Aviation industry unflapped by uncertainty about TRIA

A number of insurers, particularly those in the USA, have been getting concerned that no extension of the US Terrorism Risk Insurance Act (TRIA) has yet been announced by the US Congress. The 2002 Act created a three-year federal programme to back up insurance companies in dealing with terrorism risks and guarantees that certain terrorist-related claims will be paid. It was devised as a short-term measure designed to give the insurance market time to recover after 9/11 and develop new solutions. The current concern is that TRIA is set to expire in December 2005, even though no longer-term policy has yet been established. In the meantime, insurance policies issued during this year will have uncertainty during their final months as they carry over into 2006.

However, among those apparently least concerned are the airline industry and the aviation insurance market, despite the impression that they could be most affected by terrorist acts. Steve Doyle, manager of the global aviation and aerospace practice of Aon said: "TRIA is not a significant issue in the aviation market. As far as I am aware, there have only been a small number of policies purchased by aerospace companies and none by airlines. Also, the additional premium required by underwriters to include this coverage was substantial."

Nick Brown, chairman of the aviation technical committee of the International Underwriting Association (IUA) of London agreed that TRIA and its possible extension was of little concern in the aviation market. He said: "Very few aviation clients have chosen to purchase TRIA coverage. There are two main reasons for this. First, the US airlines have insurance coverage for war and terrorism risks provided by the US government under the Homeland Security Act. Second, the scope of the coverage provided by TRIA is too narrow to be an effective solution for most aviation companies outside the USA because it is specific to terrorist acts against the US - they therefore prefer to buy the broader coverage offered through traditional aviation hull war policies and AV52 write-backs for liability risks. Given these facts, the extension or otherwise of TRIA beyond 2005 is not a major issue for aviation insurers or their customers."

Waiting for the final Act

Mr Doyle agreed that the impact of the US Homeland Security Act had been more significant than TRIA in the aviation sector but pointed out that this Act also is only currently agreed to be in place until the end of 2005. However, as most of the major airline renewals - especially those from the US - are clustered around the final months of the year, the market can afford to wait a while to see what will happen.

He said: "The Homeland Security Act provides coverage for the US airlines in relation to war and terrorism coverage. This, therefore, not only removed these risks from the commercial market, but also the premium volume for these risks. The dominant nature of the North American airline industry meant that this was significant. As far as I am aware, there are no US airlines buying this coverage from the commercial market. As this is a more cost-effective method of gaining this coverage, we welcome it as it benefits our clients in these difficult economic times for the North American airline industry. However, it does place the North American airlines at a competitive advantage over airline buyers from other countries."

Mr Doyle said that if the coverage under the Homeland Security Act is not renewed, these US airlines will have to return to purchasing this coverage in the commercial market. That could mean there will be a significant influx of premium into the market to cover the risk that is returning.

He commented: "There has been considerable pressure on premium levels for these coverages and there have been premium reductions in the hull war, excess third-party war and also in the main hull and liability market that have started to offer increased levels of cover in the 'core' programme. Any views on the treatment that would be afforded these airlines, should they return, would be pure speculation in a market that could be subject to significant change upon any potential return by these airlines."

Commenting on the current market position, Mr Brown said: "There is currently ample capacity on both aviation hull and liability war, so the US airlines would be able to purchase cover in the market, albeit almost certainly at a higher price than they are currently paying to the Federal Aviation Administration (FAA) under the Homeland Security programme. In fact, most of the major US airlines renew in December, at which time later this year the situation regarding the FAA programme will undoubtedly be clear."

For those airlines buying war and terrorism coverage in the commercial market, the most common complaint is that they do not have long-term certainty because the coverage is usually subject to a short-term cancellation clause as well as the need to consider the unpredictability of pricing and possibly limited capacity after an incident. On this issue, Mr Brown said: "It is true that these policies tend to have short cancellation and review clauses, although many of the larger airlines do buy non-cancellable liability policies. It is also true that the commercial market can be subject to rapid changes in capacity and price, but equally governments and government policy can change pretty quickly too, so a degree of uncertainty is a fact of life."