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Terrorism: Effect on insurance and aviation industry

The Pakistani aviation and insurance industries are feeling the pinch of the terrorist attacks in the US.

By Syed M. Aslam
Oct 01 - 07, 2001

Truth, as often said, is the first casualty of war. And so are the Aviation and Insurance industries since that horrific morning of September 11 which started with the total destruction of the twin towers of the World Trade Centre in New York and a portion of the US intelligence headquarter, the Pentagon in Virginia. The low-tech terrorist attacks using hijacked commercial airliners and carried out with deadly precision aimed at delivering the maximum human and financial loss sent the US aviation and insurance industry in a spin the ripples of which have left no national economy untouched across the world.

The kamikaze terrorist attacks shattered whatever little calm existed in the world before September, 11. The US request to use Pakistan as the most vital strategic partner to hunt down the culprits and to eradicate the menace of terrorism once and for all overnight made Pakistan a frontline state.

Slain US Black Rights leader Martin Luther King once said, "What affects one affects all." The statement, perhaps, provides the best, though unintended, commentary on the post September-eleven-developments, particularly with regard to the aviation and insurance industries. The fast changing global scenario after the deadly attacks in the US has sent tremors across the national economies in ways many of which still remain oblique. Attempts to make even a calculated guess is just not possible due primarily to many loose ends and complications of global economies where all sectors are inter-related.

However, the Pakistani aviation and insurance industries, which by their very nature are heavily interlinked globally, as well as the country's heavy dependence on foreign shipping lines to facilitate its foreign trade are feeling the pinch of the terrorist attacks in the US on the one hand and the new-acquired frontline status.


A number of foreign airlines have stopped operations from Pakistan since September 11. British Airways, Air France, Germany's Lufthansa, Singapore Airlines, Malaysian Airlines, Gulf Air, China Air and Saudi Airlines have closed passenger and cargo operations in Pakistan. Cargolux has also closed its dedicated cargo operations in Pakistan while Cathay Pacific Airline of Hong Kong has announced to close its Pakistan operations on Wednesday September 26 for a month.

Three of the airlines listed British Airways, Saudi Airlines and Luthansa were the major cargo operators facilitating exports from the country. While British Airways cargo service was the part of its passenger operations, Saudi Airlines operated both passenger and dedicated cargo service and Lufthansa which ceased passenger operations about two years ago was operating a cargo dedicated service. In addition, Cargolux, Air France and Singapore Airlines all operated dedicated cargo services the last started the service just last month from Lahore.

While Emirates, the national flag carrier of the United Arab Emirates, is still operating passenger services, the national flag carrier Pakistan International Airlines (PIA) just does't have the capacity to lift the increasing volume of export cargoes left unattended due to the closure of the services of the airlines mentioned above.

However, the closing of operations by the foreign airlines is attributed to the overall recession in the aviation industry worldwide forcing global airlines to cut their expenses, according to Air Vice Marshal Arshad Rasheed Sethi, the Deputy Director General Operations of Civil Aviation Authority.

He said that CAA is bracing itself to lose substantial revenue due to the resultant decrease in its aeronautical charges which make up 85 per cent of its earnings. Not only the CAA is losing revenue in landing, parking and other airport-services related charges but it is also losing substantial sums as overflights over the national air space have declined by 35 per cent from an average 280 per day to about 180 per day. This means a major loss of revenue for the CAA, he added.


According to Moin Fudda, the chief of foreign Commercial Union Insurance, the war risk insurance on all imports and exports to and from the country, whether by air or sea, has registered an increase of 82 per cent. The primary cause of this increase is the increase in cover by reinsurance companies who are facing enormous property and aviation-related claims resulting from terrorist attacks in the US.

Global Reinsurance giants like MunichRe and SwissRe have to meet claims which according to one estimate stands at $ 40 billion in the devastation in New York alone. This would force these companies to resort to increase their reinsurance rates worldwide to absorb the substantial loss the effects of which would be felt in Pakistan, he said.

This means that the cost of reinsurance would be enormous, particularly in whole of the region of which Pakistan is a part. This would result in expensive insurance premiums particularly for such vital covers as Marine, Property and Airline the first to result in increased cost of all cargoes be it import or export and the last in increased airline fares.

As is, the freight forwarders have already increased rates for exports from Pakistan by 33 per cent which is over and above the rates fixed by the International Air Transporters Association. While the local importers and exporters may be able to absorb the increased insurance and freight rates the real cause of concern is that the situation may lead to low frequency of air freight and seaborne trade.

