Aviation Insurance: Issues Related to the Reauthorization of FAA's
Aviation Insurance Program (Testimony, 05/01/97, GAO/T-RCED-97-115).

Pursuant to a congressional request, GAO discussed the reauthorization
of the Federal Aviation Administration's (FAA) Aviation Insurance
Program, focusing on changes made to the program since GAO last reported
on it in 1994.

GAO noted that: (1) in its 1994 report, GAO found that the program did
not have sufficient funds available to pay potential insurance claims in
the unlikely event of a catastrophic loss; (2) progress has been made in
addressing this matter; specifically, the National Defense Authorization
Act for Fiscal Year 1997 made funds available to indemnify the program
for losses incurred under Department of Defense (DOD)-sponsored flights,
which account for the majority of flights insured; (3) while GAO's major
concern has been addressed, two other concerns that it raised in the
1994 report remain unresolved; (4) gaps remain in the program's ability
to pay claims for non-DOD flights; (5) although these flights account
for a relatively small percentage of the flights that have been insured
by the program, a single major loss could liquidate the program's
available funds and leave a substantial portion of the claim unpaid; (6)
FAA would need to seek supplemental funding to pay the claim, but the
delay could cause financial hardship for the affected airline; and (7)
GAO believes that some uncertainty about the program continues to be
caused by ambiguity in the statutory language and FAA's current
implementing regulations about whether the President must make a
determination that a flight is in the foreign policy interests of the
United States before issuing insurance.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-97-115
     TITLE:  Aviation Insurance: Issues Related to the Reauthorization 
             of FAA's Aviation Insurance Program
      DATE:  05/01/97
   SUBJECT:  Commercial aviation
             Military airlift operations
             Industrial mobilization
             Department of Defense contractors
             Accident insurance
             Airline industry
             Claims settlement
             Insurance claims
IDENTIFIER:  Aviation Insurance Revolving Fund
             FAA Aviation War Risk Insurance Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives

For Release
on Delivery
Expected at
10 a.m.  EDT
Thursday
May 1, 1997

AVIATION INSURANCE - ISSUES
RELATED TO THE REAUTHORIZATION OF
FAA'S AVIATION INSURANCE PROGRAM

Statement by Gerald L.  Dillingham,
Associate Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-115

GAO/RCED-97-115T


(341518)


Abbreviations
=============================================================== ABBREV

  FAA -
  DOD -
  CRAF -
  DOT -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify before the Subcommittee on
the reauthorization of the Federal Aviation Administration's (FAA)
Aviation Insurance Program (the program).  The program, which is
scheduled to lapse on September 30, 1997, provides insurance coverage
for aircraft operations that are deemed essential to the foreign
policy interests of the United States when commercial insurance is
unavailable on reasonable terms.  It is an important program for
maintaining both the financial security of U.S.  airlines and U.S. 
foreign policy interests, because the government must call on
commercial airlines to move troops and supplies when it has
insufficient airlift capacity.  The U.S.  Department of Defense (DOD)
and the Department of State have relied on the program, as have
different commercial airlines. 

Our statement today reviews changes made to the program since we last
reported on it in 1994.\1 In that report, we found that the program
did not have sufficient funds available to pay potential insurance
claims in the unlikely event of a catastrophic loss.  We are pleased
to note that progress has been made in addressing this matter. 
Specifically, the National Defense Authorization Act for Fiscal Year
1997 made funds available to indemnify the program for losses
incurred under DOD-sponsored flights, which account for the majority
of flights insured. 

While our major concern has been addressed, two other concerns that
we raised in our 1994 report remain unresolved.  First, gaps remain
in the program's ability to pay claims for non-Defense flights. 
Although these flights account for a relatively small percentage of
the flights that have been insured by the program, a single major
loss could liquidate the program's available funds and leave a
substantial portion of the claim unpaid.  FAA would need to seek
supplemental funding to pay the claim, but the delay could cause
financial hardship for the affected airline.  Second, we believe that
some uncertainty about the program continues to be caused by
ambiguity in the statutory language and FAA's current implementing
regulations about whether the President must make a determination
that a flight is in the foreign policy interests of the United States
before issuing insurance. 


