Private insurers are increasingly willing to write aviationinsurance for terrorism, and the United States is among a smallhandful of governments still providing coverage for the risk, GuyCarpenter reports.

In its “2008 Global Terror Update,” the reinsurance brokeragenoted 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 carrythird-party liability insurance to receive landing rights and as acondition for leases, the cancellation of aviation coverage couldhave threatened the industry as a whole.

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

“Airports and service providers were not offered third-partycover until weeks later, although even then the majority ofinsurers declined to write security service provider risks,” GuyCarpenter noted.

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and governments began to scale back their involvement.“By the end of 2002, most government schemes had been withdrawn andreplaced by commercial cover,” Guy Carpenter noted.

The United States is now one of just eight governments stillproviding third-party liability coverage as of 2008. The othercountries are Brazil, Canada, China, Jordan, New Zealand, Qatar andSaudi Arabia, according to the report.

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

Regarding the market for aviation insurance as a whole, GuyCarpenter found that capacity has grown and prices have droppedconsiderably.

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

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

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

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

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

Also discussed in the report are updates to various terrorisminsurance plans around the world, including some changes toterrorism programs in France and the Netherlands, and the extensionof the U.S. Terrorism Risk Insurance Act.

Belgium has created a terrorism pool for the first time–theTerrorism Reinsurance & Insurance Pool–that will act as areinsurance buyer and which “guarantees the cover of terrorismclaims during a calendar year up to a global annual limit of EUR1billion,” or $1.6 billion under current exchange rates.