Air France crash very costly to insurers, airline industry

Jun 17, 2009, 12:43 GMT

Paris - The crash of an Air France plane into the Atlantic with 228 people aboard will be very costly to insurers and to the airline industry as a whole, analysts and insurers agree.

'This is a significant accident for the aviation insurance market,' said Patrick de La Morinerie, deputy chief executive officer of Axa Corporate Solutions, a subsidiary of AXA Group, the leading insurer in the insurance policy, with 12.5 per cent of the coverage.

'It's clearly going to be a significant claim, based on the number of passengers and that it was a European carrier,' Stephen Riley, executive director of Global Aerospace Underwriting Managers, which has 7.5 per cent of the coverage of the plane.

Some 15 international insurance companies share the coverage on the accident, including Allianz and American International Group (AIG).

Riley said that the cost of the crash will almost certainly be the largest for an airplane accident since the 2001 crash of an American Airlines plane in New York City that killed 265 people and cost about 600 million dollars.

Both de La Morinerie and Riley said it was far too early to even estimate the total cost of the crash, but the British trade publication Insurance Day reported that rumours in the industry put it at between 350 million and 700 million dollars.

At this stage, the only certainty is the insured cost of the Airbus A330-200 that crashed into the Atlantic in the early hours of June 1, which is 67.4 million euros (93.5 million dollars).

But the great part of the cost will be the compensation paid to the survivors of the 216 passengers from 32 countries that perished in the accident.

De La Morinerie said that compensation payments for aviation disaster victims are regulated by the Montreal Convention of 1999, which was signed by 91 countries, including Brazil, and which became part of French law in 2004.

Under the convention, air carriers are liable for proven damages of 100,000 Special Drawing Rights (SDR), a mix of currency values established by the International Monetary Fund (IMF). This liability is currently equal to about 110,000 euros per passenger.

Added to the cost of the aircraft, it puts the minimum cost of the crash at just below 100 million euros.

But compensation payments in accidents such as the Air France crash are almost always above the minimum. Insurers such as AXA negotiate the payouts with family members or their representatives.

'The likely level of the claim depends on who the passengers were, what they did and who they left behind,' Riley said.

'Compensation will be different according to the personal situation of the victims and in particular their income, the number of their dependent relatives,' de La Morinerie explained.

In other words, compensation for the death of an unemployed bachelor survived only by a brother who has his own income will be substantially different from that for the sole breadwinner of a family of four who earned 1 million euros a year.

De La Morinerie said that the company is currently gathering information on the passengers and their families. He said AXA will pay compensation as soon as individual losses have been established.

This could take place before the cause of the crash or any fault in the accident has been established.

Ships and planes are still combing a large swath of the Atlantic Ocean about 1,200 kilometres off the Brazilian mainland, for the victims of the crash, the airplane and the two black boxes it carried that could provide clues to the cause of the accident.

An advance payment of 16,000 SDRs per passenger, or 17,600 euros currently, is to be made immediately, de La Morinerie said. 'This will avoid any situation where financial difficulties for relatives in their day-to-day economic existence may arise.'

Finally, the crash will also be costly because it will contribute to an increase in insurance premiums for airlines at the end of the year.

'There were two costly crashes earlier this year in the United States, including the splashdown in the Hudson River, and now this one,' de La Morinerie said.

'Last year, insurers were in a situation in which damages paid did not balance out with premiums. So there will surely be a hike in rates.'