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MH370 may raise aviation sector insurance rates

[SINGAPORE] With the disappearance of the Malaysia Airlines jet, the aviation-insurance industry could face one of the biggest "war-loss" payouts since the terrorist attack on New York's World Trade Centre in 2001.

If it is indeed the case that the loss of flight MH370 was triggered by what is termed "war loss" - such as pilot suicide or a hijacking - rates for aviation-sector policies could spike in the coming months, said international agency Standard & Poor's Ratings Services.

"War loss" is a separate insurance product that indemnifies the value of an airplane's hull in the event the jet is destroyed or damaged beyond economic repair, such as through a terrorist act, a hijacking or pilot suicide.

The insurance market, which covers risks such as these has "limited players" and an annual premium pool of under US$100 million globally.

A leading player in this realm is Lloyd's of London unit, Atrium. Lloyd's of London said last week that it was ready to pay out claims for the loss of the missing Boeing 777 jetliner.

Standard & Poor's estimates the losses for the aviation-insurance market at between US$250 million and US$450 million, depending on potential court settlements.

The bulk of the sum will comprise liability-loss payouts to families of the passengers; US$100 million will cover the value of the airplane hull.

Connie Wong, Standard & Poor's head of insurance ratings for Asia, told The Business Times that the sum could be higher, depending on the outcome of the potential law suits by families of the victims.

Last week, US law firm Ribbeck Law Chartered International said it had initiated the first civil legal proceedings related to MH370 and planned to pursue lawsuits seeking "millions of dollars" for the aggrieved families.

It is noteworthy that the amount paid for each passenger - there were 239 people of 14 nationalities on board - could vary widely as payouts are based on the jurisdiction in which the claim is filed and the nationality of the passenger, among other things.

Standard & Poor's does not, however, expect the liability payouts to rattle the global insurance and re-insurance companies or their Asian peers. Its credit analyst Dennis Sugrue said in a statement yesterday: "The losses will be well spread throughout the global aviation insurance and reinsurance markets, resulting in a limited credit impact on individual re/insurers."

The losses for Asia's rated life insurance companies should be manageable, said Standard & Poor's.

Ms Wong said: "Asian insurers are smaller, so even a small loss can impact them. But no one player is expected to be significantly affected."

The payouts on aviation insurance policies after the Sept 11, 2001 attacks - when aircraft used as weapons crashed into the World Trade Center, leading to huge loss of life - has been estimated at US$4 billion.

MH370 has yielded no clues to how or exactly where it disappeared on March 8. Since it has been established that the plane had flown for a significant period of time after its last contact with ground control, the possibility of "human intervention" has been widely speculated as a possible reason the jet left its charted course.

Despite the efforts of one of the largest international searches mounted by commercial and military planes and ships, there has not been a single confirmed sign of aircraft wreckage. The search is continuing, hampered only by bad weather.

Three types of policies are available in the aviation insurance space - "all-risk" policies, which cover multiple-risk elements for commercial airlines; war and political risk policies, and product-liability policies to cover mechanical failure.

If product liability caused the loss of MH370, it could trigger claims against third parties such as the airplane or engine makers or airports associated with the flight.

Standard & Poor's said: "The uncertainty around the final loss and settlement amounts will remain for some time, but insurance protection for this event is well syndicated in the global aviation market."

Australian Prime Minister Tony Abbott yesterday echoed his Malaysian counterpart Najib Razak in saying that there was no hope of finding survivors from MH370, and that the plane was lost in the remote, freezing Indian Ocean.

Referring to the wave of criticism levelled at Mr Najib for saying last week that MH370 was irrevocably lost on the basis of satellite data, Mr Abbott said that, amid the "absolutely overwhelming wave of evidence", Mr Najib was "perfectly entitled to come to that conclusion, and I think once that conclusion had been arrived at, it was his duty to make that conclusion public".

Mr Najib will travel to Perth tomorrow to visit Pearce air force base and to see the search operations off Australia first-hand.