The disappearance of Malaysia Airlines MH370 has been compounded by the loss of MH17, which was shot down by a missile over eastern Ukraine in July. Less than a week afterwards, a TransAsia Airways passenger aircraft crashed on the island of Penghu killing 48 people and injuring 10, and an Air Algerie flight came down in the Sahara desert, killing all 118 passengers.
“With a shallow premium pool fully exhausted and an expectation of an immediate review of the current hull war premium rating, MH17 and incidents in Pakistan and Tripoli look likely to be the events that may halt the decline in aviation premium income and usher in the reintroduction of increases once again,” said Gary Moran recently, head of Aon’s Asia aviation brokerage.
The total insurance loss of Malaysia Airlines Flight MH17, which crashed over the Ukraine-Russia border on 17 July 2014, is not expected to result in any ratings actions, according to a new briefing from A.M. Best. The Best’s Briefing, entitled The Insurance Implications of Malaysia Airlines Flight MH-17, states that the total insurance loss will comprise passenger liability claims and physical damage to the aircraft. The liability loss will be shared between the insurance and reinsurance markets. Allianz SE, through its specialty lines subsidiary, Allianz Global Corporate & Specialty SE, is the lead reinsurer on aviation hull and liability risks for Malaysia Airlines, with the Lloyd's market also likely to be affected by passenger liability claims (as will a number of global reinsurers). Due to the nature of the loss, a complex and lengthy settlement period is anticipated.
Ultimate cost uncertain
There is more certainty around the ultimate cost of physical damage. Lloyd’s Syndicate 609, which is managed by Atrium Underwriters Ltd, has confirmed that it is the leader of the hull war policy for Malaysia Airlines. The syndicate and its co-insurers have agreed to settle the hull war aspect of the loss and collection of funds has been instigated (subject to key facts remaining correct).
Catherine Thomas, director of analytics and one of the authors of the briefing, said: “For a number of years, abundant capacity has placed considerable pressure on pricing, as well as terms and conditions, across all aviation lines. At the beginning of 2014, rates were significantly below peak levels, and in spite of a number of large losses in recent years the market has remained profitable." She added, "For the niche war risk market, losses this year will considerably outweigh premiums written and insurers are expected to react with substantial rate increases.”
Initial mandatory payouts to the families of those onboard flight MH17 are expected to be around US$50 million, with the hull claim standing at over $100 million. Malaysia Airlines, as part of the Montreal Convention, is responsible for total compensation of $150,000 to $175,000 per passenger. Industry estimates vary, although many believe the total cost of liabilities to be over $1 billion, especially if some of the relatives of passengers sue Malaysia Airlines for flying over a war zone.
A.M. Best said that it believes the majority of the loss will be absorbed by the Lloyd's market, as well as a number of global insurers and reinsurers. Given the diversified nature of business underwritten by these entities, A.M. Best does not expect to take any rating actions in response to this single large loss. Lloyd’s and its member companies, though, have so far been unable to fully quantify how much the MH17 disaster, and the loss of the MH370 jet, will cost ultimately.
The search effort for the missing MH370 aircraft is continuing, with the cost of the search being borne by the Australian government. It has been noted, though, that Malaysia Airlines’ US$2.5-billion overall liability policy does not contain what many consider to be a standard clause that limits the amount of money an insurer would pay for search and rescue to be carried out. The Australian government could still approach Malaysia Airlines for repayment of the A$8 million it has cost it thus far, but typically this option is not taken up by governments.
The loss of flight MH17 has had an effect on airlines as well, with Tim Clark, president of Emirates Airlines, saying: “This has changed everything.” Steven Verhagen, chairman of the Dutch Airline Pilots Association, told the Wall Street Journal: “We have to assess risks better. Part of the risk assessment will always have to be ‘are there any rebels and unorganised groups and terrorists that have access to very sophisticated missile equipment, and do they have the intention to use them against civil aviation’?”
Change in the air?
On 24 July, the International Civil Aviation Organization (ICAO) issued a State Letter that reminded applicable authorities in the 191 signatory states to the Convention on International Civil Aviation of the international provisions specifying state responsibilities with respect to the safety and security of civil aircraft operating in airspace affected by conflict. The ICAO State Letter highlights that the obligations of states should not be confused with safety information circulated from time to time by ICAO when potential hazards to civil aviation operations are brought to the attention of the organisation. It also draws attention to the need for the appropriate authorities to consider and mitigate the safety risk and potential congestion consequences in the event that operators decide to circumnavigate various airspaces affected by conflict.
ICAO, the International Air Transport Association (IATA), Airports Council International (ACI) and the Civil Air Navigation Services Organisation (CANSO), jointly expressed their strong condemnation of the use of weapons against civil aviation, in a statement released at the end of July: “The downing of Malaysia Airlines Flight MH17 is unacceptable. Our organisations wish to convey our deepest condolences to the families of the passengers and crew who lost their lives in this tragic event. While aviation is the safest form of transport, the MH17 incident has raised troubling concerns with respect to civilian aircraft operating to, from and over conflict zones.”
The group met at ICAO with collective resolve to urgently review the issues and potential responses to be pursued. As a first step, States have been reminded by ICAO of their responsibilities to address any potential risks to civil aviation in their airspace. The group of industry representatives went on to say: “We recognise the essential need for information and intelligence that might affect the safety of our passengers and crew. This is a highly complex and politically sensitive area of international co-ordination, involving not only civil aviation regulations and procedures, but also state, national security, and intelligence gathering activities.” All parties to the discussion agreed that ICAO now has an important role to play in working as urgently as possible with its Member States, in coordination with the aviation industry and other bodies within the United Nations, to ensure the right information reaches the right people at the right time.