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Airport Insurance Coverage and Risk Management Practices (2011)

Chapter: CHAPTER THREE Airport Risk Manager s Role

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Suggested Citation:"CHAPTER THREE Airport Risk Manager s Role." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Suggested Citation:"CHAPTER THREE Airport Risk Manager s Role." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Suggested Citation:"CHAPTER THREE Airport Risk Manager s Role." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Suggested Citation:"CHAPTER THREE Airport Risk Manager s Role." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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13 CHAPTER THREE AIRPORT RISK MANAGER’S ROLE solidated, single risk manager approach employed by large airport operators, persons charged with the risk manage- ment role in small airports include deputy directors, finance managers, property managers, legal personnel, and various committees within the airport operator organization. Fifteen of 19 airport operators confirmed that risk management is a full-time position at their facility. Of the remaining airport operators with part-time risk managers, the primary responsibility of these risk managers entails finance, legal matters, and property management. RISK ANALYSIS After computer problems crippled the new $20 billion Chek Lap Kok (Hong Kong) airport in July 1998, economic losses related to cargo delays amounted to more than $1 billion. The staggering losses led to an inquiry by an independent commission to determine responsibility for these losses and to ensure that the same mistakes would not be made again (Macdermott 1999). The commission’s report focused on the critical nature of comprehensive risk assessment and contingency planning to ensure the success of large-scale infrastructure projects such as Chek Lap Kok. The report cited a multitude of operation problems, from slippery floors, insufficient air conditioning, and escalator stoppages to more complex problems such as malfunctioning of both the flight information display system and cargo-handling system. Here, the lack of overall risk assessment resulted in a near irreparable breakdown in procedure, $1 billion in losses, embarrassment for the government-run airport, and 6 weeks of remediation before the facility could begin operations at the intended capacity. Airport operators responding to this synthesis survey instrument are aware of the need for risk assessment. Airport operators, especially large and medium facilities, employ risk assessment techniques such as cost–benefit analysis, evaluation of loss histories, benchmarking, and statistical analysis to make the decisions that keep day-to-day opera- tions afloat and, for effective risk managers, successful. The risk management profession grew out of an insurance- buying role. Its principal professional organization, the Risk and Insurance Management Society (RIMS), evolved from an earlier organization known as the American Society of Insurance Management “acknowledging the shift toward risk management” and away from just buying insurance and managing the accompanying services (Arnold 2002). Nevertheless, insurance purchasing remains an impor- tant function of the present-day risk manager. Not all orga- nizations have risk managers, however, although someone is always responsible for the functions that a risk manger performs. The survey included questions about employment of risk managers by airport operators; their insurance-pur- chasing responsibility and authority; their systems, methods, and procedures for insurance purchasing; and how this func- tion relates to their overall role within the organization. AIRPORT RISK MANAGERS Eleven of 19 airport operator respondents employ a desig- nated airport risk manager charged with the authority to make final insurance-purchasing decisions. Airport opera- tors without risk managers tend to rely on positions such as a deputy director, a municipal risk manager (for operators that are part of a municipal agency), or legal or finance personnel to make the final insurance-purchasing decision. All but one large airport operator respondent stated that the airport risk manager is ultimately responsible for the risk management role in their facility, including insurance-pur- chasing decisions. The remaining airport operator indicated that the Treasury/Risk Financing Department is charged with these tasks. Medium airport operators fall in line with their larger counterparts. All but one medium airport operator respon- dent has a designated airport risk manager. The remaining medium airport operator uses the services of a municipal risk manager. Small airport operators tend to use a variety of resources to manage risk. Like the larger airport operators, some indicate use of a designated risk manager. Unlike the con-

