Insurance against terrorist risks

Insurance against terrorist risks

Air transportation is particularly vulnerable to the threat of terrorism. Examples include the tragic events of September 11, 2001, as well as the in-flight explosions of a UTA DC 10 in September 1989 and of a Boeing 747 in December 1988 over Lockerbie.

Several measures were taken after these occurrences to counter the threat of further terrorist attacks: more stringent checks and controls at airport access points, the use of video-surveillance cameras, the presence of armed guards on some flights, military aircraft in a permanent state of alert, etc.

It is important to remember that a risk is only insurable to the extent that it can be measured and insured for a reasonable cost (so that it can be shared between the largest number of insurers). Therefore, the scope of cover must be limited, which explains why occurrences such as damages caused by war, nuclear accidents and pollution are not covered (except for accidental contamination).

On September 11, 2001, terrorism took on a new dimension:

• The costliest disaster in the history of insurance (3 100 people died and 2 250 were injured).
• Civil aircraft were used as weapons of mass destruction.
• The terrorist threat became a reality.
• Conversely, the level of uncertainty grew as to the possible means used (ground-to-air missiles, nuclear fission and/or fusion, biological and chemical materials, etc.).

As a result, insurers are unable to assess the risk.

Moreover, the specific features of aviation insurance are relevant in this case:

• The statistical population is low: there are fewer than 16 000 commercial jets in the world that have been manufactured in the West.
• Accidents: low frequency; high intensity, very high cost.
• Insurance requirements: around 300 million dollars for hull insurance on the A380 and about 2 billion dollars in third-party liability coverage per plane for the major carriers.

Consequently, covering purely accidental risks already poses a major challenge to the basic principles of insurance (risk sharing, law of large numbers, etc.) As a result, no single domestic market has sufficient capaciy to retain the aviation risk. Consequently, aviation insurance must make extensive use of the international market (coinsurance, reinsurance).

After the attacks of September 11, 2001, aviation insurers were compelled to limit their liability with respect to non-flying third parties on a global scale (injury to persons or property on the ground) for war risks, including acts of terrorism. Governments stepped in with backstop solutions for airlines. The European Commission decided to put an end to all such measures in effect throughout the European Union on November 1, 2002. At about the same time, the US government decided to maintain its backstop, via the FAA (Federal Aviation Administration).

Today, liability cover for terrorist acts in respect of third parties on the ground is limited to 50 million dollars. The absence of a backstop mechanism in Europe and the inadequacy of the global supply have led air carriers to ask European governments to set up Eurotime, a European mutual terrorism insurance fund.

With respect to coverage for loss or damage to passengers and aircraft hulls in the event of a terrorist attack, the aviation insurance market decided after September 11 to maintain the level provided in policies already in force.