Airline Insurance Premiums Rise Other Coverage Likely To Follow
By Jaime Levy
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While some aviation companies’ planes remain on the ground, their insurance rates are probably soaring.
Following the four plane hijackings that subsequently led to the crashes into the World Trade Center, the Pentagon and a Pennsylvania field, aviation insurance lines were immediately affected.
As of Oct. 1, said Tom Andersen, chair of Coral Gables-based Southeast Insurance, every commercial and passenger aircraft company had endorsements covering third-party liability as a result of an act of war – known as AV-52 – rewritten, with premiums significantly raised and coverage amounts substantially lower. If aviation firms had not sent in their first payment by Oct. 14, he said, cancellation notices went out.
"Up until the attack of Sept. 11, the premium for the AV-52 endorsement was 10% of the aircraft liability insurance each year," said Mr. Andersen, whose company specializes in aviation and marine lines of insurance. "After the attack, with an estimated $3.2 billion possibly covered or more, all the aviation insurers announced that all their AV-52 funds were deleted."
To replenish their coffers, insurance agencies raised their premiums from 10% of an overall policy to 25%, he said. Previously, companies could get $500 million to $1.6 billion coverage for their 10%, but coverage capacity has dropped to $50 million.
"There’s an understandable reaction to the events of Sept. 11 from an insurance perspective," said James Montie, regional assistant vice president for New York-based Frank Crystal & Co., who spoke at the Greater Miami Aviation Association’s Oct. 10 luncheon. "In a typical pendulum effect, there’s a severe reaction. The initial response was to cancel war-risk policies, but it’s re-emerging with lower limits and higher premiums."
The price hike comes at an inopportune time for the aviation industry, which continues to struggle despite a $15 billion federal aid package geared toward getting commercial airlines and their affiliated industries back in the black.
"We had reasonable, affordable insurance. Because they targeted our industry as their weapon, we’re paying the price across the board," said John Zappia, senior vice president of Fine Air Services Corp., a cargo company, and an officer with the Coalition of Airline Providers. "I don’t see how they could start hiking up insurance. It’s almost like they’re using it as an excuse to raise the bill."
But insurers say the huge amount of damage caused by the Sept. 11 attacks is the sole reason for the sudden jump.
"Aviation underwriters are facing a $3.2 billon loss for the towers and a $500 million loss for the Pentagon," Mr. Andersen said. "So there’s the reason they had to get more premium as of Oct. 1."
Mr. Montie predicted that eventually insurance prices would settle, explaining that the aviation insurance industry was stretched to its limits.
"The industry has been strained, so if one tugs over here, you have to give over there," he said. "While the scope and extent of this type of coverage was not anticipated, it was in a financial sense. We’ve strained the system and the adjustment is to initially cut limits until we stabilize."
Sam Miller, vice president of public affairs and communications for the Florida Insurance Council, said that all business coverage is likely to increase in cost.
"We think any kind of commercial coverage will go up – any type of business policy. The commercial market is already hardening. Even before the disaster, companies were just starting to cut back on coverage out there," Mr. Miller said. "Some companies that handled the bulk of the World Trade Center stuff already had started to raise rates. This exacerbated that situation."