Airbus' A380 to Increase Insurer Liability

Airbus' A380 to Increase Insurer Liability
Posted: June 27th, 2006 09:12 AM PDT

Aviation insurers patiently await the introduction of the world's largest passenger aircraft into the commercial aviation space despite a series of delays that have altered its production and delivery schedule.
Aviation insurers say the size of the A380 and its large seating capacity will significantly increase exposure, and force airlines and manufacturers to seek higher hull and liability insurance limits. Airports also face increased liability.

Airbus said it will make good on its promise to deliver the first A380 to Singapore Airlines before the end of the year, but would likely limit delivery of the aircraft in 2007 to nine, instead of the 20 to 25 initially planned. Deliveries in 2008 and 2009 also will be scaled significantly, the company said.

Approximately 159 orders have so far been placed for the double-decker, super-jumbo jet designed to carry 555 passengers in a typical seating configuration, according to Airbus. Some experts say, depending on the airlines' preference, seating could vary from 480 to 850.

Experts at GE Insurance Solutions, in a recently published report, said the insured hull value of the A380 will be between $280 million and $300 million, compared to the current maximum insured value of $250 million for a single aircraft. Based on the list of A380 compatible airports, they say it's reasonable to expect average loss awards of at least $2 million for a fatal A380 accident, compared to an average of $1.5 million for the existing worldwide fleet of large aircraft. The A380 also would increase the probability of a passenger liability loss between $750 million and $1 billion by roughly 40%.

Steven Doyle, director of Aon aviation and aerospace global practice, said while the maximum potential loss to the aviation industry and insurance community will increase with the introduction of the jumbo jet, the impact on operators like Singapore Airlines that already operate large, wide-bodied aircraft between some of the world's major economic hubs would be less significant.

"If you take an airline like British Airways or Air France, who are both operating Concords, then you're looking at a small number of aircraft in the overall fleet of two of the world's largest airlines, and therefore, the impact would be less significant than if it were going to a start-up operation or airline that is completely changing their risk profile with the addition of this aircraft."

Many of these airlines already operate large, wide-bodied aircrafts such as the 747-400 and the A340s.
Still, the dreaded scenario of two-747s colliding over a major metropolis now becomes two A380s-- a far more frightening scenario. Doyle said this change in exposure signals an evolution in the industry, and not necessarily a concern for insurers.

"The aviation insurance market is here to meet the developing requirements of the industry and the A380 is the next development," he said. "These aircraft are built because the airlines want to fly them for the same reasons they want the 787s (rival Boeing's 330-passenger aircraft); because they want to fly more people further, faster and burn less fuel and gain better utilization of slots at major commercial hubs."

Recently, a delegation of London-based insurers visited the EADS' facility to learn more about developments in the A380 program, Doyle said. EADS is the parent company of Airbus. Provisions already have been made to add the A380s on to policies currently placed in the market when the aircraft is delivered and put into commercial service, he said.

Even with the increase in exposure, it's hard to tell how the A380 would affect pricing in the marketplace. In the past five years, the aviation insurance industry has enjoyed record low losses, improved safety record, and an increase in insurance capacity, which has resulted in lower premiums. Doyle said because there are other market forces at play currently, it may well be that an aircraft such as an A380 could see a reduction in premium.

It's worth noting, he said, that the A380 represents the latest in advanced technology -- which is the driving force behind the improved safety record of the industry over the past five years. "Therefore, one can expect that this aircraft will continue to improve the industry's safety record."