyle, a manager in the aviation and aerospace division at Aon, is one of the few prepared to talk about the market.

He explains the new clauses were expected: "This has been a work in progress for some time. We knew what was happening, and they won't be a shock to the market or buyers. They will not probably come into force until 2007 and we won't know the impact for another 12 months but, at this stage, they appear reasonable and make sense."

He adds that insurers must impose damage limitation: "If you had a detonation at a major airport, for example, you could well have large numbers of people affected. It could be viewed as an attack against the state and insurers know that and realise this is something they could not cover."

With Heathrow's Terminal Two being recently forced to evacuate passengers, it would appear that there could be a market for some type of business interruption insurance to cover for delays to flights. However, Mr Doyle says as yet there is no demand for this.

The heightened sense of terror attacks has done nothing to dampen insurers' appetites to write business, and, like so many other classes of insurance, the aviation market is soft. According to Mr Doyle: "There is certainly no panic in the market that an attack is imminent. The threat may be heightened but we are more prepared. There is vastly improved security screening, better training for airline staff and planes may also have sky marshals. This has been good news for underwriters."

Safety record

If improved security is bringing benefits, insurance buyers are also spoilt for choice in terms of the number of providers. New arrivals include insurance CV Starr, which has set up Syndicate 1919 at Lloyd's and will be managed by Marlborough Underwriting Agency, a subsidiary of Berkshire Hathaway. QBE has also launched an aviation syndicate within its Limit managing agency.

Max Re Capital has recently set up a dedicated aviation insurance unit, operating from Dublin, and Lancashire Insurance Company recently obtained authorisation from the Financial Services Authority. Finally, Inter Aero is open for business, a managing general agency on behalf of Arch Insurance Company.

Airline insurance is profitable business and this is fuelled by the industry's excellent safety record. According to a spokesman from broker Jardine Lloyd Thompson: "Although accidents have happened, none have seriously affected the balance sheets of either the direct market or their reinsurers."

As Mervyn Sugden, senior underwriter with Hardy Group, says: "The basic facts are that there is too much capacity and significantly large rate reductions, which will make it a sector that capital providers should be careful about. Underwriters keep saying there will be no more reductions next year - but next year never comes."

AVIATION INSURANCE - TRENDS FOR 2007

Barlow Lyde and Gilbert notes that new technology may make it possible for mobile phones to be used on aircraft and current prohibitions to be lifted.

Airlines may also be paying more attention to in-flight employee health and safety after a case in Hong Kong found Cathay Pacific Airways liable for an injury to a member of cabin crew after a drawer of a bar cart fell on her knee.

Negotiations are taking place to find less expensive ways to cover the new Airbus A380, the so-called 'super-jumbo'. Combined loss-of-life claims resulting from a major disaster involving an A380 carrying 450 to 650 passengers could exceed the current maximum $2bn (£1.08bn) payout offered by insurers, airlines fear. It is believed that $3bn of cover will be required. Airbus 380 carriers will include Singapore Airlines, Qantas and Emirates.

According to broker Jardine Lloyd Thompson: "The black cloud at the back of underwriters' minds must remain the war market, where the greatest unpredictability lies."

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