A little over one year has passed since the European Union introduced higher minimum liability insurance requirements for aircraft registered within the EU, and those of foreign registry flying into or over its 25 member states. Regulation EC 785/2004, which became mandatory last April 30, was intended to standardize disparate levels of insurance pertaining within the EU and to raise liability requirements to ensure adequate consumer protection. Heavy penalties could be imposed for noncompliance.

The document states that “sanctions for infringement of the regulation shall be effective, proportional and dissuasive.” These sanctions could include withdrawal of a European Community air carrier’s operating license, or refusal of rights for non-EC air carriers and EU operators using aircraft registered in foreign countries to land on the territory of a member state. Criminal prosecution for noncompliance has also not been ruled out.

When the regulation was first published in April 2004, aircraft operators braced themselves for a steep rise in premiums, especially in countries where insurance limits were considerably lower than in countries with a thriving aviation industry. Opposition was vociferous and has not yet been stilled, but the regulation is in place and is unlikely to be changed in the short term. But a year after the new regulation came into force, have these fears proved justified?

Premiums have certainly gone up, but it is impossible to quantify the amounts as insurance brokers and operators are reticent to reveal details, even in general terms. An industry source said that across-the-board increases in premiums ranged from double to fourfold. The operators hit hardest are probably those who previously have been under-insured. In other cases, the new arbitrary weight limits may have pushed their aircraft into higher coverage categories.

“Many business jet operators, by the very nature of their high-value assets, were already adequately covered under the new regulation,” commented Toby Ward, director of Hayward Aviation (Booth No. 1073), the London-based aviation insurance broker. “No great variations have been experienced within the EU but it is a reasonable assumption that some operators would have had to increase their limits of cover, especially those in central and Eastern Europe.”

Insurance companies have dismissed claims that they took advantage of the more stringent requirements, saying that premiums have increased only in proportion to the higher coverage limits provided. Ward pointed out, however, that rather than a hike in insurance rates, there has been a trend over the past year to a decrease owing to stiffer competition between insurance companies, and taking into account the loss record and experience of the operators.

The minimum liability coverage is SDR 250,000 per passenger. [SDR (special drawing rights) is the International Monetary Fund’s unit of currency, which last month was the equivalent of about $0.69 (U.S.) and *0.84.] Minimum coverage for baggage is set at SDR 1,000 per passenger, and for freight, SDR 17 per kilogram. EU member states can set a lower limit for noncommercial operations with aircraft having an mtow of less than 2,700 kg (5,952 pounds), provided that coverage is at least SDR 100,000.

Another major issue occupying the minds of aviation insurers and governments is whether the risks of losses to aircraft, passengers and third parties arising from weapons of mass destruction (WMD) should be assumed by government or commercial markets. Both, not surprisingly, want limited exposure to acts of war and terrorism. The European Commission has stated that compliance with EC 785/2004 includes coverage for WMD risks, but there is no specific wording about this in the published document and the insurance companies consulted by EBACE Convention News are not convinced that it is included.

Not everyone views war risk as a divisive issue. “Aviation insurance is a niche market and has always been able to deal with certain war risks,” said Ward. “It has always been very sensitive to changes, but while there are many on-going political hotspots presently, there is no specific heightened [alert to] other war risks at the moment.”

However, one area of concern, Ward observed, is governments’ increasing reliance on contracting commercial operators to fly supplies and personnel into war zones and other risk areas. “Where does the commercial risk end and the government responsibility begin?” he asked.

The market started to impose WMD exclusions in May last year, but those provisions will not take effect until renewals later this year. The newly created Aviation Insurance Clauses Group (AICG) started consulting with the aviation industry on new aviation clauses and wording last October 3, a process that will continue for some months. These changes are aimed at striking a balance between the interests of insurers and their clients, but will be nonbinding.

According to insurance company sources, the new wording may allow for a limited amount of WMD coverage–for example, single aircraft losses. This change could leave the insurance industry facing heavy losses if an attack with such weapons is mounted on an airport. In the meantime, the insurance companies are working with all industry bodies in lobbying governments, which will have to provide excess coverage guarantees until a permanent solution can be found.