14 Of the small airport operators that do conduct risk assess- ments, all evaluate contracts, records, documents, and loss histories. Most conduct personal inspections. Some also use benchmarking and statistical analysis to assess the perfor- mance of risk management strategies and their overall insur- ance program. Based on survey responses, there appears to be no marked difference in the methods used by the three airport size classifications to perform risk analysis; however, small airport operators responded that they rely less on methods such as benchmarking and statistical analysis than do the larger facilities. Who Performs Risk Analysis? Risk managers, risk analysts, safety officers, and insur- ance brokers are the person(s) responsible for risk analysis. Some airport operators also named independent risk con- sultants and/or other internal personnel as responsible for this function. All large airport operator respondents stated that risk managers or risk analysts within their organization perform risk assessments. Three of six of these respondents also use insurance brokers and safety officers within the organization to aid in assessments. Again, all medium airport operator respondents stated that the risk manager within the organization runs the analysis. Some solicit assistance from safety and insurance broker personnel. Of the small airport operators that conduct risk assess- ments, a majority of small respondents rely on safety officers; half use risk managers, broker personnel, and independent risk consultants to perform analysis for their facility. Smaller airport operators tend to rely on safety officers to conduct risk assessments, as they do not employ dedi- cated airport risk managers and the risk management func- tion tends to be part time. In contrast, medium and large airport operators use dedicated risk managers and/or staff and rely less on safety officers and insurance brokers to con- duct the analysis to evaluate insurance-purchasing decisions and determine the quality of the coverage purchased and its attendant services. PRIORITY OF EXPOSURES In order of importance, areas of exposure concerning the survey respondents include general liability, construction, and business interruption. Although these three areas are the top concerns among airport operators, other loss exposures, namely automobile liability, environmental concerns, war How Frequently Do Airport Operators Perform Risk Analysis? The majority of airport operator respondents indicated that they “usually” or “always” conduct specific risk analysis to validate insurance-purchasing decisions. Some responded that whether or not an analysis is performed depends on the type of coverage; one respondent stated that his or her facil- ity never performs risk assessments. Large airport operators reported that they “always” per- form risk assessments. For medium airport operators, risk analysis is less certain. Two of six medium airport operator respondents indicated that their facility “always” performs risk analysis to validate purchasing decisions. Another two operators indicated that their facilities “usually” perform risk analysis to validate these decisions, and the remaining two respondents stated that the performance of risk analysis depends on the line of coverage purchased. Small airport operators responded with a variety of answers when questioned about the frequency of risk assess- ment at their airports. Four of seven small operators claimed that they “always” conduct risk analysis. The remaining airport operators were split. One indicated periodic perfor- mance of risk analysis. One operator stated that the analy- sis is dependent on the line of coverage. One small facility admitted that it does not perform risk assessments at all. In summation, the survey instrument reveals that medium and large airport operators tend to rely on risk analysis to validate insurance-purchasing decisions. In contrast, small airport operators rely less on this approach, likely because on the whole they are without the dedicated personnel, mon- etary resources, and the knowledge base necessary to con- duct these tasks. What Methods of Risk Analysis Are Used? Of the airport operators that conduct risk analyses, most use not one but a variety of methods, including the evaluation of contracts, records, and documents; benchmarking; and sta- tistical analysis. All airport operators conducting risk analy- sis evaluate loss histories in performance of this task. Large facility respondents use personal inspections of their facilities and analyze loss histories using benchmark- ing; statistical analysis; and review of contracts, documents, and records. Half of these large airport operators use risk assessment questionnaires, and one uses personal interviews and staff discussions to evaluate purchasing decisions. As a group, medium airport operators evaluate contracts, records, and documents; use benchmarking; and evaluate loss histories. Some conduct personal inspections and risk assessment questionnaires.

