Insurance: Jumbo Risk

The blasts that demolished four hijacked airliners in the Middle East last week had more than political repercussions. They created shock waves in airline head offices round the world, threw the aviation insurance market into a tailspin, and endangered delicate arrangements for financing the new generation of jumbo jets.

The problems created by the destruction of a Pan American World Airways 747 in Cairo at the beginning of the week were indicative of the industry's dilemma. The 747, insured for $24.5 million, was covered by two kinds of policies—"all risk" insurance, placed largely with a U.S. consortium, and "war risk" protection, 60% underwritten by Lloyd's of London and 40% by the U.S. Government. "All risk" encompasses normal flight hazards including, in U.S. practice, damage to a plane hijacked to Cuba. "War risk" covers loss by enemy action during war. But nowadays, what is a war? There remains a range for debate as to whether the hijacking was a simple criminal incident covered by "all risk" policies, or an act of war by the Palestinian fedayeen—and which insuring group is liable.

If the "war risk" insurers are indeed found liable for Pan Am's 747, then the Federal Government will be out about $9.7 million, or 40% of the plane's value. Under the Federal Aviation Act of 1958, Washington may offer such insurance when private firms are unwilling to sell it at reasonable rates. The companies had declined to provide more than partial coverage for the costly 747s. The Federal Government therefore agreed to make up the difference for jumbo jets on international flights, starting last July 31. Washington's insurance fund is so new that premiums had brought in only $160,000 by last week. The rest will probably have to be made up by congressional appropriation.

Insurance men can calculate with reasonable accuracy the risk of crashes from aircraft failure, pilot error or weather. But hijacking is so new that insurers do not yet have enough experience to predict its probable frequency. Last week airline offices round the world were stunned by rumors that Lloyd's underwriters were canceling coverage for hijackings—reports that Lloyd's vigorously denied. What was happening was that Lloyd's members were taking advantage of their options to raise "war risk" insurance premiums by 25% to 100% because of the increasing haz ards. Such action comes at a particularly awkward time for U.S. airlines. Pan Am, for example, lost $19.6 million in the first half of 1970, and higher "war risk" premiums might add millions of dollars to its operating costs without increasing revenues at all.

Test of Ingenuity. The insurance tangle threatened to upset future financing arrangements for jumbo jets because the consortiums that finance many naturally insist on full coverage as a condition of their loans. Pan Am's 747 was owned by First National City Bank of New York, but mainly financed by a group of other banks pending an offer of guaranteed loan certificates to the public later this month. After the explosion, the offer was withdrawn until new arrangements can be devised.