Communication from the Commission on Insurance in the Air Transport sector following the terrorist attacks of 11 September 2001 in the United States
Date: 2002-07-02
Institutions: European Commission
Subjects: EU initiative, International Civil Aviation Organisation, State aid, United States, air transport, insurance, insured risk, terrorism, transport company

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 2.7.2002
COM (2002) 320 final

COMMUNICATION FROM THE COMMISSION

on Insurance in the Air Transport sector following the terrorist attacks of 11 September
2001 in the United States

COMMUNICATION FROM THE COMMISSION

on Insurance in the Air Transport sector following the terrorist attacks of 11 September
2001 in the United States

1. 

1. 

2. 

3. 

4. 

5. 

INTRODUCTION

Following  the  terrorist  attacks  of  11  September  2001,  the  provision  of  third  party
liability  insurance  for  war  and  terrorist  risks  to  the  air  transport  sector  was  thrown
into  doubt.  Until  that  date,  this  type  of  insurance,  which  ensures  that  airlines  and
other service providers can meet the cost of compensation for persons and property
affected  by  an  attack  involving  an  aircraft,  was  normally  incorporated  into  the
general policy of every company in the aviation sector. However, the extreme nature
of the damage incurred in New York caused  the insurance  industry to  reassess  this
situation and virtually all cover for third party war and terrorist risks was withdrawn.

In  the  immediate  aftermath  of  the  attacks,  most  companies  operating  in  the  air
transport  industry,  including  airlines,  airports  and  other  service  providers,  such  as
groundhandlers and air navigation providers, were left with either minimal insurance
cover of US$50 million for these risks, or no cover at all. This compared with typical
cover of well over $1 billion for most major airlines and airports before the attacks.
Certain types of operations, notably security screening companies, found it virtually
impossible  to  find  any  insurance  given  their  pivotal  role  in  controlling  access  to
aircraft on the ground.

This situation left the industry in an unacceptable situation. Airlines, especially those
with the financial obligation of paying aircraft leases, look for the financial security
of insurance policies that are sufficient to cover the maximum of eventualities and, in
particular,  third  party  damages.  If  an  incident  were  to  occur  causing  extensive
damage,  an  airline  with  insufficient  insurance  would  have  to  meet  the  cost  of  any
compensation  from its  own resources, leaving  open the possibility  of  default  on  its
financial  obligations  and  eventual  bankruptcy.  Many  airports  and  service  providers
similarly consider that it is essential to obtain a level of insurance cover high enough
to meet the cost of the damages that might result from a substantial incident.

The objective of the present Communication is to present an update of developments
in the market, to analyse the various initiatives undertaken at international level and
by the insurance and air transport industry and to present a possible way forward.

In  particular,  this  Communication  takes  account  of  the  discussions  of  Ministers  of
Transport  at  the  Council  meeting  on  17  June  2002,  at  which  it  was  concluded  that
any  solution  to  current  problems  "should  be  subject  to  conditions  under  which  the
commercial market is not unnecessarily restricted and that government  exposure is
limited as much as possible." And that "mutualisation schemes should be thoroughly
assessed."

2

1.1. 

Restoring essential cover

6. 

7. 

8. 

9. 

Given the importance of restoring at least some insurance cover for third party war
and  terrorism  risks,  the  Council  of  Ministers  took  the  view  on  22  September  2001
that Member States would exceptionally provide cover for risks of war and terrorist
acts, on condition that such aid was temporary, strictly regulated and duly notified to
the Commission. In its Communication on the repercussions of the attacks, dated 10
October  20011,  the  Commission  presented  the  outlook  for  the  aviation  insurance
market  in  the  aftermath  of  these  events  and  set  out  the  criteria  under  which  the
Commission  would  consider  Government  insurance  measures  to  be  in  line  with
Article 87 § 2 b) of  the  Treaty.  This  provision permits state aid  "to make  good  the
damage" caused by "exceptional occurrences".

In the event, all EU Member States introduced temporary insurance mechanisms for
thirty days. Many countries around the world, including the United States, Australia
and Canada, took similar action. The cover in Europe was provided initially for thirty
days.  The  Commission  stressed  in  its  Communication  that  if  the  situation  were  to
continue beyond the initial 30-day period, Member States might decide to  continue
providing  a  supplementary  guarantee  to  the  insurance  companies,  or  to  underwrite
the  risk  directly  themselves.  The  deadline  was  initially  extended  to  31  December
2001,  although  as  it  became  clear  that  the  insurance  market  would  not  recover
rapidly, the option of government intervention was prolonged twice, eventually up to
30  June  2002.  Only  one  Member  State  has  since  withdrawn  its  insurance  scheme
completely.

