RICHARD PINKHAM LONDON
Attempts to find a new solution for war risk insurance has run over its initial March deadline. But with states extending still further their emergency war-risk cover to airlines, the industry has a little more time to find measures acceptable to carriers and insurers alike.
Governments around the world stepped in with temporary insurance after commercial underwriters cancelled war risk cover in the weeks after 11 September. Those arrangements were due to run out towards the end of March, however. Only a week before cover expired, the US Federal Aviation Administration announced on 13 March that it would extend cover to US airlines for a further 60 days. The European Commission also agreed to allow its member states to follow suit.
This now presents policy makers with a pause in which they can attempt to solve the puzzle of who will provide airlines with passenger and third-party war risk. Most airlines take the view that a strict market-based product is not viable and are calling for long-term government support for the provision of this critical cover.
In the USA, this support would come in the form of guarantees for a mutual fund-type scheme, which would only require government input for the first few years. US airlines are backing a proposal sponsored by industry lobby group Air Transport Association (ATA). This would create a single-purpose, not-for-profit company to provide $2 billion of third-party liability war-risk cover.
"Equitime", named after the point in a flight at which the risk of proceeding is equal to the risk of returning, would see the FAA initially assume between $1.2 billion and $1.75 billion of the risk, with the airlines covering $300 million.
The ATA argues that the government would be completely off the hook after a few years because the annual airline payments would fund an increasing percentage of the risk until government ownership was displaced. This scenario assumes, of course, that no further war risk-covered events occur in the interim.
Equitime's design would allow for its eventual merger into a similar, international plan being tabled by ICAO, should that initiative be voted into effect by member countries. The Association of European Airlines (AEA) has announced that it is working on a similar programme for its member carriers.
Among the main objectives of the airlines is to rid themselves of the $1.25 per passenger surcharge currently being imposed by insurance companies to defray the anticipated passenger liability costs arising from 11 September. They believe the charge to be unfair and excessive.
Christopher Duncan, vice-president and chief risk officer at Delta Air Lines, says the tariff explains the reluctance of insurers to accept the Equitime proposal. "With the surcharge, [the insurance companies] can demand - and receive - massive premiums," he says. Duncan adds that the levy stands to bring the struggling insurance industry $2 billion over two years.
For their part, insurers say insurance should be covered by the market - not government - but warn that significant premium rises are inevitable.
Source: Airline Business