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Brazil jet crash won't affect rates

Brazil jet crash won't affect rates

SAO PAULO, Brazil—Commercial airline risk managers still can expect a soft--though somewhat busier--renewal season later this year despite the crash of a Brazilian passenger jet last week, according to brokers.

The TAM Linhas Aereas S.A. jet crashed July 17 while landing in rainy conditions at Congonhas Airport in Sao Paulo, Brazil. After skidding off its runway, the jet slammed into a TAM cargo building and exploded.

The crash killed 186 passengers and crew and two airline personnel on the ground. In addition, five TAM ground employees and three workers for other companies were missing late last week, said a spokeswoman for Sao Paulo-based TAM, Brazil's largest airline. Seven more TAM employees remained hospitalized, she said.

TAM has $1.5 billion of coverage under its insurance program to respond to third-party losses, sources said. New York-based American International Group Inc. leads the hull and liability program, which was placed in December by a brokerage unit of New York-based Marsh & McLennan Cos. Inc.

The destroyed jet, an Airbus 320, was valued at $41 million, a source said.

Under an international airline liability treaty signed by numerous governments, TAM is strictly liable for the crash, sources said. But because of concerns over runway lengths and resurfacing at Congonhas Airport, the airline's insurers likely will try to work out an arrangement under which the airport's liability insurers would contribute to the damages, a source said.

Since about a dozen insurers underwrite 80% of all airline and airport risks worldwide, many underwriters likely have a piece of both TAM's and the airport's programs, which should facilitate an agreement, the source said.

The airport has $500 million of liability coverage, which is led by Global Aerospace Underwriting Managers Ltd. of London, according to sources. Aon Corp. placed the coverage, sources said.

Before the TAM crash, losses this year were slightly higher compared with the same period a year ago but still were far below losses over the past several years on average, according to brokers.

Even factoring in the TAM crash, losses have not exceeded underwriters' expectations this year, said Wayne Wignes, the Chicago-based vice chairman of the North American Aerospace Division at Jardine Lloyd Thompson Group P.L.C.

As a result, airline risk managers should expect to negotiate double-digit rate cuts when renewing their coverage later this year, Mr. Wignes said. That would follow double-digit rate cuts of up to 20% last year, he said.

But because of falling rates, some underwriters are reducing their capacity, brokers said. The market remains flush with capacity, but risk managers likely will have to find additional underwriters to fill out their placements, brokers said.