Airport Insurance Coverage and Risk Management Practices (2011)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

22 CHAPTER SIX RISK RETENTION SELF-INSURANCE The survey asked respondents to state whether any portion of their insurance portfolio was self-insured. The survey did not specifically define self-insurance, but the question was phrased to specify the use of a large self-insured retention at the primary insurance level with excess insurance above the retained amount. Self-insurance involves a formal decision to retain risk rather than insure it and is distinguished from noninsurance or retention of risks through deductibles by a formalized plan or system to pay losses as they occur (Inter- national Risk Management Institute 2010). Nine of the 19 survey respondents indicated that their facility is self-insured for primary lines of insurance. All large airport operator respondents confirmed that some primary lines are self-insured. Medium airport operator respondents are split: three self-insured and three insured by traditional coverage. Conversely, no small airport operators reported being self-insured for primary lines of coverage. The size of the airport is directly correlated to whether the facility tends to be self-insured for any lines of insur- ance. Larger airport operators are self-insured for one or more lines of insurance, whereas small airport operators do not retain risk. Eight of 19 airport operators indicated they are self- insured for workers’ compensation, and six of 19 self-insure for property and six for general liability lines (see Figure 6). FIGURE 6 Number of airport operators reporting self- insurance by line. Large airport operator respondents indicated that they are self-insured for property, liability, and workers’ com- pensation coverage lines. Four medium airport operator respondents are self-insured for workers’ compensation, two reported self-insuring property, and two self-insure general liability coverage lines. Although no small airport operator respondents reported retaining risks on primary coverage lines, one small airport operator indicated that its facility is self-insured for auto collision. In general, small airport operators do not self-insure risks and medium airport operators tend to retain work- ers’ compensation risks. Large airport operators self-insure more lines of coverage including property, liability, and workers’ compensation. Most likely, this is the result of greater revenues, larger operating budgets, and the exis- tence of personnel well versed in risk management meth- odology and capable of assessment and implementation of more complex risk-financing strategies at their respective large airport facilities. WHAT COMPELS AN AIRPORT OPERATOR TO SELF- INSURE? Of the 11 airport operators that self-insure at least one line of coverage, eight indicated that a cost–benefit analy- sis prompted the decision to retain risks. Four respondents indicated a strong appetite to retain risk within their facility. Other explanations for the decision to self-insure include the ability to control claims and manage claims costs, as well as affordability of self-insurance as compared with costs of traditional coverage. Among large airport facilities, cost–benefit analysis is the primary factor in the decision to self-insure. Affordability and the desire to retain risk also rank on large airport opera- tors’ lists of reasons to self-insure. Motivation for medium airport operator self-insurance varies. Medium airport operator respondents cited fac- tors such as cost–benefit analysis, appetite for risk, cost management, better claims administration, and decision of the facility’s risk manager as prompting the decision to self-insure.

23 dents indicated a lack of coverage for professional liability, and all categories are unlikely to cover cyber risks. SELECTION OF DEDUCTIBLES Current airport operator deductibles fall in line with each airport classification’s appetite for risk as evidenced in the prior section. Fourteen of 19 airport operators indicated property deductibles ranging from zero to $100,000. Figure 7 shows property insurance deductibles for all size airports. The number of respondents indicating a deductible range, for each size range, is shown in the chart. FIGURE 7 Property insurance deductible levels, all airports. Liability deductibles follow a similar pattern to the prop- erty insurance deductibles—clustered at the lower end of the spectrum, even for the larger airport operators. Figure 8 shows deductible-level choices for liability insurance. FIGURE 8 Liability insurance deductible levels, all airports. Workers’ compensation deductibles tend to run slightly higher. Eight of 15 airport operators answering this part of the question reported workers’ compensation deductibles ranging from zero to $100,000. Figure 9 shows deductible level choices for workers’ compensation insurance. Overall, a cost–benefit analysis is generally conducted before the decision to retain risks. Large and medium airport operators also evaluate the affordability of such techniques and tend to have a stronger appetite for risk retention than do smaller facilities. ASSESSING THE VIABILITY OF SELF-INSURANCE The majority of airport operators use cost–benefit analysis to determine the appropriateness of risk retention. Survey results indicated that, once an airport facility has chosen to self-insure, the frequency of analysis of the viability of self- insurance depends on the type of coverage or particular line of insurance. Some survey participants indicated that they do not probe the viability of their risk retention programs. In stark contrast, other airport operators assess the viability of self-insurance every year. Four of the six large airport operator respondents indi- cated that the frequency of a cost–benefit analysis depends on the line of insurance. The remaining large, self-insuring airport operators perform analysis to validate risk retention every year. As with most of their larger counterparts, half of medium airport operators stated that frequency of cost–benefit analy- sis depends on the line of coverage. The other half indicated that they do not conduct such analysis. Although no small airport operators reported self-insur- ance for primary lines of coverage, five of seven small air- port operator respondents indicated that self-insurance is evaluated based on the line of coverage. The remaining air- port operators do not conduct such assessments. Overall, the frequency of risk assessments to determine the viability of risk retention programs is dependent on the line of insurance; however, it is clear from survey responses that some medium and small airport operators do not con- duct analysis into self-insurance at all. FORGONE COVERAGE TYPES When asked to point out any gaps in their facility’s coverage, most respondents indicated that their airport does not insure cyber-related risks, and six of 12 respondents indicated that their airport does not carry coverage for professional liabil- ity; six had no pollution liability coverage. Another type of frequently forgone coverage includes law enforcement errors and omissions. Overall, large airport operators are not covered for pollu- tion risks. Both medium and large airport operator respon-

24 FIGURE 9 Workers’ compensation insurance deductible levels, all airports. The survey instrument shows that large airport operators tend to carry higher workers’ compensation deductibles in comparison with deductibles for property and liability lines of insurance. Some medium airport operators also carry high workers’ compensation deductibles; however, medium airport operator deductibles for property and liability hover in the zero to $100,000 range. Small airport operators are more risk averse, with most holding deductibles no higher than $100,000 for any lines. This survey was conducted in the midst of a “soft” insur- ance market wherein insurers are pricing coverage low and probably not offering substantial premium reductions for higher deductibles. As a result, this survey may understate the “appetite for risk” of the airport operators over the long term.