An "Ad-Hoc" Insurance group was established by the Council in order to ensure, as
far as possible, that all insurance was provided on comparable terms and to monitor
developments in the market. In this group, jointly chaired by the Presidency and the
Commission, consensus was reached on a set of common principles for the provision
of  insurance,  including  the  level  of  cover  to  be  provided  and  the  premiums  to  be
paid.  It  was  understood  from  early  on  that  recipients  of  cover  should  pay  the
governments a market related charge for the insurance. The Ad-Hoc Group has met
on a regular basis, reviewing the guidelines monthly.

As presented in the  previous  Communication  of  10 October 2001, the Commission
considered  that  the  government  insurance  schemes  introduced  by  Member  States
qualified as a state aid and had therefore to be duly notified to the Commission.  In
line  with  its  responsibility  under  the  Treaty,  the  Commission  has  examined  the
notified measures each time they have been renewed, on the basis of Article 87(2)(b)
as indicated above.

2. 

THE RESPONSE OF THE INSURANCE INDUSTRY

2.1.  Market developments

10. 

In  parallel  with  the  introduction  of  the  government  schemes,  certain  insurance
companies  entered  the  market  to  provide  essential  cover  over  and  above  the  basic
$50  million  cover  offered  by  all  insurers  for  passenger  and  third  party  liability.  A

1 COM(2001) 574 final of 10.10.2001

3

                                                
11. 

12. 

small number of insurance companies have gradually developed their offer until they
can provide $1 billion of third party cover for war and terrorist risks.

The  total  cover  now  available  commercially  is  less  than  that  purchased  by  most
major  carriers  before  11  September  2001,  but  the  premiums  demanded  are  several
times greater than the total premium previously paid by most airlines for their entire
insurance policy. Since September, rates in the commercial market have ranged from
around US $1.85 down to around US $ 1.30 per passenger per flight.

In addition to costs higher than prior to 11 September, the policies offered continued
initially to be subject to the standard cancellation period of 7 days, which had been
included in all policies before 11 September and had permitted the crisis situation to
develop  in  the  insurance  market  in  the  first  place.  There  are  some  signs  that
competition is opening up on this aspect of the policies and it is possible now to buy
a policy that includes a cancellation clause that only comes into effect once a series
of four large scale incidents has taken place.

2.2. 

The international context

13. 

14. 

15. 

3. 

16. 

17. 

As stated above many countries took similar action to that of the EU Member States.
The United States, Australia, and Canada are among the major aviation nations that
provided some or all of the cover required. Some have charged premiums, although
these  are  often  far  lower  than  those  required  in  Europe,  while  others  have  simply
provided a government guarantee at no cost to their airlines at all.

However,  many  countries,  in  particular  developing  countries,  found  it  hard  to
provide  adequate  insurance  to  their  airlines  through  government  action  given  the
very  high  liability  burden  that  they  would  need  to  assume.  Since  many  of  these
airlines  fly  to  international  destinations,  it  was  essential  that  they  have  such
insurance, so they faced no option but to purchase whatever commercial cover was
available at the premiums demanded.

This has left disparities in the position of airlines and service providers from different
countries  in  the  international  air  transport  market and  an unacceptably low level  of
cover for some airlines.

OPTIONS FOR FUTURE ACTION

In the longer term, the Commission considers that it is unsustainable for governments
to  continue  to  provide  third  party  cover  for  war  and  terrorist  risks  in  this  ad-hoc
manner that was designed to address exceptional circumstances. The current system
has prevented a breakdown of both the air transport system and the insurance market
for  these  types  of  aviation  risk,  but  it  is  not  stable  enough  to  give  companies  or
governments the level of certainty they need.

The Commission is of the opinion that, at this stage, there are two basic options for
future action - a return to the commercial market or the establishment of some sort of
mutual insurance fund. The creation of such a fund has been proposed at global level
in  the  International  Civil  Aviation  Organisation,  in  the  United  States  under  the
auspices  of  the  Air  Transport  Association,  which  brings  together  the  top  American
airlines, and in Europe under  the  auspices  of  the  Association of European  Airlines.
The  latter  has  the  support  of  all  major  air  transport  stakeholders  in  Europe:  IACA

4

18. 

