Aviation insurers under attack after 9/11 price hike

By Peter Chapman

Date: 10/11/04

The European Commission is pressing for concessions from aviation insurers whom it accuses of plotting industry-wide price rises in the wake of the 9/11 terrorist attacks.

The Commission's competition watchdogs launched an investigation into insurers after they apparently acted in concert to reduce cover and increase the price of policies covering all types of aircraft-related risks. The pricing changes were made after terrorists used hijacked American jets as missiles, demolishing the twin towers of the World Trade Center in New York.

The Commission is threatening legal action unless the insurance companies make commitments as to future conduct of business.

A Commission spokeswoman told European Voice: "I can confirm that the investigation is

still going on," adding: "You could say that 'crunch-time is approaching'."

The events of 9/11 were unprecedented in the history of the insurance industry. But the Commission's competition department (DG Comp) believes that insurers' concerted response betrayed structural problems in the industry and that companies are too closely linked for effective competition.

In the aftermath of the US attacks in 2001, insurers cancelled so-called hull coverage from 24 September. Shortly afterwards, they reinstated the clause with a surcharge of 0.05% on each insured entity's average fleet value, leading to an estimated fourfold increase in insurance costs for some airlines.

Third party war risk liability insurance was also cancelled from 24 September. Coverage was later reinstated but with an increased premium and a surcharge of &036;1.25 (€1) per passenger. Third-party liability other than to passengers was limited to &036;50 million (€38.5m) and a cancellation clause remained in place.

Since then, the industry has changed many of the policies, showing that customers are still able to exert some market pressure.

But Article 81 of the EU's Treaty forbids most types of price-fixing agreements.

DG Comp's insurance unit accepts that insurers need to cooperate to a certain extent when they are covering big risks, such as the losses from air crashes, but is concerned that this cooperation should be limited to the strict minimum necessary for effective protection for airlines - and that it should not lead to coordination of the market.

Officials are understood to be pushing big insurers for a range of undertakings to stop them from hurting customers by colluding on their products. This would guarantee more effective separation of companies.

But the EU executive is ready to issue a formal statement of objections - the prelude to hefty fines amounting to as much as 10% of global turnover - if the talks fail.

Many of the largest aviation insurers, such as Allianz Marine and Aviation and AIG, are members of the London-based International Underwriting Association, which represents the interests of the sector. The group cites "market reform" as one of its aims.

Spokesman Scott Farley confirmed that DG Comp had issued a number of requests for information during the three-year-

long investigation, which was never formally publicized.

"A statement of objections is one of the possible outcomes," admitted Farley. "We have been helping DG Comp with its investigation, but we have not heard anything more," he added.

Allianz also confirmed that it had been in touch with Mario Monti's department.

But a spokesperson said that the company could not comment on the issue before a formal decision had been taken.

Industry sources are hoping that Monti's successor, Dutchwoman Neelie Kroes, may decide to take a fresh look at the dossier.

Competition officials acknowledge that a decision is unlikely to come before Monti steps down, and that the new Commissioner could take an interest in such a controversial case.

A lawyer acting for one of the insurers indicated that "the betting is currently 60-40 in favour of the Commission sending a statement of objections".

The European Commission's Directorate-General for Competition has launched an investigation into aviation insurers after they apparently acted in concert to reduce cover and increase the price of policies covering all types of aircraft-related risks in the wake of the 9/11 terrorist attacks.