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Claims stemming from the Sept. 2 Swissair crash could consume more than 70% of this year's worldwide aviation insurance premiums, but that likely will not stop underwriters from slashing airlines' premiums this autumn.
Aviation market executives said that while some forces could turn around the market quickly, the market's excess capacity likely will drive underwriters to continue bidding for business in order to retain market share this autumn. Between 60% and 70% of the world's airlines renew their coverages during the last quarter.
"Every underwriter I know is committed to a market-share strategy, and brokers force them to respond accordingly," observed Ric Parker, a Greenwich, Conn.-based reinsurance consultant for captives and reinsurance brokers. Mr. Parker specializes in alternative risk financing for aero-space risks.
But, market executives disagree over how successful airlines will be in negotiating various terms and conditions, including computer date-recognition exclusions.
All 229 passengers and crew died when the Swissair passenger jet, an MD-11, crashed off Nova Scotia's east coast about an hour after takeoff from New York. The pilot of Flight 111, which was en route to Geneva, reported smoke in the cockpit before the crash (BI, Sept. 7).
Aviation sources said the hull loss was $126.5 million.
Market executives do not expect the airline's insurers to establish a liability reserve for a month or two. However, market executives said, the reserve could approach $500 million because of the high number of professionals on board the flight and Swissair's 1996 decision to waive the liability restrictions the Warsaw Convention established for airlines when passengers are harmed or killed on international flights.
Attorneys for former middleweight boxing champion Jake La-Motta have filed the first lawsuit over the crash. Mr. LaMotta's last surviving son and business partner, Joseph, 49, was killed in the crash.
The lawsuit, filed Sept. 9 in federal court in Brooklyn, seeks $50 million of compensatory damages and $75 million of punitive damages from Swissair; Delta Airlines Inc., a part owner of Swissair; McDonnell Douglas Corp., which built the MD-11; and Boeing Co., the jet builder's parent company.
The suit is designed to call attention to airworthiness concerns that the Federal Aviation Administration has had in recent years over wiring problems in MD-11s, said Jake LaMotta's attorney, Mitch Baumeister of New York-based Baumeister & Samuels P.C.
The latest of three MD-11 airworthiness directives, which the FAA issued in June 1997, warned that a wire chafing problem could cause fires in wire bundles and produce smoke in the cockpits of an estimated 45 of 86 MD-11s in service worldwide at that time.
The airline said it had not seen the suit and could not comment.
Swissair previously has said it made minor cockpit wiring modifications in the plane that crashed.
Authorities last week had not determined the cause of the crash.
But, a Swissair spokesman said Canadian aviation authorities have told the airline that plane wreckage from near the cockpit shows signs of heat stress, which might indicate an electrical fire.
In January, market executives expected that accounts renewing during the spring would be able to negotiate 10% to 15% premium reductions for hull and liability coverage. That would have put those accounts on par with those that had renewed in autumn of 1997. Underwriters hoped to stabilize rates and premiums for the remainder of the year (BI, Jan. 26).
Instead, overcapacity and underwriters' desire to maintain market share forced down premiums 25% to 40% and around 30% on average throughout the year, according to market executives.
Even airlines that have had significant losses in recent years negotiated substantial rate cuts this year, market executives said.
For example, US Airways Group Inc., formerly USAir Inc., negotiated a 50% rate cut, several market executives said. US Airways would not comment.
In addition, Federal Express Corp. recently renewed its hull and liability coverage at a 30% rate cut, despite the loss of an MD-11 in July 1997, market executives said. Fed Ex's expiring coverage did not reflect the loss, estimated at $115 million, because the freight carrier had negotiated its renewals last year before the crash (BI, Aug. 4, 1997).
Phil Williams, a senior risk analyst with Fed Ex, said he believed the rate cut was smaller than 30%.
"There's no logical explanation" for the falling aviation insurance rates based on underwriters' losses, said Bill Behan, president of aviation broker AirSure Ltd. of Golden, Colo. "The capacity is there. People need the premium to keep their doors open, their people employed and get the bills paid," he said.
A $626.5 million Swissair loss would represent 70% to 74% of the $850 million to $900 million of aviation hull and liability insurance premiums worldwide for all of 1998, market executives say.
The Swissair liability reserve would not drain underwriters' cash reserves immediately, but the airline's hull loss and others so far this year still represent up to 64% of underwriters' estimated written premium for the entire year, according to figures from the aviation division of broker Aon Group Ltd. in London. Hull losses worldwide through Sept. 2 totaled $545.4 million, according to Aon.