19. 

(International  Air  Carriers'  Association),  ERA 
(European  Regions  Airline
Association),  ACI  (Airports  Council  International)  and  AECMA  (European
Association of Aerospace Industries).

These proposals are described below, although it should be said that other proposals
could  be  envisaged,  differing  in  the  level  of  cover;  the  mechanism  for  government
involvement  or  the  level  of  government  involvement,  which  possibly  might  be
reduced  by  using  commercial  reinsurance  or  guarantees.  Other  options  outside  a
fund,  such  as  the  possibility  of  addressing  concerns  about  cancellation  through  a
commitment  from  governments  to  intervene  if  the  market  withdraws,  can  also  be
considered.

In  considering  the  future,  it  will  be  important  to  avoid  any  undue  distortions  of
competition between airlines and between service providers within the Community.
Even with  agreed  guidelines  for  the  provision  of  this  insurance,  there  are  currently
some differences in approach between different Member States, which, among many
other factors, clearly affect competition between companies in the air transport sector
and  insurers.  As  mentioned  above,  one  Member  State  has  already  withdrawn  its
government scheme. Others have either limited the cover available and or raised the
cost of their schemes.

3.1. 

A return to the commercial market

20. 

A simple option for resolving differences between government regimes and restoring
some  normality  to  the  situation  would  be  to  agree  on  a  date  for  the  complete
cessation of the government schemes in the EU, after which all airlines, airports and
service providers such as groundhandlers and air navigation providers, would have to
buy commercial cover once again. This would restore a market solution and remove
any  distortion  based  on  differing  government  regimes  affecting  the  functioning  of
both the air transport and the insurance sector.

3.2. 

A "mutual fund" solution

21. 

However,  as  mentioned  above,  a  number  of  mutual  fund  solutions  are  under
consideration in the United States, in Europe and at a global level. The three schemes
proposed are summarised in an annexed table.

3.2.1. 

"EQUITIME" - the US industry initiative

22. 

In  the  United  States,  the  Air  Transport  Association  (ATA)  has  developed  a  plan
called  "Equitime".  It  would  entail  the  establishment  of  a  fund  paid  from  premiums
levied  on  airlines  and  major  service  providers,  but  would  require  a  guarantee  from
the government in order to be established. It would provide cover for a maximum of
US$ 2 billion for passenger and third party primary and excess liability, without any
scheme  cap,  cancellable  after  a  7-days  notice  for  non-payment  of  the  premium  or
otherwise after a 90-days notice. The annual retention amount, i.e. the  amount paid
once-off  to  the  insured  following  any  one  occurrence,  would  be  set  at  US$  300
million for the 1st year of the functioning of the scheme. The US government would
have to provide an underlying guarantee to cover liabilities in excess of the fund that
had been built-up.

5

23. 

The  ATA  has  submitted  proposals  to  the  US  government  for  consideration,  but,  at
this stage, no further information is available about the progress of discussions. The
US is set to extend its government insurance system until mid-August while further
analysis is undertaken.

3.2.2.  The ICAO Scheme

24. 

At global level, the  International  Civil  Aviation  Organisation  (ICAO)  has  overseen
the  development  of  a  proposal  for  a  mutual  fund  that  would  provide  third  party
liability cover for war and terrorist risks to the air transport industry as a whole. As
with  Equitime,  the  scheme  would  see  the  creation  of  a  fund  from  the  premiums
collected  from  participating  companies.  The  scheme  would  provide  cover  between
US$ 50 million and US$ 1.5 billion. It would be non-cancellable, with total liability
capped  at  US$  15  billion.  It  would  be  able  to  "drop  down"  in  order  to  cover  the
primary  third  party  and  passenger  liability  should  the  commercial  market  issue  a
seven-day  cancellation  notice.  All  ICAO  member  states  would  have  the  option  of
joining  and  they  would  share  the  cost  of  providing  an  underlying  government
guarantee in proportion to their budget contributions to the Organisation.

25. 

