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When the first commercial Airbus A380 blesses the tarmac at Singapore Changi Airport this month with its elegant, 22-wheeled, reinforced-plastic self, it will carry with it a new era of liability exposure in aviation insurance.

But delays in delivery and overcapacity in the market mean the 239-ton jet's most significant impact on insurance pricing is probably still a few years away.

The European Aeronautic Defence and Space Co.'s double-decker passenger plane in some configurations could seat more than 800; the current limit is around 500. But that increased seating capacity also means increased liability limits and hull coverage.

A 2006 study by GE Insurance Solutions, now part of Swiss Re, concluded that the increased cost of the A380 will result in a 20 percent increase in maximum airliner hull value, from a previous high of approximately $250 million to as much as $300 million.

The actuaries also estimated that by the time the first wave of 130 Airbus A380s made it to the market, the percentage of worldwide aircraft with seating above 450 could triple to 15 percent. Orders for the A380 are now above 160. Average liability loss in the industry is also estimated to increase 10 percent, from $329 million to $359 million.

Wayne Wignes, executive director of the Global Aviation Practice Group for Chicago-based Aon Corp., says the debut of the A380 reminds him of the 1969 introduction of the Boeing 747. As the 747 did, the A380 will increase prices for all commercial airlines, not just operators of the A380.

"If action or inaction by a service provider is ever found to be the cause of an incident with the A380, the liability would be immense," Wignes says. "Underwriters would be aware of that, and it would be reflected in insurance pricing."

A SOFT PARADE

In the short term, experts say the A380 is making a quiet entrance from an insurance-pricing standpoint.

One key factor is overcapacity. After Sept. 11, 2001, airlines felt obligated to increase coverage. Premiums skyrocketed from an annualized rate of $1.75 billion to around $4 billion. But when faltering airlines reduced their number of routes, reducing risk exposure, the result was airlines holding too much coverage. A vastly improved industry safety record contributed to the bulge.

Martin Stevens, the London-based chief underwriting officer for American International Group Inc., says the aviation industry's insurance premiums are now below where they were pre-Sept. 11, and this fall's A380 debut in Singapore isn't likely to alter them substantially.

The slow pace at which the aircraft has been delivered also has lessened the A380's impact, says Steve Alexandris, a vice president and senior airline underwriter in the Atlanta office of specialty insurer C.V. Starr & Co. Inc. Originally expected to be in use in Singapore in the fall of 2006, the A380 has been delayed more than a year because it was overweight and required complicated wiring.

The delay meant a handful of top Airbus executives lost their jobs, the number of A380s ordered was reduced and the sales price dropped in some cases. Furthermore, the delay has given customers more time to shop for coverage.

"Is it a big deal?" says Steven Doyle, the London-based executive director for Aon Global Aviation. "Probably it would have been had it come to the industry a little bit quicker than it has. It has been such a long, ongoing process that people are now kind of accustomed to it. You're not going to see the skies darkened with A380s."

Luxury-seating arrangements requested by the A380's first customers are also playing a role. Neither Singapore Airlines Ltd. nor another early customer, Qantas, is ordering planes with much more than 500 seats, equal to what some 747s already carry.

"The addition of the A380 is not suddenly going to dramatically change the risk profile of airports that are already seeing large, wide-bodied aircraft," Doyle says.

In addition, Alexandris, who specializes in coverage for airlines based in the United States, says U.S. airlines will be slow to take on the A380 because of the country's litigious atmosphere and the different service needs of airlines based here.

"The U.S. airlines we have spoken to don't seem to have a whole lot of interest in the A380," Alexandris says. "They would rather offer two flights of 300 people two hours apart than one flight flying 600 people."

Alexandris says U.S. airlines, which continue to struggle financially, also aren't going to have much of an appetite for the plane's price--around $300 million--or its higher insurance costs. Experts say liability limits sought by airlines operating the A380 are in the $2.5 billion range, compared with the $1.5 billion to $2 billion the rest of the market demands.

What also remains to be seen is what kind of safety record the A380 will establish. The plane has the most up-to-date technology, but that also creates a learning curve for pilots.

"When Airbus first started delivering some of their highly advanced aircraft, they ran into some issues where the plane was doing one thing and the pilot was doing another and they had to remedy the situation," Alexandris says.

AS THE CYCLE TURNS

The A380 is coasting into a market in which airlines are carrying coverage that is more than double their amount of risk, premiums are dropping steadily and aviation insurance is becoming one of the most profitable departments in many insurance companies' portfolios.

But the aviation insurance market, like most, is a cyclical one. And forces are on the move that could make the market tighter and less profitable for insurers.

As airlines gradually add more routes, risk increases, a factor that will cause the market to tighten. In three to four years' time, substantially more of the overdue A380s will come into use just as premiums start heading back up.

"I think as people start to draw down capacity, then the A380 will have an impact, and it will have a dramatic impact," Alexandris says.

AIG's Stevens agrees. "If in a couple of years, we see capacity in the 160 percent to 170 percent range, then the pricing might get a little harder."

As more A380s enter the market, operators at airports used by A380s will have to increase coverage. The reason: Aircraft have to carry enough liability insurance to cover possible collisions with other planes, including much bigger ones.

A case in point is the September 2006 collision of a Legacy executive jet with a Gol Boeing 737. At least 150 people on the Boeing died, but the executive jet and its seven passengers landed safely. If a Legacy can doom a 737, it's possible to bring down an A380 with a similar-sized jet, Stevens says.

High fuel costs add another challenge for airlines, something that might prevent customers from carrying the $3 billion in liability some experts say the A380s will demand.

But Stevens says airlines will manage costs to the best of their ability without scrimping on coverage. "At the end of the day, they'll get by with what they can."

DAN REYNOLDS is senior editor of Risk & Insurance®.

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