15 istration of claims. Of those 10 that conduct such analysis, three perform this evaluation every year, three evaluate every 3 or more years, and three evaluate claims admin- istration practices when they rebid the airport’s insurance package. Large airport operator respondents tend to evaluate claims administration either every 3 years, when they rebid insurance, or not at all. Medium facilities are split, with three indicating that they perform cost–benefit analysis of claims administration every year, and three providing varying responses ranging from evaluation upon rebid of insurance to never. All small airport operator respondents answered that they do not perform cost–benefit analysis regarding self-administration of claims, which is not unexpected given that none of the small airport operator respondents currently engage in self-administration of claims. In summation, the survey results indicate that medium airport operators tend to evaluate self-administration of claims more frequently than both large and small airport operators. Although large airport operators do perform this analysis, they use this risk management tool less frequently, generally when they rebid the facility’s insurance package about every 3 years. Small airport operators do not conduct this type of cost–benefit analysis. These results are in line with earlier survey findings that small airport operators rely less on risk analysis, most likely because they are without the greater resources of their medium and large airport operator counterparts. INCREASING IMPORTANCE OF RISK MANAGEMENT AT AIRPORTS Fifteen of 19 respondents indicated that the risk manage- ment function has become increasingly important to their airport in recent years, and not one respondent stated that the risk management function had declined in importance over recent years. From the survey responses, it appears that regardless of revenue size, risk management is becoming more of a priority for airports across the country. The increasing weight of the airport risk management function may be directly attributed to the ever-expanding nature of the aviation industry. In addition to air transporta- tion and preflight dining, airport operators are transition- ing into full-service operations in the business of providing hotel accommodations, gym facilities, museum and exhibi- tion space, shopping, and connections to various methods of ground transportation. The transition equates to new and previously unexplored exposures and the need to effectively oversee those exposures. and terrorism, professional liability, and cyber risks, worry the respondent airport operators as well. Large airport operators prioritize general liability and war and terrorism as the two loss exposures causing them the most concern and requiring the greatest amount of atten- tion today. Business interruption and construction tie for third among large airport operator exposure concerns. Medium airport operators are most concerned with general liability and construction liability exposures. No medium airport operator respondents cited war and ter- rorism as a priority concern. One medium airport operator included automobile liability exposures as one of their top three exposure concerns. Small airport operator exposure concerns primarily include general liability and automobile liability. Fewer than half of small airport operator respondents reported business interruption, environmental considerations, or cyber risk within their top-three exposure concerns. No small airport operators mentioned professional liability or war and terror- ism exposures as priorities within their organization. Overall, general liability exposures take priority with airport operators in all size classes. Small and medium air- port operators did not express concern regarding war and terrorism; however, war and terrorism is of great concern for larger respondent airport operators. Both large and medium airport operators expressed some concern for construction liability exposures, whereas small airport operators are more concerned with automobile liability exposures. CLAIMS ADMINISTRATION Most airport operators do not self-administer claims. Of airport operator survey respondents that do, two stated that their facility self-administers general liability claims, and another self-administers workers’ compensation claims, automobile liability claims, and all other coverage lines up to program retention levels. Only one large airport operator respondent self-administers claims for general liability. Medium airport operators were split on claims administration, with half indicating that they self-administer and half outsourcing claims. No small airport operators reported self-administration of claims. Thus, the survey instrument illustrates that medium airport operators are most likely to engage in claims administration, whereas small airport operators do not self-administer claims at all. Results also show that just 10 of 19 respondents do not conduct a cost–benefit analysis relating to the self-admin-

16 decisions. None of the interviewees defined “enter- prise risk management.” One interviewee said, “I have yet to meet anyone who actually practices enter- prise risk management,” and that it was not easy to do so because uninsurable risks were often addressed by line managers, not by the risk manager. Another question asked whether the risk manager was considered a member of senior staff within the organization. Six of the eight interviewees answered yes. Five of the interviewees report to a chief finance offi- cer or director of finance. Two report to a chief adminis- trative officer or director of administration. One reports to the human resources director. This finding reflects industry observations that risk management is viewed increasingly as a financial function (International Risk Management Insti- tute 2010). INTERVIEW RESULTS—RISK MANAGER’S ROLE Participants in the interviews were asked, “How has the evolving role of risk management affected insurance pur- chasing in your organization?” Responses varied, as shown in Appendix E, but there were several common threads: 1. Risk mitigation has become more important than insurance. 2. Insurance has become a “last resort” after exploring other avenues for financing risk. Several interviewees commented that their organizations retain or “self- insure” large loss exposures. 3. “Enterprise risk management” has become important within some organizations, and one indicated that this perspective was the basis for insurance-purchasing

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 30: Airport Insurance Coverage and Risk Management Practices identifies both the variables that affect insurance purchasing for airport operators and the range of risk management practices that exist among U.S. airports. The report is designed to help airport officials confronted with risk-financing and insurance-purchasing decisions.

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