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LONDON-Aviation insurers are warning airlines that the size of passenger liability claims could surge by as much as 20% a year when members of the International Air Transport Assn. remove liability limitations on international flights.

The IATA earlier this year cleared the last of the major obstacles to widespread adoption of its Intercarrier Agreement on Passenger Liability Limits, which waives airlines' per passenger liability limits for international flights (BI, Jan. 20).

Barry Wilkes, chairman of the Aviation Insurance Offices' Assn., which represents international aviation insurers operating in London, said that increased claims from the removal of liability limits could total about $200 million to $300 million annually as a result of the new agreement. The IATA pact is expected to come into effect this week and will be retroactive to mid-November 1996.

Mr. Wilkes said the agreement will create added exposures for insurers, which are "currently assessing the coverage and rating implications" of the IATA agreement.

With unlimited liability already the norm for U.S. domestic flights, Mr. Wilkes said he expects most of the increased claims to come from passengers on international travel in Europe and parts of the Far East. That is because these are areas with higher standards of living and also have major airlines that have accepted the IATA pact on unlimited liability.

At the same time the exposure will grow, Mr. Wilkes said that current aviation rates are already at "unsustainable" levels.

Rates weakened generally

throughout 1996, but the pace of decline accelerated particularly in the last quarter, when the majority of major airlines traditionally renew their cover, he said on the eve of the AIOA's annual meeting.

Commenting on the outlook for aviation insurance pricing, Mr. Wilkes said that the test for whether rates firm up will be the April 1 renewals, though he conceded "the market remains extremely soft, dogged by surplus capacity worldwide."

Other classes of aviation insurance-major manufacturers' hull policies, product and airport liability insurance and general aviation-also have followed a downward trend in rates, he said.

Mr. Wilkes attributed the market's pricing weakness to better-than-average loss statistics for 1995, the continuing high level of excess capacity and the fact that the world's airlines saw their profits on international scheduled routes drop last year.

The AIOA estimates that the cost of major losses for Western-built jet aircraft was $477 million in 1996. Although this was up from an exceptionally low total of $418 million in 1995, it still was one of the lowest figures of the past decade, mainly because a large proportion of 1996 losses were of older, lower-value aircraft.

Passenger fatalities last year arising from 11 accidents involving Western-built jets were the highest since 1985, at 1,306 against 383 in 1995.