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7 CHAPTER ONE INTRODUCTION BACKGROUND The objective of this synthesis is to examine the current risk management practices and to identify variables, including Risk management is a broad, multidisciplinary field that exposures that affect insurance-purchasing decisions for air- involves elements of science, engineering, law, finance, port operators. This synthesis identifies key factors for airport insurance, and management. It has been referred to as the operators to consider when making decisions on their own true "renaissance profession" (LeStrange 1993, p. 2) because insurance requirement needs and risk management practices. of the multiple areas of knowledge and skill required. Airport risk management is a subspecialty of the field SCOPE OF STUDY of risk management. Airport risk management is fur- ther characterized by the nature of the aviation industry, The scope of this study, as determined by TRB staff and which includes life safety considerations, catastrophic the topic panel, is limited to examining current airport risk loss potential, and high visibility. Although there are some management practice in insurance purchasing. The study unique elements to airport risk management, the underly- includes commercial and general aviation airports. ing principles and the inherent breadth of the risk manage- ment discipline apply to airport risk management as they Although airport risk management includes many other do to risk management in other fields. With such a broad facets, such as loss control, alternative risk financing, risk discipline in such a dynamic field, a synthesis of practice analysis, coverage analysis, enterprise risk management, and must focus on a manageable subtopic to attain any measure more, this report does not address those subjects. Although of coherence. this report includes some discussion of the risk manager's role in the insurance-procurement process, the report is not This introductory chapter describes the purpose of the about developments in the risk management field. report, presents the methodology used to develop the report, provides general background information, and outlines the The intent of this synthesis is not to identify potential organization of the report. weaknesses or provide recommendations to correct any per- ceived deficiencies. OBJECTIVES OF STUDY STUDY METHODOLOGY This synthesis topic was scoped by a nine-member panel of industry experts whose discussions identified several issues Several techniques were used to capture this information, in U.S. airport risk management: including a literature search on current airport risk manage- ment practices, a survey of airport operator personnel respon- 1. A lack of consistency in insurance-purchasing practice, sible for risk management, and interviews with selected airport operator system risk managers. As requested by the 2. A wide variation in technical knowledge among per- study sponsors and the panel, both the survey questionnaire sons charged with buying insurance, and the interview question list were kept as short as possible to encourage participation and to minimize disruption for 3. A lack of benchmarking information within the indus- the participants. Interviews were to be held to 20 minutes. try (for insurance purchasing), Literature Search 4. Significant variation between airport operators in exposures to loss, and A literature search was conducted to document current prac- tices in airport risk management and insurance purchasing. 5. A wide variation in coverage purchased. The search focused on (1) available documentation regarding

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8 coverage purchased; (2) regulatory or statutory restrictions Owing to the limited survey respondent pool, the sur- or requirements applicable to insurance purchasing at air- vey analysis was conducted on the basis of airport operating ports; and (3) current procurement practices used by airport revenue size. This approach resulted in an equal number of operators, including use of insurance brokers. Because there respondents for each operating revenue size classification. is a dearth of published work specifically on airport insur- Operating revenues ranged from $100 million to more than ance buying, the literature field was expanded to include $600 million. A copy of the survey questionnaire can be more generic works addressing such topics as use of insur- found in Appendix A, and a list of respondent airport opera- ance brokers, coverage purchasing, and general insurance- tor systems is included as Appendix B of this report. related risk management practices. For purposes of this synthesis, Survey Large airport operators are those reporting last-year A survey was developed to identify practices and correlate operating revenue of more than $600 million; characteristics of airport operators that use them for the pro- cess of identifying and financing risks. The Internet-based Medium airport operators are those reporting operat- survey was designed to be closed-ended. With very few ing revenue between $251 million and $600 million; and exceptions, responders needed only to check a box on a form. Small airport operators are those reporting operating Various sources were invoked to obtain a population of revenue less than $250 million. U.S. airport operators, including trade associations, insur- ance sources, and the contacts of the panel and the principal The 19 survey respondents are almost equally divided investigator. This effort yielded a relatively small population among the three size classifications, with six survey given the more than 10,000 U.S. airports. A difficulty in sur- respondents each for large and medium airports and veying smaller airport operators without risk managers or seven for small airports. The survey generally relied on key persons responsible for risk management is identifying the respondents to report their revenue size and did not to whom to send the survey. A second difficulty is finding attempt to validate the responses through review of public persons with sufficient time or interest to participate. Air- records. Because most of the financial information avail- port operators were prequalified by a preliminary survey of able from the airport operators came from the 2009 fis- a larger population to determine those willing to participate. cal year, the results may be somewhat skewed downward regarding size. The year 2009 was a poor one for most Twenty-one prequalified airport operator systems were airport operators, with enplanements and revenues below selected to participate in the survey. A total of 19 airport normal owing to the state of the economy. The survey operator systems (42 airports), a 90% response rate, replied assumed that the airport operator representatives would to the survey request. Their geographic distributions are be knowledgeable about their current operating revenues, shown in Figure 1. In some cases, additional airport map especially with regard to recent changes resulting from pins may be hidden underneath another pin. economic conditions. FIGURE 1 Geographic distribution of survey respondents.