--------------------
\1 Aviation Insurance:  Federal Insurance Program Needs Improvements
to Ensure Success (GAO/RCED-94-151, July 15, 1994). 


   TYPES AND USES OF AVIATION
   INSURANCE
---------------------------------------------------------- Chapter 0:1

Commercial airlines normally carry commercial insurance to cover
losses caused by such things as mechanical failure, weather, and
pilot error.  In addition, they carry war-risk insurance to cover
losses resulting from war, terrorism, or other hostile acts. 
Commercial war-risk insurance, however, can be canceled or restricted
in the event of a major war, its geographical coverage can be
restricted, and its rates can be raised without limit.  Therefore, to
provide the insurance necessary to enable air commerce to continue in
the event of war, the Aviation Insurance Program was established in
1951.  The program authorized FAA to provide war-risk insurance for
those commercial aircraft operations deemed essential to the foreign
policy of the United States when such insurance is not available
commercially or is available only on unreasonable terms.  In 1977,
the Congress authorized the program to provide aviation insurance due
to any risk, not just war risk, under the above conditions.  To date
FAA has issued only war-risk insurance. 

The fundamental premise underlying the program, according to FAA, is
that the government should not provide insurance on a regular or
routine basis; rather, the government should be the insurer of last
resort.  Consequently, FAA is not statutorily required to issue
insurance to air carriers.  Rather, FAA may issue aviation insurance
only when certain conditions are met:  (1) The President must
determine that the continuation of specified air services, whether
American or foreign flag, is necessary to carry out the foreign
policy of the United States and (2) the Administrator of the FAA must
find that insurance for the particular operation cannot be obtained
on reasonable terms from the commercial insurance market. 

FAA issues two types of aviation insurance:  nonpremium and premium. 
FAA issues nonpremium insurance for airlines performing contract
services for federal agencies that have indemnification agreements
with the Department of Transportation (DOT).  Under the
indemnification agreements, the federal agencies that contract for
aircraft reimburse FAA for the insurance claims it pays to the
airlines.  This insurance is provided at no cost to the airlines,
except for a one-time registration fee of $200 per aircraft.  At
present, only DOD and the State Department have such indemnification
agreements with DOT.  Nonpremium insurance accounts for about 99
percent of the aviation insurance issued by FAA.  Since 1975, about
5,400 flights have been covered. 

For example, in 1990 and 1991, during Operation Desert Storm/Shield,
FAA issued nonpremium insurance for over 5,000 flights of commercial
airlines that provided airlift services as part of the Civil Reserve
Air Fleet (CRAF).\2 The commercial insurers had canceled war-risk
coverage for those airlines that had clauses in their policies
excluding CRAF activities.  In addition to the CRAF program, the
commercial air carriers insured under the program have flown many
other important airlift missions for the United States, such as 111
flights to Tuzla, Bosnia, in 1996. 

For other regularly scheduled commercial or charter service, FAA
issues premium insurance.  With premium insurance, airlines pay
premiums commensurate with the risks involved, and FAA assumes the
financial liability for claims.  As a condition for obtaining premium
insurance, the aircraft must be operating in foreign air commerce, or
between two or more points both of which are outside of the United
States.  In total FAA has provided this insurance for 67 flights
since 1975.  For example, FAA provided premium insurance in 1991 for
flights operated by Tower Air to evacuate U.S.  citizens from Tel
Aviv. 

Both forms of FAA's insurance cover loss of or damage to the aircraft
(hull insurance), along with coverage for bodily injury or death,
property damage, and baggage and personal effects (liability
coverage).  The maximum amount of hull and liability coverage that
FAA provides under its policies is limited to the amounts insured by
an airline's commercial policy. 

The program is self-financed through the Aviation Insurance Revolving
Fund (the Fund).  Moneys deposited into the Fund to pay claims are
generated from insurance premiums, the one-time registration fee
charged for nonpremium insurance, and interest on investments in U.S. 
Treasury securities.  From fiscal year 1959 through March 1997, the
Fund accumulated approximately $65 million in revenues and paid out
net claims totaling only about $151,000.  Appendix I summarizes the
major attributes of the program. 


