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Originally published July 22, 2014 at 6:35 PM | Page modified July 22, 2014 at 7:06 PM

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Jet insurers worry after Malaysia Airlines’ latest crash

For just one category of aviation insurance — war-risk insurance on the planes — claims for incidents in the past five months total an estimated $600 million for a sector that collects $65 million a year in premiums.


The New York Times

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KUALA LUMPUR, Malaysia — Malaysia Airlines’ two crashes in less than five months are sending tremors through the aviation-insurance market — not least because the carrier’s $2.25 billion overall liability policy is mysteriously missing a standard clause that usually limits insurers’ payments for search-and-rescue costs.

The looming payments are coming as underwriters face other claims, because of the shelling of Libya’s main airport a week ago, with 20 planes damaged, and a pair of deadly Taliban attacks on Karachi’s airport in Pakistan.

For just one category of aviation insurance — war-risk insurance on the planes — claims for incidents in the past five months total an estimated $600 million for a sector that collects $65 million a year in premiums.

Airlines have many insurance policies. But the main one is an “all risk” policy that covers most crash-related expenses, including what is usually the biggest: paying for settlements with passengers’ next of kin.

Malaysia Airlines’ broader policy has a high cap by industry standards — $2.25 billion for each crash — because the carrier operates big Airbus A380s, each configured for 494 passengers, and it wanted ample coverage.

But the policy is unusual in that it does not have a separate limit for search-and-rescue costs — it is limited only by the overall $2.25 billion cap for the policy, three people with knowledge of the policy said. It is unclear why the clause was omitted, they said.

The absence of a separate limit for search-and-rescue costs means that Malaysia Airlines could seek reimbursement for tens of millions — and potentially hundreds of millions — of dollars in search costs if the Malaysian and Australian governments decide to bill the airline for even part of their considerable expenses in looking for Flight 370, which vanished March 8.

The crash of Flight 17 in Ukraine appears to have caught the war-risk insurance market particularly by surprise. Insurers often bar airlines from flying across dangerous areas, or cancel their policies, but most carriers kept flying over Ukraine until the crash. The number of flights there dropped only 12 percent in the month leading up to it.

“One assumes that if the war-risk underwriters thought there was any risk, they would have prohibited airlines from flying or canceled their policies,” said Paul Hayes, head of accidents and insurance at Ascend, an aviation-consulting firm in London.

Insurance adjusters agreed with the Malaysian government there was a strong but not fully proved possibility that Flight 370 was lost because of deliberate action, given that the plane made at least four turns over the course of an hour before heading south across the Indian Ocean and apparently running out of fuel. The final compromise followed a precedent in other cases in which pilot suicide was suspected but not proved.

“It was basically split between the two policies,” said Neil Smith, the head of underwriting at the Lloyd’s Market Association, a trade group composed of Lloyd’s of London insurance underwriters.

Airline-insurance premiums are set through an annual process in which underwriters bid for which provider will offer the lowest premiums at the best terms. Few airlines’ policies have been renewed yet; Malaysia Airlines’ has not. Until this year, Malaysia Airlines paid some of the lowest insurance premiums in the global aviation market, because it had a fairly young fleet of Boeing and Airbus planes.

Many leases and other contracts in the airline industry require carriers to be insured. Despite recent losses, Smith said, airlines were still able to obtain insurance, although he declined to speculate on the likelihood of increases in premiums.

“If it wasn’t available,” he said, “the airlines wouldn’t be able to fly.”



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