US airlines plan to create a company to insure themselves against terrorism and acts of war at premiums about half the rate private insurers have been charging since the Sept. 11 terrorist attacks.
AMR Corp's American Airlines Inc, UAL Corp's United Airlines and other members of the Air Transport Association, the US airlines' trade group, are forming the company, according to Jerry Frick, head of the global aviation practice for Marsh Inc.
Marsh, the insurance brokerage unit of Marsh & McLennan Cos, advised the association on the plan.
PHOTO: AP
The airlines would provide about US$300 million in start-up funding and first-year premiums to the company, called Equitime, said Jim Casey, a spokesman for the association. Coverage will cost about US$0.50 to US$0.70 per passenger, compared with the US$1.33 they pay now. Insurance available in the private market requires airlines to pay premiums equal to the potential loss they could absorb.
"Pre 9-11, US airlines were paying a combined US$15 million to US$20 million for war risk coverage and today we're paying a combined US$930 million," said Chris Duncan, risk manager at Delta Air Lines Inc and chairman of the ATA's insurance group. "That's not insurance."
The program would offer liability coverage of up to US$1.5 billion per event. The ATA hasn't completed the proposal and would still need regulatory approval for some parts of it, Casey said.
"We're not at a point where we can formally announce anything," Casey said, declining to detail outstanding issues.
The proposed insurance could be available to US passenger and cargo carriers as early as June, he said.
Commercial insurers limited war-risk coverage available to airlines and increased premiums after the attacks, forcing carriers to seek alternatives and more funding for insurance. The US government stepped in to provide coverage through March 20 for damages of more than US$100 million that might result from acts of terrorism.
"The appeal to the government is that Equitime is a self-help mechanism that over time reduces the necessity of the federal government providing a backstop to the industry," Marsh's Frick said.
The International Air Transport Association and the International Civil Aviation Organization are also working on plans to provide alternative insurance to airlines, airports and vendors, said David O'Connor, an IATA director.
The proposal includes additional coverage from the US government for claims over Equitime's initial US$300 million during the first year, Casey said. As Equitime's premium payments and interest accumulate, the federal government's role would decrease, he said.
Frick said the company would eventually eliminate the need for coverage from the government.
The Transportation Department didn't have an immediate comment on what role it might play in Equitime. The carriers would need the government to extend its stopgap coverage past March 20 and no decision has been made on that front, said Bill Mosley, a spokesman for the Transportation Department.
Officials at American and United, the two largest carriers, declined to comment on the plan, which was reported Sunday by the New York Times. Other airlines couldn't be reached for comment.
Equitime is being formed under the 1986 US Risk Retention Act, which allowed groups of companies in the same industry to form a risk retention group to insure its members.
The Risk Retention Act supersedes state insurance laws, so the new company doesn't have to be licensed by every state. That speeds up the process and cuts costs for the airlines, Frick said.
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