Terrorism and the Aviation Industry

November 2006

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Contents

• What is terrorism?• What is the cost of terrorism?• Is terrorism insurable?• What is the response of the insurance industry?• What is the response of the aviation industry?• What happens next?

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What is terrorism?

• US Army found over 100 definitions of terrorism• Common themes

– Inherently controversial– Political judgement– Social bias– Western-centric

“Terrorism is the use or threatened use of force designed to bring about political change”

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What is terrorism?

• Terrorist or freedom fighter?

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What is terrorism?

• MI5 tracking 30 Terror plots in UK• 1,600 individuals under surveillance• MI5 increased by 50% since 9/11 – 2,800 Staff

(Source: BBC 10/11/06)

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What is terrorism?10 October 1933 - United Airlines 21 November 1971 - China Airlines 12 December 1981 - Aeronica7 May 1949 - Philippine Air Lines 26 January 1972 - JAT Yugoslav Airlines Flight 364 11 August 1982 - Pan American World Airways9 September 1949 - Canadian Pacific Airlines 8 March 1972 - Trans World Airlines 19 August 1983 - Syrian Arab Airlines12 August 1952 - Transportes Aéreos Nacionales 25 May 1972 - LAN Chile 23 September 1983 - Gulf Air Flight 77111 April 1955 - Air India 15 June 1972 - Cathay Pacific Airways Flight 700Z 18 January 1984 - Air France1 November 1955 - United Airlines Flight 629 16 August 1972 - El Al Israel Airlines 10 March 1984 - Union des Transportes Aériens25 July 1957 - Western Airlines Flight 39 19 March 1973 - Vietnam Airlines 23 January 1985 - Lloyd Aèreo Boliviano17 April 1959 - Tigres Voladores 21 April 1973 - Philippine Air Lines 9 March 1985 - Royal Jordanian Airlines8 September 1959 - Mexicana 18 May 1973 - Aeroflot 23 June 1985 - Air India Flight 18216 November 1959 - National Airlines Flight 967 17 December 1973 - Pan American World Airways Flight 110 30 October 1985 - American Airlines6 January 1960 - National Airlines Flight 2511 22 March 1974 - Air Inter 2 April 1986 - TWA Flight 84010 May 1961 - Air France Flight 406 26 August 1974 - Trans World Airlines 3 May 1986 - Air Lanka Flight 51222 May 1962 - Continental Airlines Flight 11 8 September 1974 - Trans World Airlines Flight 841 26 October 1986 - Thai Airways International Flight 620

8 December 1964 - Aerolineas Abaroa 3 June 1975 - Philippine Air Lines 29 November 1987 - Korean Air Flight 8588 July 1965 - Canadian Pacific Airlines Flight 21 5 July 1975 - Pakistan International Airlines 1 March 1988 - Commercial Airways Flight 20622 November 1966 - Aden Airways 1 January 1976 - Middle East Airlines Flight 438 21 December 1988 - Pan American World Airways Flight 103

9 May 1967 - Cubana de Aviación 7 September 1976 - Air France 19 September 1989 - Union des Transports Aériens Flight 772

12 October 1967 - British European Airways Flight 284 6 October 1976 - Cubana de Aviación Flight 455 27 November 1989 - Avianca Airlines Flight 20311 December 1967 - American Airlines 17 August 1978 - Philippine Air Lines 18 March 1991 - Aeroflot19 November 1968 - Continental Airlines 19 February 1979 - Ethiopian Airlines 19 July 1994 - Alas Chiricanas Flight 0090111 March 1969 - Ethiopian Airlines 26 April 1979 - Indian Airlines 11 December 1994 - Philippine Air Lines Flight 43422 December 1969 - Air Vietnam 15 November 1979 - American Airlines Flight 444 9 July 1997 - TAM Flight 28321 February 1970 - Swissair Flight 330 9 September 1980 - United Airlines 22 December 2001 - American Airlines Flight 6321 February 1970 - Austrian Airlines 21 December 1980 - Transportes Aereos del Caribe 24 August 2004 - Volga-AviaExpress Flight 130321 April 1970 - Philippine Air Lines 31 August 1981 - Middle East Airlines 24 August 2004 - Siberia Airlines Flight 104724 August 1971 - Alia Jordanian Airlines 13 October 1981 - Air Malta

77 Bombings, 51 of which caused deaths

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What is terrorism?

• 23 June 1985• Air India182• 329 fatalities (inc 22

crew)• Bomb detonated in

cargo hold at 31,000ft (9,500m)

• $95m hull loss• $29m liability loss• Deadliest attack pre

9/11

Right front door of Air India 182 recovered from the ocean floor

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What is terrorism?

• Pan Am hi-jacking 1970 Dawson’s Field did not constitute an act of war– “war-like act between sovereign entities”

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What is the cost of terrorism for aviation?

• Security costs USD 5.6 billion a year more than prior to 2001

• Worldwide international passenger traffic is still 5% below pre-9/11 expected trend

• Jet fuel has increased from USD 30 to as high as USD 90 a barrel since 9/11

(Source: IATA)

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Is terrorism insurable?

• UK – Pool Re• Spain – Consorcio• South Africa – SASRIA• Israel – PTCF• GAREAT – France• Extremus - Germany

• Before 9/11 terrorism loss potential appeared to be manageable

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Is terrorism insurable?

• Terrorist actions inextricably linked to state• Public sector controls ways of influencing,

deterring and destroying terrorists• Potential loss is virtually unbounded• Lloyd’s RDS – 5 airports and 15 passenger jets• Inconsistent to turn to private sector for financial

protection?

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Is terrorism insurable?

• Insurance industry = loss mitigation and financial recovery

• Partnership between insurance industry and government most cost-efficient way to manage terrorism?

• Mandatory insurance – greatly expands risk community, spreads risk through society, cover for landmark risks remains affordable

• A public problem addressed by a national solution?

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What is the response of the insurance industry?• Traditional insurance market slow to react to clients needs

following substantial reduction in level of cover provided post-9/11

• Opportunist markets providing high level insurance policies at a premium– Berkshire Hathaway– AIG– GE Frankona

• US Government utilises Homeland Security in order to secure coverage including hull war at low cost

• Today, the traditional market now has an appetite for liability war risk

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What is the response of the aviation industry?• Security improvements – watch lists, advance passenger

information, air marshals, fingerprinting• Contingency planning and coordination for airports• But, unharmonised measures create passenger confusion

and inconvenience• Aviation premiums average 15.5% higher than pre 9/11• Premiums = 70% of total risk management costs• 2/3 of airlines have company-wide risk management

strategy• Risk management = 2.1% of airlines total revenues

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What next?

• AEA Action plan• Global Aviation Security Action Group