The  ICAO  proposal  has  been  developed  to  a  high  level  of  detail.  Following  a
discussion  of  the  proposal  in  the  ICAO  Council,  ICAO  Members  are  now  being
consulted  about  the  scheme  and  asked  whether  they  are  prepared,  in  principle,  to
sign-up. If 51% of the Members, by budget contribution, agree, the scheme will be
established.

3.2.3. 

"EUROTIME" - the European initiative proposed by the AEA

26. 

27. 

28. 

29. 

The  Association  of  European  Airlines  (AEA)  with  the  support  of  the  biggest  air
transport industry stakeholders in Europe, has reacted to developments in the United
States  and  ICAO  by  devising  its  own  proposal  for  a  regional  mutual  fund,  called
"Eurotime".

The proposal is closely based on the work carried out in ICAO and the scheme can
be  considered  largely  compatible  with  the  broader  global  system  proposed  in  that
organisation.  Similarly,  it  would  provide  insurance  not  only  to  airlines,  but  also  to
the industry (the service providers) as a whole.

The proposal would entail the gradual building of a mutual fund from which the cost
of  damages  would  be  met.  The  fund  would  be  built  up  from  premiums  charged  to
companies.  According  to  the  scheme's  promoters,  the  system  would  require  an
underlying  guarantee  from  the  governments  of  participating  countries  to  cover  the
cost  of  claims  while  the  fund  was  being  amassed  and  to  ensure  that  the  company
remained properly financed in all eventualities.

For  example,  there  are  strict  requirements  concerning  the  amount  of  capital  an
insurance company is required to have and the way in which it makes provision for
possible claims. Clearly, the large commercial insurers currently offering products in
this market are already well established, with all the financial requirements in place.
Eurotime  will  need  to  find  the  funding  to  satisfy  these  requirements.  Under  the
current  proposal,  the  promoters  propose  that  governments  should  fund  the
capitalisation using the premiums they have collected from airlines for the insurance
cover  they  have  supplied  since  September  2001.  Moreover,  governments  would

6

initially be asked for their guarantee to be extended for at least three years, i. e. until
the  initiators  expect  Eurotime  to  be  superseded/absorbed  by  the  global  ICAO
scheme.  As  of  that  date,  government  guarantees  would  have  to  be  provided
according to the conditions of the ICAO scheme. However, if the Eurotime scheme
were to continue after that time, an extension of the guarantee would be needed.

30. 

The promoters  of  Eurotime hope  for the support of all the EU  Member  States  plus
the  other  European  members  of  the  European  Civil  Aviation  Conference  (ECAC),
which  would  bring  in  all  the  Community's  partners  in  Central  and  Eastern  Europe.
They propose that governments would receive payment (set by the promoters at 20%
of premiums collected) in return for providing their guarantee.

4. 

EVALUATION

4.1. 

The commercial market

31. 

32. 

33. 

34. 

A  return  to  the  market  would  present  many  advantages,  allowing  a  natural
equilibrium  to  re-emerge  and  leaving  flexibility  for  premiums  to  adjust  as  insurers
assess their liabilities and potential future risks over the coming years.

However, three difficulties with this solution have been put forward by the air
transport industry:

–  They argue that the level of competition in the market is as yet unproven and the
cost  of  the  insurance  policies  on  offer  remains  historically  high  compared  to
prices before 11 September 2001.

–  They argue that, unless commercial premiums fall further, European airlines and
service providers could be left at a  cost disadvantage  if other countries maintain
their government schemes or  decide  to  set  up  a  mutual  fund  of  their  own.  They
argue  this  could  be  exacerbated  if  EU  companies  were  forced  to  return  to  the
market ahead of their competitors and before the market develops further.

–  Finally,  they  argue  that  the  conditions  attached  to  the  commercial  insurance
policies now available, while varying from offer to offer, still involve cancellation
clauses  similar  to  those  that  existed  before  11  September  and  which  permitted
insurers to withdraw  at seven  days  notice. This  would  mean that  in  the  event of
another serious incident or, a series of incidents, industry and governments could
be back to where they started immediately post 11 September, with no cover even
having paid very high premiums to insurers in the meantime.

It  is  certainly  true  that  the  cost  of  the  third  party  war  risks  insurance  is  at  a
historically  high  level,  although,  to  some  extent,  it  must  be  considered  a  normal
process  for  insurance  costs  to  rise  when  insurers  face  an  increased  level  of  claims
and as risks are reassessed.

