Airport Insurance Coverage and Risk Management Practices (2011)

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10 CHAPTER TWO AIRPORT OPERATOR INSURANCE-BUYING PRACTICES USE OF BROKERS Number of Brokers Ten of 19 survey respondents indicated that they use one insur- ance broker when purchasing coverage for their airport. Seven of 19 employ two brokers, whereas two operators use more than three brokers when placing coverage for their airport. Large airport operators tend to use a greater number of brokers, most (n = 4) using two or more. Medium airport operators generally use only one broker, although some did cite use of two or three-plus brokers. Small airport operators generally use only one insurance broker. Broker Selection Large airport operators exclusively use the open competitive bid process to select insurance brokers for their facilities. In contrast, small and medium airport operators practice a variety of other procurement methods in broker selection, such as a request for qualifications, request for proposals, or selection from prequalified pools. Smaller airport operators tend to competitively pro- cure broker services contracts less frequently than large or medium airport operators. A strong majority of large and medium airport operator respondents competitively pro- cure broker services contracts every 3 to 5 years, whereas all small airport operator respondents competitively procure their broker services no more frequently than every 5 years. Open competitive procurements are motivated by sev- eral factors (International Risk Management Institute 2010), among them airport procurement guidelines, service pro- vided, broker performance, and contract expiration. Survey results illustrate that regardless of airport size, contract expi- ration and procurement guidelines are the common impetus for competitive procurement. Airport Operator–Broker Agreements Once the broker is chosen, written service agreements between the broker and the airport facility are the norm for all airport classifications and sizes; however, some small airport operators do choose to work with brokers under less formal arrangements. All large and medium survey respondents reported the use of written broker service agreements between airport facil- ity and broker. Only two small airport operator respondents, both reporting revenues of less than $100 million, stated that they have no formal written agreement with their insurance broker. All other respondents use a written agreement. Airport Operator–Broker Relationship The majority of airport operator respondents have long-term relationships with their current broker. Thirteen airport operator systems indicated that they have worked with their current broker for 5 years or more. Survey results also demonstrate that the smaller the air- port operator, the more likely the airport operator and its broker are to have forged a long-term relationship. Although a number of large and medium airport operators have worked with their current broker of record for approximately 3 years, all small airport operator survey respondents indicated that their current broker has served for anywhere from 5 to 10 or more years. This is consistent with the above-mentioned results showing that smaller airport operators competitively bid insurance brokerage contracts less frequently than their larger counterparts. Smaller airport operators also show more reliance on the advice of their respective brokers. Overall, 12 of 19 airport operator respondents stated that they rely extensively on broker recommendations when making insurance-purchas- ing decisions. Of this group, half (n = 3) of all large airport operator respondents and six of seven small airport operator respondents reported extensive reliance on broker recommen- dations. Small airport operators indicated that they are unable to perform the kind of in-depth coverage analysis required and thus depend on their broker to provide these services. INSURANCE-PURCHASING DECISIONS Who Decides? Insurance-purchasing decisions often follow a multilayered approach. Respondents universally indicated that internal airport operator staff and brokers assist in the purchasing process. Some airport operators employ dedicated commit-

