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AIRPORT INSURANCE COVERAGE AND
RISK MANAGEMENT PRACTICES
SUMMARY Insurance is one "risk-financing" technique. It remains one of the most important risk-
financing techniques available to airport operators. For some airports, commercial prop-
erty and casualty insurance coverage and the attendant services and advice that come with
the insurance purchase are the primary means for financially managing the risk of loss
within the organization. For other airports, insurance is more of a technique to supplement
other risk management practices or a mechanism to help provide financial recovery from
potentially catastrophic loss. Regardless of how they use the tool, most airport operators
buy some form of property/casualty insurance.
This report presents the results of ACRP Project 11-03 S01-03 and is intended to identify
the variables that affect insurance purchasing for airport operators and to identify the range
of practices that exist among U.S. airports. Once identified, the practices can be synthe-
sized into a set of basic principles to be considered and applied as appropriate by airport
officials confronted with risk-financing and insurance-purchasing decisions.
A survey was developed to identify current insurance-buying practices and the charac-
teristics of airports that use them. Twenty-one prequalified airport operator systems were
selected to participate in the survey. Airports were prequalified by a preliminary survey of
a larger population to determine those willing to participate. Nineteen prequalified airport
operator systems, representing 42 airports, replied to the survey request. This was a 90%
response rate.
In addition, eight airport operator systems participated in detailed interviews about their
insurance-purchasing practices. These eight systems represented 20 airports.
Respondents to the survey were classified by revenue size for analysis purposes, rather
than by passenger boardings or the FAA hub size definitions. Sizes used are small (less
than $250 million), medium ($251 to $600 million), and large ($600 million and above).
The reason for this classification system is that of the airport operator systems identified as
willing to participate in the study, 16 of 19 systems fell into a single category, Category I
under 14 Code of Federal Regulations (CFR) Part 139. The remainder fell into a secondary
large category. None were in the smaller three FAA categories.
Therefore, identification of variables that could affect insurance-purchasing behav-
ior required a different method of classification. Although a number of smaller airport
operators are included in the study by virtue of being part of larger airport systems, the
insurance-purchasing practices for such airport operators are determined by the parent
organization, which falls into a larger category for purposes of analysis.
Another reason for use of revenue size rather than passenger boardings is that insur-
ance-purchasing practices are more likely to be influenced by the size and sophistication of
an organization than by the passenger-boarding variable. For example, an airport system
with a large, sophisticated operation weighted heavily toward freight movement, rather
than passenger boardings, would likely use insurance and other risk management tech-
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niques more like a large passenger-oriented system than like a small airport with few board-
ings. Yet, a classification system based on boardings would put the large commercial freight
airport operator and the small airport operator in the same category.
Topic areas covered in the survey and interviews included --
· General airport operator insurance-purchasing practices;
· The role of the risk manager with regard to insurance purchasing;
· Sources relied on for determining practices and procedures;
· Types of coverage, limits, and deductibles purchased; and
· The use of risk retention as a risk-financing tool.
All airport operators indicated that they rely on both internal staff and insurance brokers
when making insurance-purchasing decisions, although large airport operators used bro-
kers less intensively than their smaller counterparts. Small airport operators rely on their
insurance broker to make recommendations on purchasing decisions, whereas large airport
operators did not indicate this reliance. Smaller airport operators also indicated longer term
relationships with their insurance brokers.
Large airport operators reported less concern with price as a purchasing determinant but
were more concerned with loss exposure than small airport operators when buying coverage.
Medium airport operators considered price, coverage, and exposure equally when making
insurance-purchasing decisions.
All airport operators purchase some level of coverage for general liability, property, and
business interruption. Medium and large airport operators tend to purchase their own insur-
ance for construction, as opposed to having construction contractors purchase the coverage,
such as builders' risk or consolidated coverages as found in an owner-controlled insurance
program. Larger airport operators are more likely to buy coverage for war and terrorism
risks, whereas small airport operators do not purchase this coverage as often. Medium air-
port operators tend to self-insure for workers' compensation at a greater rate than airports
in other size categories.
All airport operators indicated that they have not changed deductibles in the past 3 years,
with many small airport operators responding that deductibles and limits have remained
unchanged over many years. Large airport operators tend to evaluate deductibles and limits
annually and will change when savings are indicated.
If an airport operator self-insures all or a portion of any line of insurance, it tends to be for
workers' compensation. All airport operators indicated that they remain bare for cyber risks.
Large airport operators tend to have a larger appetite to retain risks, whereas small airport
operators tend to carry low deductibles--not a surprising finding.
Results of surveys and interviews conducted for this project indicated that the risk man-
agement function has become more important within airport organizations within the past
5 years. All respondents affirmed this finding, including those for whom risk management
was not the only, or even necessarily the primary, job function.
How airports administer risk management is at least partly determined by the size and
resources of the facility. As would be expected, larger airports are more independent, have
greater resources, and use a greater variety of risk management techniques. They also
approach their risk financing from a different perspective than their smaller counterparts.
As one interviewee indicated, the larger airports tend to look at insurance as a "last resort."
Smaller airports tend to view insurance as their primary risk-financing tool.
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Medium and large airports frequently employ a full-time risk manager, who conducts
risk assessments, usually supervises a modest sized staff, is considered a member of senior
management, and reports having a considerable level of authority in making risk-financing
decisions and ordering insurance coverage.
The risk management function at small airports tends to be part time and to rely on
services, such as risk assessments, provided by a variety of resources within and outside
the organization, including other employees and insurance brokers.
