Private insurers are increasingly willing to write aviation insurance for terrorism, and the United States is among a small handful of governments still providing coverage for the risk, Guy Carpenter reports.

In its “2008 Global Terror Update,” the reinsurance brokerage noted that governments stepped in to provide insurance after Sept. 11, 2001, when aviation carriers withdrew coverage for acts of war, terrorism and related perils.

The report noted that because airlines are required to carry third-party liability insurance to receive landing rights and as a condition for leases, the cancellation of aviation coverage could have threatened the industry as a whole.

“Within days of the [Sept. 11] events, all aviation insurers issued a seven-day notice of cancellation to reduce third-party war risk liability insurance for air carriers and aircraft operators to a maximum of $50 million aggregate cover, down from as much as $2 billion for any one occurrence,” according to the report.

“Airports and service providers were not offered third-party cover until weeks later, although even then the majority of insurers declined to write security service provider risks,” Guy Carpenter noted.

However, with no further losses in the months after Sept. 11, the report said third-party war liability prices dropped materially, and governments began to scale back their involvement. “By the end of 2002, most government schemes had been withdrawn and replaced by commercial cover,” Guy Carpenter noted.

The United States is now one of just eight governments still providing third-party liability coverage as of 2008. The other countries are Brazil, Canada, China, Jordan, New Zealand, Qatar and Saudi Arabia, according to the report.

Legislative authority for this coverage in the United States is scheduled to continue until at least Aug 31, the report noted.

Regarding the market for aviation insurance as a whole, Guy Carpenter found that capacity has grown and prices have dropped considerably.

“On primary liability covers, it is now possible to purchase $150 million aggregate cover for air carriers and service providers, and on excess third-party liability covers, excess of $1 billion aggregate cover is available,” the reinsurance broker said.

However, insurers are still somewhat wary of an attack at an airport with a weapon of mass destruction that could “produce an accumulation of losses that could ruin the market,” according to the Guy Carpenter analysis.

“The aviation hull war market began to impose WMD exclusions on renewals in May 2005, but the liability exclusions have yet to be used,” the firm related.

It said this delay is due in part to the terms of a settlement between the European Commission and London aviation insurers to conclude an EC probe into the London aviation market's response to Sept. 11.

The report predicts that insurers will likely not change current clauses this year because of soft aviation market conditions. However, it added that insurers may withdraw all WMD coverage if another major terrorist loss occurs.

Also discussed in the report are updates to various terrorism insurance plans around the world, including some changes to terrorism programs in France and the Netherlands, and the extension of the U.S. Terrorism Risk Insurance Act.

Belgium has created a terrorism pool for the first time–the Terrorism Reinsurance & Insurance Pool–that will act as a reinsurance buyer and which “guarantees the cover of terrorism claims during a calendar year up to a global annual limit of EUR1 billion,” or $1.6 billion under current exchange rates.