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, but similarly use internal staff resources as well as those of their insurance broker in making all coverage determinations. It can be noted, however, that large airport operators do tend to rely less on the advice of their brokers in mak- ing insurance-purchasing decisions, most likely because of greater resources available to larger facilities with more numerous staff and expanded operating budgets as com- pared with their smaller counterparts. In each of the three airport size classifications, there is a designated hierarchy of individuals who interact to shape the coverage that will insure the airport, its operations, facilities, employees, and visitors. In general, large airport operators appear to delegate this decision-making process to airport officials and internal staff; medium and small airport opera- tors tend to entrust coverage decisions to insurance brokers to supplement their more limited internal resources. What Factors Influence Purchasing Decisions? Overall, the most important factor in insurance-purchasing decisions is coverage (protection). Price ranks second in importance among survey respondents and exposure ranks third. However, although coverage is the priority among all survey respondents, medium and small respondents rank price as equally influential or in some cases even more influ- ential (as compared with coverage) in purchasing decisions. Figure 3 illustrates the importance of factors such as price, coverage, and exposure in making insurance-purchas- ing decisions as weighed by survey respondents from all air- port size classifications. The questionnaire also included a category of broker recommendation and a category for other factors. Neither category had any responses. Smaller airport operators are the most cost sensitive when procuring coverage for their facility. Although medium air- port operators also express concern as to the price of insur- ance, large airport operators do not recognize price as a factor in their coverage decisions. All airport operators reported that coverage is an impor- tant criterion. Larger and medium airport operators are con- cerned with the various exposures faced by their airports, whereas small facilities do not identify exposures as an influ- ential factor in their coverage decisions. Oddly, although a strong majority of airport operators admit at least some reliance on the advice of their broker in making purchasing decisions, none of the respondents regardless of class size list broker recommendation as the most important criterion for their insurance-purchasing decisions. How Often Do Airport Operators Shop Coverage? A variety of factors determine how often an airport opera- tor obtains competitive insurance quotations or “shops” the various lines of coverage. Overall, 13 of 19 survey respon- dents shop property and casualty lines every year, with four of 19 respondents indicating that they shop coverage every 3 years. One airport operator respondent indicated that they do not “shop” for coverage at all. Another indicated that coverage selection or shopping is dependent on preliminary renewal pricing and coverage terms. Although three of the six large airport operators shop every 3 years, medium and small airport operators tend to shop annually. Larger airport operators shop less frequently because they negotiate longer program terms, lock in rates over multiple years, and tend to develop long-term relation- ships with insurance carriers. What Prompts the Purchase of New Insurance Products? When it comes to buying new insurance products, 14 of 19 respondents cited the use of cost–benefit analysis as the most important factor in coverage selection. Remaining respon- dents cited newly identified exposures as the motivating fac- tor behind the purchase of new lines of coverage. In this instance, there are no significant differences between the size classifications. All identified cost–benefit analysis as the determinant factor in purchasing a new insur- ance product. According to the survey instrument, small airport opera- tors are price sensitive when making insurance-purchasing FIGURE 3 Factors influencing insurance buying practice at all airport size classifications by priority. Numerical axis shows number of airport operators responding.

12 decisions and are less concerned about the exposures atten- dant to airport operator functions. Although medium air- port operators take price into consideration, they are equally concerned with exposure and coverage. Large airport oper- ators, on the other hand, do not consider price a determining factor in purchasing decisions. Large airport operators give factors such as coverage and exposure far more weight in the deliberations process. A point of commonality among the three size classifica- tions is that all airport classifications use internal staff in addition to the expertise of their insurance brokers to make purchasing decisions. However, medium and small facilities rely more on brokers than do large facilities. Small and medium airport operators also find common ground in their tendency to shop coverage more frequently than large airport operators. Although the small and medium facilities indicate program shopping once per year, larger facilities are in the practice of locking in rates for long-term programs with their chosen insurance carriers. All three clas- sifications, however, prefer to conduct a cost–benefit analysis in contemplation of the purchase of a new insurance product. INTERVIEW RESULTS—INSURANCE-PURCHASING DECISIONS One of the most interesting findings of the follow-up inter- views with airport officials was the relatively high level of authority granted to airport risk managers regarding insur- ance-purchasing decisions (see Appendix E). Most risk managers have limited or full buying authority subject to ratification by a governing body or top-level executive. In the public sector, purchasing authority is often highly lim- ited, especially for service purchases. Although ratification is required in all interviewed airport operator entities and dollar amounts are restricted for some airports, the level of authority for insurance buying is quite high and, in some cases, without specific limits. The interviews also explored the effect of tort liability caps on insurance-buying decisions. Five of eight inter- viewees reside in states with governmental tort liability caps on claims. The caps range from $50,000 to $1,500,000 per occurrence. Two states have no caps (two operators are located in the same state). Four of the interviewees stated that tort liability caps influence their insurance-buying decision. One interviewee stated that purchase of insurance above the tort caps waives the entities’ immunities. In that instance, the airport operator buys insurance only to tort limits for nonaviation exposures. Some of the operators indicated that despite immunities or tort caps, the airport purchases cover- age out of caution.