As  regards  distortion  of  competition  between  airlines,  while  insurance  might  have
become  a  more  substantial  element  in  airline  costs  than  previously,  the  scope  for
to  create  distortion  of  competition,  particularly  on
raised 
intercontinental routes where ticket prices are higher, is admittedly limited.

insurance  costs 

7

35. 

36. 

37. 

38. 

The  most  serious  of  these  problems  appears  to  be  the  threat  of  instability  and
cancellation. While the risk of seven-day cancellation is not a new one, it would be
preferable  to  avoid  a  repetition  of  the  situation  in  September  2001,  when  a  sudden
cancellation  of  cover  forced  a  period  of  uncertainty  and  a  hasty  intervention  by
governments. An attempt has been made  by the commercial  insurers in this  part of
the market to overcome the problem of short term cancellation, however, in the event
that  the  primary  policy  is  cancelled,  it  would  still  be  necessary  to  renegotiate  the
third  party  war  risks  policy  to  allow  it  to  take-over  some  of  the  cover  previously
supplied under the primary policy.

In  the  light  of  experience  over  the  last  eight  months,  in  which  insurance  has  only
been provided in an ad-hoc manner with government support, the important issue is
how  to  find  a  solution  that  offers  more  stability  than  the  current  one.  The  tense
international  situation  and  the  reaction  of  the  reinsurance  industry  as  it  assesses  its
exposure to air transport may mean that it is difficult for the commercial market to
provide this stability. While it is unclear to what extent it is the current government
insurance schemes that have distorted this market and discouraged  companies from
providing  this  type  of  insurance,  it  is  clear  that  a  return  to  the  situation  pre-11
September is highly unlikely.

Three companies are currently offering products in this part of the insurance market.
However, having been able to restrict their exposure for third party war and terrorist
risks to $50 million under the primary policy, many of the traditional insurers are still
choosing to remain on the sidelines as far as providing excess cover up to $1 billion
is  concerned.  Indeed,  further  repercussions  on  the  market  are  possible  as  the
reinsurance industry reassesses its exposure to the air transport sector. It may become
more difficult to find reinsurance cover for air transport policies.

In  conclusion,  while  price  competition  is  increasing  and  while  the  improved
cancellation  clauses  in  the  commercial  offers  represent  some  movement  towards
greater stability, last year's events demonstrate that a market solution may yet oblige
governments  to  intervene  once  again  in  an  ad-hoc  and  temporary  manner.  A  more
durable and stable solution is desirable.

4.2. 

The "Eurotime" scheme

39. 

40. 

As  presented  by  the  AEA  Eurotime  seeks  to  offer  the  benefit  of  stable  insurance
cover  by  anchoring  the  scheme  initially  with  government  guarantees  and  at  a  later
stage  with  a  large  fund  accrued  from  premiums.  This  removes  much  of  the  risk  of
cancellation  and  breaks  the  dependency  of  the  sector  on  the  commercial  insurance
and  reinsurance  market.  However,  under  this  scheme,  government  intervention
would  be  needed  once  a  serious  incident  happened  and  the  resources  accumulated
under this mutual fund had been exhausted.

It  should  be  noted  that  the  extent  of  the  state  guarantees  for  Eurotime  would  be
substantial, in particular in the first few years of operation. The limit of the scheme
for third party liability would be $1 billion per incident, yet its retention would only
be US $150 million in the first year if the currently proposed premium level of $0.50
is  retained.  Therefore,  in  the  case  of  a  single  serious  incident  in  the  first  year  of
operation, Member States would have to close any gap between that retained capital
and  the  upper  limit  of  the  policy.  This  exposure  would  be  higher  if  the  primary
insurance  market  collapsed  and  the  "drop-down"  facility  within  the  scheme  was

8

41. 

42. 

43. 

invoked to provide airlines with passenger liability in addition to the basic third party
liability.

The  scheme's  promoters  also  see  cost  saving  as  a  major  benefit  of  Eurotime.  A
premium  of  $0.50  as  proposed  could  value  the  underlying  state  guarantees  and
savings  to  EU  carriers,  based  on  estimated  traffic  of  420  million  passengers  per
annum, at around $300 million. For the broader membership of ECAC, with traffic
of  approximately  650  million,  the  value  of  state  guarantees  and  the  savings  to
carriers could be around $500 million. The precise cost to governments of supporting
this scheme will need to be examined further.

