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Suggested Citation:"Summary." 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:"Summary." 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:"Summary." 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:"Summary." 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:"Summary." 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:"Summary." 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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SUMMARY AIRPORT INSURANCE COVERAGE AND RISK MANAGEMENT PRACTICES 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-

2 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.

3 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-

4 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 cost–benefit 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 International–North 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.

5 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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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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