WSJ: European Airlines Face WMD-Insurance Problem

European Airlines Face WMD-Insurance Problem

By CHARLES FLEMING

Staff Reporter of THE WALL STREET JOURNAL

October 20, 2005; Page A13

European airlines are facing a black hole when it comes to insuring
themselves against some large-scale terrorist attacks, causing worries
among some carriers that unless governments step in they may have to
ground their fleets.

As negotiations get under way between the carriers and insurance
underwriters for next year's policy renewals, brokers and airline
officials say many insurers are refusing to cover aircraft -- and
threatening to stop insuring passengers and property below -- in the
event of an attack with a weapon of mass destruction.

Until now, the London-based companies that dominate aviation insurance
have covered airlines against such risks. The policy change could leave
airlines facing costs of hundreds of millions of dollars if a jetliner
is destroyed this way.
[Fleet Risk]

Unlike the U.S., where the government has told airlines it will act as
insurer of last resort in the event of a terror attack, European
airlines depend on commercial insurers, including the Lloyd's of London
market.

Airlines worry their planes may be grounded because under European
Union rules, no commercial aircraft can fly unless fully insured for
third-party liability, according to the International Air Transport
Association. So far, no EU government besides Ireland has said it would
fill the void.

In fact, should any agree to act as insurer of last resort to the
airline industry, they run the risk of violating the EU ban on state
subsidies. Ludolf van Hasselt, head of the European Commission's Air
Transport Policy unit, said last week that if governments step in, they
can do so only "as a short-term solution."

About 60% of the world's aviation insurance, valued at an estimated
$2.5 billion in annual premiums, is written in London. About two-thirds
of those policies come up for renewal in the last two months of every
year.

Most London insurers have started excluding attacks involving weapons
of mass destruction on aircraft-hull policies, brokers said. And this
month, they announced they intend to stop providing related liability
coverage next year.

The weapons at issue include "dirty" bombs that use explosives to
scatter radioactive material, biological and chemical weapons or
electromagnetic devices. Insurers would continue to cover airlines in
the event of terror attacks not involving weapons of mass destruction.

"There's no point in trying to get underwriters to take on policies
that will ruin them," said Ken Coombes, managing director of the
aviation practice in London of insurance brokerage firm Marsh &
McLennan Cos. "A dirty bomb exploding in a plane at a major airport
like Heathrow would wipe out" an insurer.

British Airways declined to discuss its specific insurance policies. A
spokeswoman said: "We are reviewing our options. This is an industry
issue." Air France spokeswoman Brigitte Barrand said the airline
"hasn't been notified by its insurers that any of its current policies
will have certain risks excluded."

Scandinavian Airlines System spokesman Hans Ollongren said the company
expects to fly without full hull protection starting early next year,
and has told the Swedish, Danish and Norwegian governments it could
face an even more serious problem if its liability policies are cut
back.

"SAS and other Swedish airlines have asked us to be prepared to step in
with guarantees [but] Sweden has always been reluctant to step in with
such state aid measures," said Lars Osterberg, transport-policy
director at Sweden's Ministry of Industry, Employment and
Communications.


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