Monday, April 19, 2010

Iceland’s Volcanic Eruption: A Nightmare for Air Travel Insurance Providers?

Given that the ongoing Icelandic volcanic eruption had disrupted air travel over one of the world’s most lucrative airspace, could this “inconvenience” eventually bankrupt travel insurance providers?

By: Ringo Bones

Fortunately, no loss of life has yet been reported on the ongoing Icelandic volcanic eruption of the Eyjafjallajokull Glacier Volcano, but it seems to me that the insurance pay-outs from such “inconvenience” has a high probability of rivaling that of the insurance pay-outs of the 1906 San Francisco Earthquake. According to IATA, the resulting ash cloud that lead to the suspension of commercial air travel over the affected European airspace had been costing major airline companies on average 200-million US dollars a day.

British Airways and other major European air carriers have had their share prices go down due to the resulting air travel chaos. Millions of dollars have already been lost when perishables destined for European markets that had to be air freighted never got to their intended customers, like flowers from Kenya. Not only did the Icelandic volcanic eruption did a number on European commerce, it also disrupted the travel plans of European VIPs – even US President Barack Obama – indefinitely postponing their plans to attend the State Funeral of the late Polish president Lech Kaczynski.

Volcanic ash is especially damaging to modern jet engines because the ash is primarily composed of very fine glass particles that can gunk up as it melts within the turbines in the high temperature interior of jet engines. The ongoing eruption of the Icelandic volcano also produces a greater quantity of ash because it is situated in a glacier. Unfortunately, the last time the volcano erupted was in 1820s and Victorian era gentleman-scientists probably overlooked it due to its remote location. Thus making predictions on when it erupts that much difficult.

From an insurance company’s perspective, the air travel chaos caused by the volcanic eruption to one of the world’s most lucrative airspace can be a travel insurance provider’s and airfreight insurance provider’s liability nightmare. Especially those who are obligated to pay damages that includes care and loss of services, not to mention those that still pay for any mental anguish incurred by their policyholders. Given the austere fiscal environment of our post global credit crunch world, British Airways had even stated that they don’t have enough insurance money to refund stranded passengers.

Will the over 17,000 flights cancelled across European airspace – not to mention incoming Transatlantic air traffic from America - eventually drive airline companies with insufficient financial backing to the brink of bankruptcy? Only time will tell since Iceland’s geologist have forecasted that the volcanic eruptions will probably continue until the 21st of April. And if it does continue until mid July, tourists around the world planning their European summer vacation will certainly have their travel itineraries rescheduled. Ruining Europe’s still-recovering tourism industry and becoming every insurance company’s worst nightmare.