This  cost  advantage  appears  substantial,  although  it  might  decrease  in  later  years,
since  in  the  absence  of  a  claim,  the  commercial  insurers  could  reduce  premiums
through  a  "no  claims bonus", bringing their prices closer to the projected Eurotime
premium. In the case of an incident, Eurotime would need to increase its premiums
in order to cover potential damages and to reimburse its government backers, again
eroding its cost advantage.

The  Eurotime  system  might  be  able  to  offer  a  level  of  stability  to  the  European
aviation  industry that makes it  attractive, since it would quasi  automatically trigger
government guarantees in case of a major incident, while a return to the commercial
market  would  potentially  oblige  governments  to  intervene  once  again  in  an  ad-hoc
and temporary manner,

4.3. 

The ICAO Scheme

44. 

45. 

46. 

The ICAO scheme could go ahead if a broad global consensus can be reached on its
establishment. As noted above, it is similar to the Eurotime proposal, but would offer
all  air  carriers  and  service  providers  from  ICAO  countries  the  possibility  of
benefiting  from  adequate  insurance  cover  for  both  third  party  as  well  as  passenger
liability,  if  necessary.  That,  in  turn,  would  facilitate  the  introduction  by  the
Community of a harmonised approach to insurance minimum  coverage,  as all third
country  carriers  flying into  and  within  the  Community  would  be  able  to  obtain  the
necessary cover at reasonable cost.

However, European countries should not shoulder the burden alone, which suggests
that at least one other major aviation members, notably either the US or Japan, would
need  to  participate  in  that  scheme  for  it  to  gain  full  European  support.  Since  the
support  of  51%  of  the  ICAO  membership  by  budget  share  is  required  before  the
scheme  can  proceed,  however,  it  seems  unlikely  that  the  scheme  could  get  off  the
ground  without  the  US  (around  30%  of  the  budget)  and  Japan  (around  15%  of  the
budget). The Member States of the European Union together account for some 32%
of ICAO contributions.

Furthermore, it should be borne in mind  that establishment of the  ICAO  scheme  is
likely to be a complex process, given the large membership of that organisation. The
promoters of Eurotime estimate that it could take three years. This might mean that
European governments might wish to intervene to provide insurance for a substantial
period to bridge the gap until the ICAO scheme comes on stream.

47. 

A global scheme would have significant advantages. Most importantly, it would  be
open  for  accession  to  all  ICAO  members,  thereby  bringing  the  scheme  within  the

9

reach  of  developing  countries.  This  could  help  ensure  that  all  airlines  are
appropriately  insured  -  an  important  objective  given  that  many  developing  country
carriers  fly  into  the  Community.  It  would  also  make  it  easier  to  subject  all  air
services  both  into  and  within  the  Community  to  common  rules  on  adequate
insurance,  applied in a harmonised  way.  Finally,  by  spreading  risk  widely  between
many ICAO Members, the scheme places a lower individual liability on each state.

5. 

CONCLUSION

With regard to the establishment of a mutual scheme:

48. 

49. 

50. 

51. 

52. 

53. 

In the light of the conclusions reached at the Transport Council meeting on 17 June
2002, and on the basis of the analysis presented herein and given the current market
conditions, the Commission considers that the air transport sector should, in the short
term,  work  further  on  a  mutual  fund  solution,  whether  Eurotime  or  the  ICAO
scheme, variations on either, or a combination of the two, so as to offer air transport
undertakings  a  stable  operational  environment,  preserving  third  party  war  and
terrorist  cover  without  any  risk  of  future  disruption.  It  was  estimated  by
representatives  of  the  European  air  transport  sector  that  they  might  need  another
three months to agree on the details of the Eurotime proposal.

However, the creation of such schemes must at all times be fully compatible with the
Treaty  rules,  in  particular  those  on  competition  and  State  aid.  The  Commission
reminds Member States of the obligation to notify in advance to the Commission any
project  to  grant  aids  (Article  88.3  EC).  The  present  communication  in  no  way
prejudges the position that the Commission may take following such a notification.

In  addition,  a  scheme  should  not  restrict  the  functioning  of  the  commercial  market
unnecessarily, involve undue Government exposure and should provide  a clear exit
strategy for government involvement.