Moin expressed apprehensions that the increased cost of reinsurance poses a challenge for the Pakistani insurance industry in general and small and medium size companies in particular.

The outgoing chairman of Insurance Association of Pakistan, the representative body of some 56 general insurance companies in the private sector both local and foreign, M.I. Ansari said that war risk insurance which makes a portion of all cargo insurance covers has already been increased from 2.75 per cent to 5 per cent. Similarly, the premium on hull (body of the ship) insurance has already registered an increase of 20-50. So what does this mean?

It means that since the shippers have to buy hull insurance they would be force to increase the freight rates to ultimately increase the costs of all imports and exports entering in or shipped out of the country. This would affect both the air and ship freights. Asked what exactly would be monetary effect of the increased freight and hull insurance, Ansari said that it is hard to calculate the costs as it depends on the increase in the premium rate by the insurance companies and also on what kind of increase in freight rates shippers resort to.

A declaration of war would mean the promulgation of War Risk Ordinance under which the insurance companies would play the role of an agent while the government would be liable for the claims as well as the collector of premiums. However, as this applies to only 'declared war' and even in case if there is such a war between the US and Afghanistan from which we can be affected there would be no War Risk Ordinance.

The Pakistani insurance companies which rely heavily on the foreign reinsurance companies usually conclude the yearly contracts in October and November are looking at increased reinsurance costs which would be a problem for small size insurance companies.


The increased premiums by the insurance companies, freight rates by the shippers and the suspension of operations by foreign airlines, both dedicated and non-dedicated freight operators, have started to take a toll on exports. On the one hand it has resulted in increasing the prices of exports and on the other it is resulting in pile-up of cargoes at the commercial airports.

One of the worst hit exports are the leather and leather garments the major destination of which is such European countries as Germany, France, Spain and UK. With winter just around the corner this is the peak season of finished leather and leather garments exports to Europe. The termination of flights by major European airlines, particularly such entirely cargo dedicated ones as Lufthansa, Cargolux and Air France plus British Airways which also lifted cargo as part of its passenger operations is feared to seriously jeopardize leather and leather garments exports to the EU. The emerging scenario is all the more painful as during the first two months of the current fiscal July and August the exports of leather and garments touched $ 104 million figure showing an increase of almost 4.5 per cent over the corresponding period figure of $ 99.74 million last year.

Talking to PAGE the member of Federation of Pakistan Chambers of Commerce and Industry (FPCCI), S.M. Naseer said that leather and leather garment exports stands heavily affected despite the best efforts by the Pakistan International Airlines. Naseer who is also one of the top major finished leather exporter said that both the air and seaborne shipments are affected. While leather and garment goods are exported both through air and sea the bulk of it is shipped through sea which costs much less.

He said that while the Pakistani leather and leather garment exporters would be able to absorb the cost of increase insurance and freights and while they could still manage to remain competitive in the international markets the delayed deliveries have the potential to result in the cancellations. More importantly, he said, the delayed deliveries plus the looming uncertainty may drive the importers in the international markets to replace us with our neighbour.

He said that the leather and leather garments exporters have already started receiving faxes from their international buyers expressing concerns about timely delivery due to termination of flights by a number of foreign airlines. They have also expressed concerns about the developing situation in the region saying that it may result in irregular supply and thus hinting at diverting their business to our main competitor, India. It is imperative that measures should be taken to lift the export cargoes on top priority basis so as to help avoid a situation where orders are cancelled or buyers find new suppliers in other countries or otherwise it would be hard to rebuild markets already established all over again.

Seafood exports.

The US is one of the major destination of the Pakistani seafood. Since the terror attacks the seafood exports have come to a standstill due to a absence of response from the buyers in the US. Repeated attempts by the local seafood exporters remain futile due to lack of response on the part of the US buyers. This has resulted in a decline in prices of seafood in the local market for the welcomed surprise of buyers. If and when the exports to the US resumes its usual activity the increased insurance and freight rates are feared to increase the cost, fact which poses many challenges for the exporters.


While the aviation and the insurance industries are hit the worst by the terror attacks in the US President George W. Bush has already announced a $ 15 billion and $ 16 billion bail out packages for the two industries respectively the two sectors by their very nature would leave no other economic activity untouched, and unscarred.

Pakistan, due to its very geographical location and its unstinted support against the US-led war against terrorism is feeling the pinch more than most other countries in the region. As Moin Fudda said that 'Pakistan is not the only country which is affected, however, and we have to collectively decide the course of action for the local insurance industry which is capable of successfully meeting the crisis no matter how difficult it seems.' The same is also true for aviation industry and foreign trade. We shall, and must, overcome.