Select Committee on European Scrutiny Thirty-Eighth Report





COM(02) 320

Commission Communication on insurance in the air transport sector.

Legal base:


Document originated:

2 July 2002

Deposited in Parliament:

16 July 2002


HM Treasury

Basis of consideration:

EM of 29 July 2002

Previous Committee Report:


To be discussed in Council:

No date set

Committee's assessment:

Politically important

Committee's decision:

Cleared, but request to be kept informed




    1. After the events of 11 September 2001 the limit on cover for third party war and terrorist risks for aviation was reduced from US$2 billion to US$50 million and premiums were sharply increased. Governments worldwide introduced temporary measures to address the problems thus created for the aviation industry. A year on, possible longer-term solutions for the insurance and aviation industries are emerging. In this Communication the Commission gives an update of developments in the market, analyses various initiatives from international organisations and from the insurance and aviation industries and suggests a possible way forward for the EU.
    2. The document

    3. The Commission takes account of discussion at the Transport Council of 17 June 2002, which concluded that solutions to present 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".
    4. The Commission recalls that immediately after 11 September the Council of Ministers decided Member States should provide replacement cover for the aviation industry for thirty days, subsequently extended a number of times, with a current final date of 31 October 2002. It notes that concurrently in the insurance industry some companies have re-entered the market offering cover up to US$1 billion. However, this is not only still less than the pre-11 September limit but is with greatly increased premiums. And some policies are still subject to a 7-day cancellation notice period, which caused the immediate problem after 11 September. The Commission continues that premiums charged by Member States are below the new market rates but are often higher than those of other governments, including the USA's, providing replacement cover. But many governments, particularly in developing countries, feel unable to provide replacement cover: their airlines pay the new commercial premiums. This adds to competitive disparities in the international aviation and commercial insurance markets.
    5. The Commission says it is unsustainable to continue to provide cover for war and terrorist risks in a way designed to address exceptional circumstances. The present measures have prevented a breakdown in the aviation system and in the insurance market for this system but do not give either governments or companies the stability and certainty they need. It sees two options for the future: some form of mutual insurance fund or a return to the commercial market.
    6. The Commission draws attention to three proposals for mutual schemes. These are:

    • Equitime: the US Government has yet to decide whether to support this proposal for a fund built up by premiums from US airlines and service providers to cover US aviation risks, backed by the government as reinsurer;

    • an International Civil Aviation Organisation (ICAO) scheme: a proposal for a mutual fund for the whole air transport industry built up from premiums, backed by a guarantee by member governments, as lenders of last resort, in proportion to their ICAO contributions;

    • Eurotime: a proposal developed by the Association of European Airlines (AEA) in response to the Equitime proposal. Eurotime would be similar to the ICAO scheme, but at the European level. However, it would require government investment and outright guarantee rather than loans. It would last for at least three years but would eventually be absorbed into the ICAO scheme.

    1. The Commission notes that a return to the commercial insurance market would allow a natural equilibrium to emerge. But the air transport industry argues that:

    • the level of restored competition in the insurance market is unproven and premiums remain very high;

    • European airlines and service providers would be at a disadvantage if other governments continued their current schemes or established their own mutual funds, and this disadvantage would be exacerbated if EU companies were forced to return to the market before their competitors;

    • the continued existence of cancellation clauses in commercial policies currently available, similar to the pre-11 September ones, risks exactly the same insurance crisis arising if there were a repeat of 11 September type events.

    1. As for the proposals for mutual funds, the Commission notes that, whilst the AEA scheme does offer the European aviation industry stability, it would require significant government intervention and exposure. The ICAO scheme would have the advantage of being open to all countries, important to developing countries, and spread the risk amongst many members, reducing the liability of each. The Commission proposes that in the short term the air transport sector should work further on a mutual fund solution, either Eurotime or the ICAO scheme, which should be compatible with competition and State Aid rules.
    2. The Commission concludes that in the next few months it will continue to examine with Member States and the aviation and insurance industries the proposals for mutual fund schemes, especially to ensure the minimum distortion of the commercial market, minimum government exposure and an exit strategy for governments. The possibility of mutualisation being supported solely by private investment and insurance will be explored. And the Commission would also explore what, if any, legislative requirements there might be.
    3. The Government's view

    4. The Financial Secretary to the Treasury (Ruth Kelly) says:
    5. "The objective of Government support in aviation insurance following 11 September has always been to encourage a return to commercial insurance and the Government's aim remains to withdraw completely from the scheme as soon as practicable. Government schemes were always intended to be short-term and temporary, in line with Article 8, 2b of the Treaty, which states that State Aid is allowable where it will 'make good the damage' caused by 'exceptional circumstances'.

      "Commercial provision of insurance is now beginning to re-emerge, and government-backed schemes should not act as a disincentive to further improvements. Arguments for continuing support are not now justified by market failure, but by the need for market stability and preventing European airlines from being put at a competitive disadvantage.

      "Although the ICAO proposals expose the UK taxpayer to a wider range of risks than the Eurotime scheme, it has the advantage that government guarantees would be in the form of loans that would eventually be repaid. The Eurotime scheme does not involve loans, but outright payments from governments, although the range of countries whose risks the taxpayer would assume would be less.

      "The UK Government would not want to support the principle of a mutual scheme that tied in governments for a long period of time, or that discouraged the return of more normal commercial market conditions."


    6. A longer-term solution to the post-11 September problems in aviation insurance is important for both the aviation and the insurance industries. We are content to clear the present document, but ask the Minister to keep us informed of developments in finding an appropriate solution to these problems.


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Prepared 11 November 2002