--------------------
\2 CRAF is composed of the commercial aircraft and crews that
airlines commit to support military airlift requirements during
national emergencies.  CRAF provides up to half of the nation's
strategic airlift capability without the government having to
purchase additional aircraft, pay personnel costs, or fly and
maintain the aircraft during peacetime.  According to information
from the U.S.  Transportation Command, which oversees the CRAF
program, as of December 1996, 34 different airlines had contracted
with DOD to provide up to 674 aircraft during CRAF activations.  The
Persian Gulf conflict was the first and only time CRAF has been
activated since its inception in 1951. 


   NATIONAL DEFENSE AUTHORIZATION
   ACT FOR FISCAL YEAR 1997
   ADDRESSED THE MAJORITY OF
   PROBLEMS WITH INSURANCE PROGRAM
   FUNDING
---------------------------------------------------------- Chapter 0:2

In 1994, we reported that the Fund's balance was insufficient to pay
many potential claims and that delays in the payment of claims could
cause a financial hardship for affected airlines.  Since then,
however, the National Defense Authorization Act for Fiscal Year 1997
(P.L.  104-201) has addressed these problems for DOD-sponsored
flights. 

When we reported on this issue in 1994, about 20 percent of the
aircraft registered for nonpremium insurance had hull values--the
value of the aircraft itself--that exceeded the Fund's balance of $56
million.  According to FAA's most currently available information,
about 15 percent of the aircraft registered for nonpremium insurance
have hull values that exceed the Fund's March 31, 1997, balance of
about $65.2 million.\3 In other words, the loss of any one of those
aircraft would liquidate the entire balance and leave the liability
portion on any claim unpaid.  FAA estimates that the average
contingent liability per incident for each registered aircraft is
about $350 million.  Clearly, the Fund's balance is inadequate to
settle claims of this magnitude.  We also reported in 1994 on a
related problem with the timeliness with which the government could
reimburse an airline for a major loss.  Because the FAA would have
needed to seek supplemental funding to pay any claims that exceeded
the Fund's balance, airline officials had expressed concern that
untimely reimbursements could cause severe financial hardships and
possible bankruptcy. 

The National Defense Authorization Act directed that the Secretary of
Defense promptly indemnify the Secretary of Transportation for any
loss covered by defense-related aviation insurance within 30 days. 
Second, the act authorized the Secretary of Defense to use any
available operations and maintenance funds for that indemnification. 
The appropriations made to the Defense Department's operations and
maintenance accounts for fiscal year 1997 totaled approximately $91
billion.  The unobligated balance remaining at the end of fiscal year
1997 is estimated to be $0.9 billion.  Thus, sufficient funds appear
to be available to reimburse the airlines for defense-related
aviation hull losses, and there is a legislative requirement to do so
in a timely manner.  According to the FAA, industry, and airline
officials with whom we spoke, these provisions generally resolve much
of the uncertainty that they had earlier expressed about the Fund's
insufficient balance. 


--------------------
\3 FAA's June 1996 listing of registered aircraft showed that of the
834 aircraft registered, 114 (14.5 percent of the 783 that had hull
values listed) had hull values that exceeded the Fund's March 31,
1997, balance.  FAA's April 21, 1997, listing showed that 970
aircraft were registered; however, individual hull values for these
aircraft were not readily available from FAA. 


   FURTHER CHANGES ARE NEEDED IN
   THE AVIATION INSURANCE PROGRAM
---------------------------------------------------------- Chapter 0:3

We have two remaining concerns about the program.  The first is
making sure that the program has sufficient funds available to pay
potential insurance claims for non-Defense-related flights in a
timely manner.  The second involves clarifying whether an explicit
presidential determination of the foreign policy interests of the
United States is needed before FAA can issue insurance. 