At this stage, it is clear that, while neither Eurotime nor the proposed ICAO scheme
would  be  given  "special  and  exclusive"  rights,  both  schemes  would  have  a  severe
impact on the potential for commercial insurers to trade successfully in this market.
In  both  cases,  a  new  company  with  government  capital,  underpinned  by  a  state
guarantee,  would  have  considerable  financial  advantages  over  its  commercial
competitors.

Furthermore, given the possible effects of the establishment of a government-backed
mutual  scheme  on  the  commitments  of  the  Community  in  the  area  of  financial
services  under  the  GATS,  where  it  has  undertaken  to  open  its  market  to  foreign
insurance companies, the Commission will have to examine whether the adoption of
a mutual fund solution could be considered as preventing de facto the sale of aviation
insurance inside the EU. In establishing such a fund, it would be important to verify
that Community commitments to international trading partners were not undermined.

Minimising  or  renouncing  government  support  would  assist  greatly  in  addressing
these  issues.  Governments  will  wish  to  minimise  both  their  exposure  to  possible
losses and the level of their intervention in any scheme. In this context, the promoters
of the mutual schemes will need to examine the premiums proposed. If the premiums

10

54. 

55. 

56. 

57. 

58. 

were raised to amass the funds necessary more quickly, and the air transport industry
used  its  own  capital  to  create  the  scheme  rather  than  depend  on  state  money,  the
government role would be considerably reduced.

With regard to the examination of purely private solutions:

Given  that  there  are  a  number  of  insurance  companies  operating  in  this  part  of  the
market, the commercial options should be fully explored, as should the possibility of
addressing concerns about cancellation through a commitment from governments to
step-in to preserve cover only if the commercial market withdraws. It should also be
investigated  to  what  extent  a  mutual  solution  could  be  pursued  using  only  private
investment and insurance.

With regard to the current government measures providing insurance cover:

In  order  to  permit  a  process  of  development  and  negotiation  to  take  place,  the
Commission  considers  that  a  period  of  stability  is  required.  It  would  seem
appropriate to agree upon a further prolongation of the current government insurance
schemes  to  allow  full  analysis  of  the  ICAO  and  Eurotime  mutual  schemes  and  to
permit  them  to  progress  into  firm  proposals  that  take  account  of  the  above.
Accordingly,  Member  States  might  wish  to  continue  to  provide  essential  insurance
through  their  own  government  mechanisms  for  a  further  four  months  until  31
October 2002.

However, given that some Member States oblige their carriers to buy their insurance
on  the  market,  and  in  order  to  guarantee  a  level  playing  field  among  European
players,  it  would  be  desirable  to  align  the  premiums  charged  for  providing
government guarantees to the most attractive market offer.

The  Commission  considers  that,  in  view  of  the  situation  of  the  aviation  insurance
market, the exceptional occurrences that justified the application of Article 87.2.b of
the Treaty to authorise national aid schemes (see Communication of 10.10.2001) are
still present. For this reason, Member States wanting to extend such schemes should
notify any prolongation to the Commission. Provided that the other conditions in the
the
aforementioned  Communication  of 
Commission  will  authorise  the  extension  until  31  October  2002  subject  to  review
should circumstances change significantly.

the  Commission  are  also  fulfilled, 

With  regard  to  the  adoption  of  a  common  approach  towards  proposals  at
international level:

The  Commission  considers  that  Member  States  will  have  to  coordinate  their
positions so as to reach a common initial reaction to the ICAO proposals within the
deadline  required  by  ICAO  (17  July  2002).  The  Commission,  based  on  currently
available  information,  considers  that  Member  States  should  indicate  a  favourable
attitude in principle to the creation of such scheme, on condition that ICAO's largest
members participate in the scheme2; that the scheme does not unnecessarily restrict
the commercial market; that it limits government exposure as much as possible; and
that there is a clear exit strategy for government involvement.

2 Australia, Brazil, Canada, Japan, Russian Federation, United States.

11

                                                
Member States will only be able to indicate their final position on the ICAO scheme
after a full analysis of that scheme, which the Commission will supply in time for the
Transport Council planned for October 2002.

With regard to further legislative requirements:

59. 

60. 

The Commission undertakes to work with Member States to examine fully the merits
of the two schemes, as well as the various issues of compatibility with Community
law, so as to present a fully reasoned position by the next Transport Council meeting
planned for October 2002.

