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Cameroon crash unlikely to affect airline rate drop

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Cameroon crash unlikely to affect airline rate drop

DOUALA, Cameroon--The crash of a nearly new Kenya Airways Boeing 737-800 jetliner in the swamps of Cameroon earlier this month killed 114 passengers and crew in what was the ninth insured airline incident this year.

The crash is not expected to change the continued decline in insurance rates in the aviation market, market observers say.

Rates should continue to slide in double digits as they did in the last quarter of 2006 when more than 70% of the world's airlines renewed their insurance programs, brokers say. The rates dropped by 20% during April 1 airline renewals, before the Kenya Air disaster.

Kenya Airways Flight KQ507 to Nairobi, Kenya, crashed shortly after takeoff from Douala Airport in Douala, Cameroon, on May 4. All 105 passengers and nine crew died in the disaster. The aircraft is valued at $52 million, sources in the London market said.

Though it took two days to find the crash site, the jetliner plummeted only three miles from the end of the runway. Experts have speculated that there may have been an unseen storm cell just off the runway that caused the disaster. However, other reports have said that both engines failed on takeoff. Official investigators are still searching the wreckage for clues.

The Boeing 737-800 aircraft has an excellent safety record, according to aviation data analysts Ascend, part of the Airclaims Group of Cos. in London.

Most of the passengers on the Kenya Airways flight were from Cameroon, South Africa, and other African countries, though some were from Europe, India, China and the United States, news reports say.

The liability loss will depend on each passenger's nationality and/or ticket, which will dictate what international convention applies to damages as a result of the death, of a passenger, legal experts say.

For some passengers, the Warsaw Convention will apply which would limit liability to 100,000 Special Drawing Rights ($152,144) per passenger unless willful misconduct can be proved. For others, the Montreal Convention could apply, which offers unlimited liability.

Kenya Airways is insured through the insurance program for the Air France-KLM Group, London market sources confirmed. Kenya Air was 26% owned by KLM when the Dutch airline merged with Air France in 2004. The Air France-KLM Group insurance program is led by French aviation insurer La Reunion Aerienne and covers a $28 billion fleet, sources said.

Air France's broker, Marsh Ltd., a London-based unit of New York-based Marsh Inc., would not comment on the crash or the coverage. La Reunion Aerienne did not return calls, nor did Kenya Air's attorneys at Clyde & Co.'s Beaumont & Son specialist aviation unit.

The Kenya Air loss is the ninth insured airline incident involving a Western-built jet this year, which is similar to the accident rate in 2005 and 2006, according to Ascend statistics.

"It is unlikely that this loss will have a direct effect on rating levels," said Stephen Riley, executive director of Global Aerospace Underwriting Managers Ltd. in London. "This loss won't change market conditions," agreed Steven Doyle, manager, aviation practice group for Aon Global, a unit of Aon Corp., in London.

"There is still a lot of surplus in the market," added David Sales, director of aerospace at London-based Benfield Group Ltd. "But it will add to the attritional losses and there will come a time when these losses will break the camel's back," he said.

Most airline renewals fall in the last quarter of the year, however, this year some airlines seem to be moving away from the fourth-quarter renewals to hedge the changes in premium rates at the end of the year, experts noted.

British Airways P.L.C., for example, moved its renewal to April 1 from the fourth quarter last year, which has made the monthly worldwide airline premium for April 1 increase to 7% of total annual worldwide airline premium from 4%, London-based sources said. Airline insurance premium fell by an average of 20% on April 1, they said.

Other airlines, meanwhile, are using "split placements" to renew half of their insurance programs on, say, August 1, and the other half on, say, March 1, sources add. "Though this can be complicated, it is workable," said one London market executive who did not want to be named. "This way, you can hedge against rising or falling prices."