      MAKING SURE THAT THE FUND IS
      SUFFICIENTLY CAPITALIZED
-------------------------------------------------------- Chapter 0:3.1

For the relatively rare flights for which FAA may extend nonpremium
insurance at the request of the State Department (one flight since
the program's inception) and for the flights for which FAA provides
premium insurance (67 flights since 1975), the Fund may still be
undercapitalized in the event of a catastrophic loss.  The insured
State Department flight occurred in January 1991, when U.S. 
personnel were flown from Oman to Frankfurt because of the increasing
unrest in Somalia.  FAA also has extended premium insurance
relatively infrequently.  Most recently, premium insurance was issued
for 37 flights to or from the Middle East between August 1990 and
March 1991, which included evacuating U.S.  citizens from Tel Aviv
and ferrying cargo to Dhahran. 

While FAA has paid no claims for premium insurance flights in the
history of the program, if there should be a catastrophe, the Fund
may not have sufficient money to pay the claim in a timely manner. 
Not counting the liability associated with the loss of a flight, a
claim for the loss of a single aircraft--which can cost $100
million--could liquidate the Fund's entire balance and still leave a
substantial portion of the claim unpaid for an indeterminate period
of time. 

In 1994, FAA proposed alternative financing sources to make
additional funds available for the reimbursement of major claims. 
Those alternatives included obtaining a permanent indefinite
appropriation from the Congress and the authority to borrow funds
from the U.S.  Treasury to pay claims that exceed the Fund's balance. 
FAA proposed using the permanent appropriations to pay claims under
premium insurance, and the borrowing authority to pay claims under
nonpremium insurance while awaiting a supplemental appropriation from
the Congress or reimbursement from the indemnifying agency.  However,
the Office of Management and Budget did not approve the proposal, and
the administration therefore did not forward the proposal to the
Congress.  Thus, the Fund remains potentially undercapitalized. 

FAA is proposing to raise the one-time fee that the airlines pay to
register each aircraft for nonpremium insurance.  FAA published a
notice of proposed rulemaking in the Federal Register on April 17,
1997, that would raise the registration fee from $200 to $550; the
increase is based on the changes in the consumer price index since
the fee was set in 1975.  However, such an increase would have a
limited impact on the Fund's balance in comparison with the potential
costs resulting from a major loss of a non-DOD flight. 


      CLARIFYING THAT FLIGHTS ARE
      IN THE INTERESTS OF THE
      UNITED STATES
-------------------------------------------------------- Chapter 0:3.2

In our 1994 report, we recommended that the program's authorizing
legislation be clarified because there were ambiguities in the
legislation and in FAA's implementing regulations about the need for
FAA to obtain a presidential determination that a flight is in the
foreign policy interests of the United States before issuing
nonpremium insurance.  No clarification in the legislation nor in the
current FAA regulations have been made, and we believe that
ambiguities still exist. 

FAA does not see this situation as a problem.  FAA considers
presidential approval of the indemnity agreement between DOT and
other government agencies to constitute the President's having
determined that the flights covered by these agreements are in the
foreign policy interests of the United States.\4 This position is
based on FAA's Acting Chief Counsel's 1984 review of the legislation
and its accompanying legislative history.  He concluded that the
requirement for a presidential determination applied only to premium
insurance and that the President's signature on an interagency
indemnification agreement was all that was required to issue
nonpremium insurance.\5 FAA published a proposed rulemaking in the
Federal Register on April 17, 1997, that would revise its regulations
to point out specifically that the presidential approval required for
the issuance of nonpremium insurance is demonstrated by the standing
presidential approval of the indemnification agreements with other
government agencies. 

We disagree with FAA's position.  We believe that while FAA's current
practice has the advantage of being easier to administer, it lacks
sufficient foundation in the authorizing legislation and current
implementing regulations.  We believe that the act, as currently
written, requires that a presidential determination be made as a
condition for issuing both nonpremium and premium insurance. 

