Aviation insurance market takes jet crash and jet fire in stride; One more major mishap, however, could begin to affect pricing

Byline: DAVE LENCKUS

The loss of a Chinese commercial passenger jet last week on the heels of a tragic Brazilian jet crash last month likely will not harden the aviation insurance market, but it may stem rate cuts for airlines with blemished loss records, market experts say.

Before the China Airlines loss, some insurers already were paring back capacity in a competitive market, and airline risk managers with fourth-quarter renewals faced the likelihood of having to line up more underwriters to secure their desired limits.

The market, however, remains overcapitalized despite those actions, experts say. Airlines with good loss records, therefore, still should be able to negotiate rate cuts during fourth-quarter renewals, if market losses do not deteriorate more than expected for the remainder of the year, they said.

But, with marketwide losses for the year edging up to a level where another big loss could threaten the market's profitability, some airlines that do not have pristine loss records should not expect rate cuts, brokers said.

China Airlines sustained a $45 million hull loss Aug. 20 when one of its Boeing 737-800 passenger jets exploded on an airport tarmac shortly after landing in Okinawa, Japan. All 157 passengers and eight crew members-including two pilots who jumped from a cockpit window-escaped safely before the jet exploded. The jet had landed early from a flight originating in Taipei, Taiwan, where China Airlines is based.

Global Aerospace Underwriting Managers Ltd. of London is the airline's lead hull and liability insurer. Chicago-based Aon Corp. placed the coverage.

China Airlines, which has a checkered loss history, canceled its existing coverage in July and negotiated a new policy for a reduced premium, according to sources. It renewed early because of concerns that rate reductions would be difficult to obtain during the market's primary three-month renewal season, which begins Oct. 1.

Over the past 10 years, the airline has had four total losses, three of which resulted in a total of 391 fatalities, said broker Trevor Howard, a partner with Jardine Aerospace, a London-based unit of Jardine Lloyd Thompson Group P.L.C.

The number of total losses for the airline is "quite extraordinary,'' Mr. Howard said. The number of fatalities also is high, he said.

On average, the world's 400 airlines sustain 24 total losses that result in 1,000 fatalities annually, Mr. Howard said. Over a 10-year period, that averages 25 fatalities and less than one loss per airline.

A month earlier, an Airbus 320 jet operated by Brazilian airline TAM Linhas Aereas S.A. crashed while landing in rainy conditions at Congonhas Airport in Sao Paulo, Brazil, killing nearly 200 passengers, crew and ground personnel. The destroyed jet was valued at $41 million (BI, July 23).

Even 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.

Therefore, the China Airlines loss will not change the market, several brokers predicted. During last year's fourth-quarter renewals, airlines negotiated double-digit rate cuts-some as high as 20%, according to brokers.

"Unless something drastic happens, I don't see anything changing too much'' for the upcoming renewal season, said Alan P. Webb, managing director of the aerospace division at London-based Heath Lambert Ltd.

But the market is "becoming less tolerable to rate reductions,'' and underwriters are telling brokers not to expect large rate reductions during the upcoming renewal season, one broker noted.

Brokers, however, do not expect that underwriters will be able to maintain that resolve across the board, the broker said.

Another broker, Wayne Wignes, the Chicago-based vice chairman of the North American aerospace division at JLT, agreed that good risks still should be able to negotiate rate cuts.

But because China Airlines sustained a hull loss, which underwriters pay quickly, the market's resolve to stop premium reductions across the board will be strengthened, he predicted.

The result likely will be that airlines with bad experience will face rate hikes, he said.

CAPTION(S):

Despite a huge blaze when an engine on a China Airlines Boeing 737-800 exploded after landing in Japan, all 165 passengers and crew aboard the commercial passenger jet had already escaped safely. * Firemen work at the site where a TAM jet crashed in Sao Paulo, Brazil, in July and killed up to 200.

Copyright 2007 Crain Communications Inc.