In  addition,  in  its  Communication  of  10.10.2001  the  Commission  undertook  to
examine a) the revision of the amounts and conditions of insurance required for the
issue of operating licences and b) the possibility of "mutualisation" of insurance risks
at European level, while recognising that a compensation fund for extreme damages
exceeding  insurable  risks  might  be  a  possible  solution.  The  Commission  will
continue  to  monitor  developments  in  the  aviation  insurance  market  with  regard  to
these issues. Should the Commission consider that it is appropriate to further address
the issues under a) and b) above, and to proceed towards either the Eurotime scheme
or  the  ICAO scheme or  both, it  will examine whether any legislative  proposals  are
necessary and appropriate.

12

Annex 1: COMPARATIVE TABLE OF THE DRAFT MUTUAL SCHEMES AND INSURANCE
MARKET

ELEMENTS

ICAO

EQUITIME

EUROTIME

 MARKET

COVERAGE

Excess TPL* - drop
down and PAX**

TPL and PAX primary
and excess

Excess TPL - drop
down and PAX

WHO IS COVERED

All air transport
operators & all
service providers

Equity holders &
biggest service
providers

All air transport
operators & all
service providers
(ECAC)

Combined single
limit for primary TPL
coverage - US$50
million and excess
TPL

All air transport
operators & all
service providers

LIMIT

US$ 1,5 billion/ US$
2 billion incl. PAX

US$ 1,5 - 2 billion

US$ 1,5 billion/ US$
2 billion incl. PAX

US$ 1 billion

ESTIMATED ANNUAL
PASSENGERS

1 700 000 000

680 000 000

650 000 000 (total
ECAC estimate)

offered world-wide
no country excluded

PROJECTED RATE

US$ 0.50

Base price – US$ 0.64

US$0.50 increasing
to US$0.75 incl. PAX

 between US $ 1,25 -
1,85 per passenger

SCHEME CAP***

US $15 billion

None

US $10 billion

Up to US $ 4 billion

CAPITALISATION

As required by local
regulations****

US $ 50 million paid
by members

As required by local
regulations***

not applicable

RETENTION

none

US $ 300 million 1st
year

US $ 150 million 1st
year

not applicable

ALL IN AGGREGATE

US $ 500 million 2d
year

US $ 250 million 1st
year

US $ 1 billion 3rd year

US $ 500 million 1st
year*****

PRIMARY CAP

US $ 50 million
aggregate TPL for
each air carrier

None

US $ 50 million
aggregate TPL for
each air carrier

US $ 50 million
aggregate TPL for
each air carrier

GOVERNMENTS
REINSURANCE BASIS

Lender of last resort

Excess of retention

Excluding PAX -
excess of primary cap
and retention

not applicable

MINIMUM
GOVERNMENT
SUPPORT

51% based on ICAO
funding allocation

US Government only

"majority" of ECAC
Governments

not applicable

GOVERNMENT
RINSURANCE COSTS

Share of surplus

Less than US $ 0.10
p/PAX

20% of premium paid
at the end of each
year

not applicable

PERIOD

Minimum 3 years/up
to 5 years or more

Rolling 12 months –
FAA giving 180-days
notice

Minimum 3 years /
(mutually agreed -
absorbed by ICAO)

 1 year from
conclusion

13

PREMIUM
ADJUSTMENT

After 30-days notice

As necessary to cover
retention each year

As necessary to cover
retention each year

CANCELLANTION

Non-
cancellable******

90-days

Non-
cancellable******

some offer no claims
bonus after 1 year,
also can adjust
upwards

Varies: some insurers
offer non-cancellable
cover, others
maintain cancellation
with notice.

ESTIMATED VALUE
OF GOVERNMENT
GUARANTEE

Ca. US $ 0.80 per
PAX

US$ 1,36 billion

Not calculable as
scheme covers both
PAX and TPL

Ca. US $ 0.80 per
PAX

US $ 520 million

Scheme Cap = Loss threshold triggering review of the scheme and 90-days

TPL = Third Party Liability

*…………..
**………… PAX = passengers
***………..
cancellation
****………. Capitalisation requirements depend on the domicile of the scheme
*****……..
******…… 30-days notice in case of non-payment of premium

Amounts excluding PAX coverage; inclusion would double the retention

14