Even so, while market executives said they could not be certain, they predicted that accounts renewing this autumn likely will have little problem negotiating rate cuts approaching 30%.
Underwriters likely will be persuaded to consider airlines' individual experience and lower rates enough to achieve rating parity with airlines that renewed earlier this year, said Harold Clark, chairman and chief executive officer of N.Y.-based U.S. Aviation Underwriters Inc. USAUI is the management company of aviation underwriting pool U.S. Aircraft Insurance Group.
Even renewing accounts with recent losses may be able to negotiate some sort of rate reduction, market executives said.
In a 1998 market summary letter produced after the Swissair crash, Aon noted that even with current aviation exposure levels nearly double 1990 levels, worldwide premium would have to dip as low as $700 million to reach "an equivalent average rating level of 1990." The summary concluded that "without further significant hull loses to create a strain on underwriters' cash reserves, it is still difficult to see exactly what will halt the slide to this rock-bottom level."
In addition, 1998 has been a good year for U.S. aviation underwriters, because they have not been hit with the worst of this year's airline or satellite losses.
Another factor contributing to lower rates is the soft reinsurance market.
Aviation insurance rates are about one-third of the aviation market's historic burning costs, which means they are two-thirds below underwriters' historic costs, Mr. Parker said. But, that does not necessarily bother underwriters, because their retentions are next to zero, he said.
The retrocessional market is the main payer of aviation losses today, Mr. Parker said.
Mr. Clark agreed that "when reinsurance is available at attractive prices, it tends to dictate the playing field."
The guessing game aviation underwriters will be playing this autumn renewal season is whether they will have the same reinsurance support after their year-end reinsurance renewals that they have now. "Further losses this fall could harden the reinsurance market," said Peter Biccars, chief operating officer of the aviation division at J&H Marsh & McLennan Ltd. in London.
Perhaps the most contentious negotiating point is over computer date-recognition problems.
London and U.S. underwriters over the past several months have been trying to introduce a date-recognition exclusion. The underwriters also are offering a reinstatement of coverage -- or a writeback -- at no additional premium for accounts that can demonstrate they have cleared up their computer problems.
However, some writebacks are more liberal than others, said Rod Mezzina, a managing director at J&H Marsh & McLennan Inc. in New York.
Market executives said an exclusion and writeback would function much like how underwriters currently treat aircraft mechanical breakdowns. If an aircraft lands safely after experiencing a mechanical breakdown, the repair costs are not covered. If the breakdown leads to a crash, the airline is covered.
Overall, the market is handling the issue on a case-by-case basis, said Mr. Biccars of J&H Marsh & McLennan. Underwriters have been able to include the exclusions and writebacks in some cases but not in others. In still other situations, they have managed to insert a provision that states they will add an exclusion and a possible writeback later when the market agrees on wording, Mr. Biccars said.
The London market is trying to work out acceptable wording and may reach a compromise this fall, said Bill Smith, managing director of Aon's aviation division in London.
In other areas:
* More than ever before, airlines in the past year have sought liability limits greater than $1 billion. Brokers said accounts generally ask for the greater coverage late in negotiations to make the renewal pricing even more attractive. Underwriters said accounts often give up some premium reductions in exchange for the higher limits.
* Brokers disagree over the popularity of profit commissions and prompt-payment premium discounts.
Aon asserts in its market summary that the size and availability of both are increasing.
But, Mr. Biccars said that generally only airlines with poor experience opt for and can get profit commissions on higher rates.
He also said most airlines prefer to pay their premiums quarterly, rather than all at once in exchange for an added discount. The discount typically does not match the airlines' potential investment return on the money, he said.
* Market executives also disagree on whether airlines can negotiate coverage for additional risks, including employee discrimination, extra expense, and costs due to transportation delays.
Mr. Parker predicted airlines would be "very successful" in obtaining that coverage.
Mr. Biccars disagreed. He said underwriters expanded coverage to those risks last year, not expecting to pay any claims. But, claims surfaced, which will prompt underwriters to pull back the coverage this autumn, he said.
Contrasting underwriters' views on rate cuts and sticking with new loss-producing coverage, Mr. Biccars said: "Stupidity is one thing. Suicide is another."
Meanwhile, war risk underwriters also are paring rates extensively. Worldwide premiums are down 33% to 60% to $20 million to $30 million from $45 million to $50 million last year. Several market executives said they have never seen prices so low.
Edwin Unsworth in London contributed to this article.