AIRLINE CAPTIVE INSURER TO BEAR SWISSAIR CLAIMS

LONDON -- Hull and liability claims from last week's crash of a Swissair passenger jet off Nova Scotia are covered by an airline industry captive insurer but will be felt globally by aviation reinsurers.

The aircraft's hull is insured for more than $125 million, while liability claims are likely to cost hundreds of millions of dollars more, given the size of liability reserves for other recent aviation disasters. In addition, Swissair is among the international air carriers that waived Warsaw Convention restrictions on liability limits for passengers on international flights (BI, Dec. 9, 1996).

The crash of the MD-11 airliner occurred the night of Sept. 2, killing all 215 passengers and 14 crew members.

The plane was on an eastbound flight, Flight 111, from New York to Geneva, Switzerland, when it crashed into the Atlantic Ocean as it attempted to make an emergency landing at Halifax, Nova Scotia, after reporting smoke in the cockpit about one hour after takeoff.

While the cause of the crash is still being investigated, Georges Schorderet, chief financial officer of Swissair's parent company, SAirGroup, said there was no indication of a terrorist attack.

Philippe Bruggisser, SAirGroup chief executive officer, said in a statement after the crash that in March 1997 minor modifications had been made to cockpit wiring in the aircraft that crashed. The modifications were carried out at the airline's initiative three months before Boeing Corp., owner of McDonnell Douglas, issued an Airworthiness Directive instructing operators to make such modifications on their MD-11 fleets.

Among the passengers and crew were 53 passengers of Delta Air Lines and one Delta crew member, who were on the flight because of a cooperative agreement between Delta and Swissair.

Also among the passengers was Albert J. Tahmoush, former chairman of broker Frank B. Hall & Co.

The direct hull and liability insurance for Swissair is shared 50/50 by two Guernsey-based captive insurance companies, Polygon Insurance Co. Ltd. and Pentagram Insurance Co. Ltd. The captives are owned by the KSSAF group of airlines, which includes KLM Royal Dutch Airlines, Scandinavian Airlines System, Swissair, Austrian Airlines and Finnair.

In addition to insuring the five founding airlines' risks, the captives also write third-party coverage for about 30 other, mainly European, airlines.

Malcolm Nevitt, chief underwriter for Polygon in St. Peter's Port, Guernsey, confirmed that the Swiss-air MD-11's hull was insured for $126.5 million.

Although he declined to specify the limits of Swissair's liability coverage, Mr. Nevitt said it was "more than adequate, and in line with the largest airline limits."

Major airlines typically carry $1.25 billion to $1.5 billion in liability limits.

The hull and liability coverage provided by the captives was reinsured in major markets worldwide.

J&H Marsh & McLennan and Aon Corp. are the joint brokers, and coverage at Lloyd's was led by ACE London Aviation.

Swissair issued a statement saying it will compensate relatives of the passengers "under applicable law."

Swissair said relatives in immediate financial need would be given interim payments "as soon as possible" of $20,000 per passenger.

This was the first fatal accident involving Swissair since October 1979, when a DC-8 overran the runway on landing at Athens, Greece, and 14 passengers were killed in the ensuing fire.

Earlier this year, SAirGroup outsourced all risk management functions to its London broker and assigned responsibility for risk management decisions to its corporate treasury department (BI, April 27).

SAirGroup Corporate Insurances was disbanded in March. All risk management functions, including the purchase of conventional insurance and the management of alternative risk financing programs, were taken over by SAirLink, a newly formed unit of broker J&H Marsh & McLennan Inc. in London.

While insurers should end up paying the full insured value of the aircraft, brokers said Friday it was too early to comment on the anticipated level of liability claims.

The MD-11 is manufactured by McDonnell Douglas Corp., and the first plane went into commercial service at the end of 1990. The plane that crashed last week entered service for Swissair in August 1991.

Prior to last week's disaster, this model of airplane had experienced only one other total loss. That was in July 1997, when an MD-11 cargo aircraft operated by Federal Express Corp. was destroyed by fire after an apparent hard landing at Newark International Airport in New Jersey. All five people on board escaped without injury.

In 1993, two passengers were killed onboard a China Eastern Airlines MD-11 when it temporarily went out of control.

Airclaims Ltd., a U.K.-based company that compiles airline safety statistics, reports that in the 12 months to Sept. 2 there have been 33 jet aircraft losses, including the Swissair MD-11, involving more than 1,400 fatalities.

Airclaims has no estimate of insured or total financial losses.