Volcano Will Likely Affect Aircraft Hull and Aviation Liability Renewals
By CYRIL TUOHY, managing editor, Risk & Insurance®
Iceland's Eyjafjallajokull volcano threw international air travel into chaos earlier this week, but insureds can at least be grateful for the fact that the volcano has added downward pressure on hull and liability premiums in an aviation insurance marketplace flying with plenty of capacity.
Grounded airliners reduce hull premiums, and fewer passengers flying in the air means less liability risk, said Richard Manson, a spokesman for Global Corporate and Specialty with Allianz in Munich.
"You are talking about nearly a week of downtime," he said.
Airline contracts renew annually, typically at year-end, so airlines will have to wait until the end of the year before the benefits of the volcano turn up--assuming no major disasters occur between now and the end of the year.
Shortly after Eyjafjallajokull blew its top on April 14, European authorities closed much of their airspace to commercial traffic as a precaution from the ash plume and suspended particles, feeling they posed a danger to jet engines.
As many as 28,000 daily flights around Europe came to a standstill, stranding an estimated 750,000 travelers and throwing the aviation industry into chaos.
The only flights that took off were empty planes flying at low altitude to position themselves once the air travel restrictions were lifted, and the airlines, faced with losses amounting to as much as $200 million per day, have asked the European Union for compensation.
Britain reopened its airspace on April 20, followed by other European countries.
DAYS OF DEBATE AHEAD
Steve Skowronski, managing director in the insurance practice at the consulting firm LECG-SMART, said it was a bit early to estimate insured loss related to the effects of the volcano.
The ash plume drifted east from Iceland to the Continent, but caused no physical damage to either aircraft or airport infrastructures. Business-interruption insurance policies therefore didn't take effect.
"The Lloyd's market seems to be scratching their heads," said Thomas R. Petersen, director of public relations for Valencia, Calif.-based Petersen International Underwriters. "There's no interruption other than executives waylaid, and most are doing business wherever they are."
He related the story how a Fox News correspondent, for example, found himself stuck at London's Heathrow Airport while returning from the Middle East. Instead of slumping in a waiting room chair, the reporter spent six days reporting on the chaos and disruption at Europe's largest airplane hub.
Manson added that Allianz had not received a single call from a client looking to file a business interruption claim. "It's too large and erratic an event to be able to calculate properly," he said.
The events caused by the volcano are "unique," added Manson, and will be the subject of hours of discussion within insurance company crisis rooms.
He also said that the question isn't whether the industry can insure against such events (it can't), but whether insureds can re-evaluate continuity plans to hedge against such rare events.
Aviation rates rose last year following a string of accidents in the air and on the ground. Rates were beginning to soften again this year, according to a Marsh market report.
In 2007, the top U.S. underwriters of aviation risk were Chartis, Berkshire Hathaway, Allianz and XL, according to data from A.M. Best & Co.
April 23, 2010
Copyright 2010© LRP Publications