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10 CHAPTER TWO AIRPORT OPERATOR INSURANCE-BUYING PRACTICES USE OF BROKERS All large and medium survey respondents reported the use of written broker service agreements between airport facil- Number of Brokers ity and broker. Only two small airport operator respondents, both reporting revenues of less than $100 million, stated that Ten of 19 survey respondents indicated that they use one insur- they have no formal written agreement with their insurance ance broker when purchasing coverage for their airport. Seven broker. All other respondents use a written agreement. of 19 employ two brokers, whereas two operators use more than three brokers when placing coverage for their airport. Airport OperatorBroker Relationship Large airport operators tend to use a greater number of The majority of airport operator respondents have long-term brokers, most (n = 4) using two or more. Medium airport relationships with their current broker. Thirteen airport operators generally use only one broker, although some did operator systems indicated that they have worked with their cite use of two or three-plus brokers. Small airport operators current broker for 5 years or more. generally use only one insurance broker. Survey results also demonstrate that the smaller the air- Broker Selection port operator, the more likely the airport operator and its broker are to have forged a long-term relationship. Although Large airport operators exclusively use the open competitive a number of large and medium airport operators have worked bid process to select insurance brokers for their facilities. with their current broker of record for approximately 3 years, In contrast, small and medium airport operators practice a all small airport operator survey respondents indicated that variety of other procurement methods in broker selection, their current broker has served for anywhere from 5 to 10 such as a request for qualifications, request for proposals, or or more years. This is consistent with the above-mentioned selection from prequalified pools. results showing that smaller airport operators competitively bid insurance brokerage contracts less frequently than their Smaller airport operators tend to competitively pro- larger counterparts. cure broker services contracts less frequently than large or medium airport operators. A strong majority of large and Smaller airport operators also show more reliance on the medium airport operator respondents competitively pro- advice of their respective brokers. Overall, 12 of 19 airport cure broker services contracts every 3 to 5 years, whereas operator respondents stated that they rely extensively on all small airport operator respondents competitively procure broker recommendations when making insurance-purchas- their broker services no more frequently than every 5 years. ing decisions. Of this group, half (n = 3) of all large airport operator respondents and six of seven small airport operator Open competitive procurements are motivated by sev- respondents reported extensive reliance on broker recommen- eral factors (International Risk Management Institute 2010), dations. Small airport operators indicated that they are unable among them airport procurement guidelines, service pro- to perform the kind of in-depth coverage analysis required vided, broker performance, and contract expiration. Survey and thus depend on their broker to provide these services. results illustrate that regardless of airport size, contract expi- ration and procurement guidelines are the common impetus for competitive procurement. INSURANCE-PURCHASING DECISIONS Airport OperatorBroker Agreements Who Decides? Once the broker is chosen, written service agreements between Insurance-purchasing decisions often follow a multilayered the broker and the airport facility are the norm for all airport approach. Respondents universally indicated that internal classifications and sizes; however, some small airport operators airport operator staff and brokers assist in the purchasing do choose to work with brokers under less formal arrangements. process. Some airport operators employ dedicated commit-
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11 tees and/or outside risk management consultants, whereas others follow the advice of airport commissions, boards, or a director of risk management in choosing and procuring coverage best suited to their facilities. Large airport operator survey respondents indicated reli- ance primarily on internal staff resources, with help from the broker and outside consultants. Many of these larger airport operators also make purchasing decisions under the direction of a board of commissioners and the airport's risk manager. Medium airport operators rely less on a commission or board, FIGURE 3 Factors influencing insurance buying practice at all but similarly use internal staff resources as well as those of airport size classifications by priority. Numerical axis shows number of airport operators responding. their insurance broker in making all coverage determinations. whereas small facilities do not identify exposures as an influ- It can be noted, however, that large airport operators ential factor in their coverage decisions. Oddly, although do tend to rely less on the advice of their brokers in mak- a strong majority of airport operators admit at least some ing insurance-purchasing decisions, most likely because reliance on the advice of their broker in making purchasing of greater resources available to larger facilities with more decisions, none of the respondents regardless of class size numerous staff and expanded operating budgets as com- list broker recommendation as the most important criterion pared with their smaller counterparts. for their insurance-purchasing decisions. In each of the three airport size classifications, there is a How Often Do Airport Operators Shop Coverage? designated hierarchy of individuals who interact to shape the coverage that will insure the airport, its operations, facilities, A variety of factors determine how often an airport opera- employees, and visitors. In general, large airport operators tor obtains competitive insurance quotations or "shops" the appear to delegate this decision-making process to airport various lines of coverage. Overall, 13 of 19 survey respon- officials and internal staff; medium and small airport opera- dents shop property and casualty lines every year, with four tors tend to entrust coverage decisions to insurance brokers of 19 respondents indicating that they shop coverage every to supplement their more limited internal resources. 3 years. One airport operator respondent indicated that they do not "shop" for coverage at all. Another indicated that What Factors Influence Purchasing Decisions? coverage selection or shopping is dependent on preliminary renewal pricing and coverage terms. Overall, the most important factor in insurance-purchasing decisions is coverage (protection). Price ranks second in Although three of the six large airport operators shop importance among survey respondents and exposure ranks every 3 years, medium and small airport operators tend to third. However, although coverage is the priority among all shop annually. Larger airport operators shop less frequently survey respondents, medium and small respondents rank because they negotiate longer program terms, lock in rates price as equally influential or in some cases even more influ- over multiple years, and tend to develop long-term relation- ential (as compared with coverage) in purchasing decisions. ships with insurance carriers. Figure 3 illustrates the importance of factors such as What Prompts the Purchase of New Insurance price, coverage, and exposure in making insurance-purchas- Products? ing decisions as weighed by survey respondents from all air- port size classifications. The questionnaire also included a When it comes to buying new insurance products, 14 of 19 category of broker recommendation and a category for other respondents cited the use of costbenefit analysis as the most factors. Neither category had any responses. important factor in coverage selection. Remaining respon- dents cited newly identified exposures as the motivating fac- Smaller airport operators are the most cost sensitive when tor behind the purchase of new lines of coverage. procuring coverage for their facility. Although medium air- port operators also express concern as to the price of insur- In this instance, there are no significant differences ance, large airport operators do not recognize price as a between the size classifications. All identified costbenefit factor in their coverage decisions. analysis as the determinant factor in purchasing a new insur- ance product. All airport operators reported that coverage is an impor- tant criterion. Larger and medium airport operators are con- According to the survey instrument, small airport opera- cerned with the various exposures faced by their airports, tors are price sensitive when making insurance-purchasing