Medium and large airport operators tend to rely on risk analysis to validate insurance-
buying decisions. Small airport operators are less likely to use risk analysis. When such
analysis is conducted, the methods do not vary among the size classifications, aside from
the concept that smaller airport operators may rely less on more sophisticated (and time-
consuming) methods such as benchmarking and statistical analysis.
When it comes to self-administration of claims, medium airport operators are the most
active and tend to evaluate the decision to self-administer more frequently than do large and
small airport operators. Small airport operators do not self-administer claims and do not evalu-
ate self-administration as an option. Large airport operators in this survey generally also forgo
the self-administration of claims; however, they do tend to look at this option periodically.
Survey findings indicated that, regardless of revenue size, airport operators procure
insurance coverage for property, general liability, and business interruption. Nevertheless,
there are differences between the coverage-buying practices of the three size classifica-
tions. The survey indicated the following insurance-purchasing behaviors:
· Large airport operators may purchase contractors' pollution liability insurance for
construction projects, but in general, large airport operator respondents are less likely
to purchase pollution legal liability coverage than are small and medium airport
operators.
· Medium airport operators do not purchase workers' compensation, employment lia-
bility, and auto liability as often as larger and smaller airport operators.
· Small airport operators do not buy construction insurance outside of the occasional
purchase of builders' risk coverage. However, medium and large airport operators,
often engaged in construction activity, are more likely to participate in consolidated
insurance programs and tend to purchase builders' risk coverage more frequently.
· Nearly all large airport operators and about half of medium airport operators pur-
chase insurance against acts of war and terrorism. These facilities tend to include
this coverage principally in property coverage lines. Small airport operators, if they
do purchase war and terrorism coverage, tend to purchase coverage for liability lines.
At small airports, deductibles and limits tend to remain unchanged for years at a time.
In contrast, large airport operators tend to monitor the marketplace and modify both limits
and deductibles where there is potential for additional savings.
Most airport operators indicated that deductibles have not changed within the past 3
years; however, when deductible amounts and liability limits are adjusted, large airport
operators tend to do so because of perceived risk and affordability, whereas medium air-
port operators are generally motivated by affordability alone. In addition, as with coverage
determination and risk assessment, when it comes to modification of deductible levels
and liability limits, medium and small airport operators are more likely than large airport
operators to rely on the recommendation of their brokers.
Overall, large airport operators tend to self-insure, whereas small airport operators do
not. Where an airport operator does choose to retain risk, workers' compensation insur-
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ance appears to be the most frequent choice. Medium and large airport operators tend to
retain more workers' compensation risk compared with other lines of insurance.
Most airport operator respondents perform a costbenefit analysis (evaluate the cost of
various options compared with the expected benefits to be derived) to determine whether
to retain risk. Respondents did not characterize the level of formality of this analysis. Fre-
quency of analysis to validate this decision to self-insure depends in large part on the line of
insurance; however, there are small and medium airport operators that choose not to conduct
such analysis. Entire lines of coverage are also forgone by all airport size classifications in
favor of risk retention, with coverage for cyber risk being chief among them.
The rule as illustrated by the survey appears to be, the larger the airport, the more risk
that is retained. This is most evident in workers' compensation deductibles selected by large
and medium airport operators, which in practice are the highest among the various lines of
coverage. Smaller airport operators are more risk averse and usually carry deductibles no
larger than $100,000.
A few principal conclusions are derived from the data and the interviews in this study.
1. The portion of the airport community characterized as either II (14 CFR Part 139) or
Small Hub (49 United States Code 47102) classification standards is difficult to reach
and underrepresented in this study. No participants came from either of these groups
because none could be identified as willing to participate in prequalification surveys.
Similarly, no private airports were represented. Further study may be appropriate to
find out whether this part of the community needs the kind of assistance and informa-
tion that is available to the types of airport operators that did participate.
2. A belief that smaller airport operators may not have the access to peer support or
industry group resources is not supported by the information obtained in the inter-
view portion of this study. Of the six "small" airport operator interview participants
(less than $250 million operating budget), all respondents identified collaboration
with peers and participation in industry or professional groups (Airports Council
InternationalNorth America, Risk and Insurance Management Society, Public Risk
Management Association) as their principal method for determining risk manage-
ment best practices. However, this belief in lack of access for some may be accu-
rate for classifications mentioned in the first conclusion above (i.e., Classification II
or Small Hub). Because of the difficulty in identifying willing participants in these
groups, the study revealed no conclusions about the groups' resources for peer con-
sultation or benchmarking.
3. The smaller airport operators in this study showed more emphasis on price and less on
coverage than did the larger airport operators. A follow-up study may be appropriate
to find the reasons for this emphasis and to determine whether it is warranted or the
result of misconception or lack of understanding of the risks.
4. Because price is the primary decision driver for smaller airport operators, a group pur-
chasing or group self-insurance program may be appropriate to help provide adequate
coverage at competitive pricing that could be obtained if economies of scale were avail-
able. Additional research is needed to determine whether this approach is viable.
5. The apparent tendency of smaller airport operators to forgo terrorism and pollution
liability coverage merits further research to determine whether this decision is related
to cost or whether there is a valid reason to assume limited exposure.
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6. This study focused on insurance purchasing. Another important risk-financing tech-
nique is contractual risk transfer, in which another party agrees to pay for loss upon
certain contingent events. For smaller airport operators especially, this technique
may be valuable because it is very low cost and can be very effective if used prop-
erly. A research project to identify the need for training or dissemination of informa-
tion in this area may benefit the smaller airport operators.
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