In our 1994 report, we recommended that the Congress consider
legislative changes that would address the Fund's capitalization and
the ambiguities about presidential determination.  During this
reauthorization process, we continue to believe that the Congress
should consider providing a mechanism by which DOT can obtain access
to financial resources so that it can pay claims that exceed the
Fund's balance within the normal time frames for commercial insurance
for those few flights not sponsored by DOD.  The source of funds
could include (1) a permanent indefinite appropriation to cover the
potential losses incurred during premium-insured flights and (2) the
authority to borrow sufficient funds from the U.S.  Treasury to pay
the losses incurred during nonpremium flights made for qualifying
government agencies other than DOD.  DOT would repay the Treasury
after it was reimbursed by the indemnifying agency.  According to an
analyst in the Congressional Budget Office, such changes would have
no perceptible effect on the federal budget.\6 We also continue to
believe that the Congress should clarify the issue of whether or not
a presidential determination is required before FAA can issue
nonpremium insurance. 


--------------------
\4 The last agreement was signed by President Bush on April 12, 1990. 

\5 FAA obtains a presidential determination before issuing premium
insurance. 

\6 The Budget Enforcement Act of 1990 (P.L.  101-508) requires that
all direct spending and tax legislation enacted for a fiscal year
must be deficit neutral in the aggregate.  (Direct spending is
defined as entitlement authority, the Food Stamp Program, and budget
authority provided by law other than appropriations acts, such as
what would be provided under FAA's proposal.) If such legislation
causes a net increase in the deficit, it must be offset either by
increasing revenues or by decreasing direct spending in another
program in the same fiscal year.  According to an analyst in the
Congressional Budget Office, although this requirement would apply to
a proposal such as this, an offset would probably not be needed for
the proposal, since it would likely be judged to have no effect on
the deficit on the basis of the historically low losses in the
program. 


-------------------------------------------------------- Chapter 0:3.3

This concludes our prepared statement.  I would be happy to respond
to any questions that you or members of the Subcommittee might have. 


A SUMMARY OF THE MAJOR ATTRIBUTES
OF THE AVIATION INSURANCE PROGRAM
=========================================================== Appendix I

Item                      Nonpremium                Premium
------------------------  ------------------------  ----------------------------
Definition                Insurance issued for      Insurance provided to
                          American or foreign-      American or foreign-flag
                          flag aircraft under       aircraft for regularly
                          contract to any federal   scheduled commercial or
                          department or agency      charter service between two
                          that has an               or more points outside the
                          indemnification           United States
                          agreement with DOT

Coverage                  Hull and liability        Hull and liability insurance
                          insurance

Insurance premium         None                      Applicant pays FAA
                                                    commensurate with risk

Registration fee          One-time registration     None
                          fee of $200 per aircraft

Payment of claims         Paid out of Aviation      Paid out of Aviation
                          Insurance Revolving Fund  Insurance Revolving Fund

Claims paid since         $151,000                  None
the program's inception
in 1951

Reimbursement             The indemnifying agency   None
                          reimburses FAA for
                          insured losses

Flights insured since     About 5,400 (over 99      67
1975                      percent of the total),
                          most of which occurred
                          in support of Operation
                          Desert Storm/Shield

Sponsors/users of         DOD--All but one flight   Commercial air carriers
insured flights           sponsored by DOD as part
                          of the Civilian Reserve
                          Air Fleet or under
                          individual contracts
                          with DOD

                          State Department--one
                          flight

Aircraft currently        970 specific aircraft     Not applicable
registered                with 46 carriers under
                          contracts with DOD

                          10 carriers with State
                          Department policies--
                          but only two carriers
                          have registered aircraft

Mechanism for             The National Defense      Not applicable. FAA assumes
reimbursement             Authorization Act for     the financial liability for
                          Fiscal Year 1997          claims payable
                          authorized the Secretary
                          of Defense to use any
                          available operations and
                          maintenance funds for
                          indemnification

                          Department of State has
                          no specific source of
                          funds
--------------------------------------------------------------------------------
Source:  GAO's analysis of information from FAA. 

RELATED GAO PRODUCTS

Military Airlift:  Observations on the Civil Reserve Air Fleet
Program (GAO/NSIAD-96-125), March 29, 1996. 

Aviation Insurance:  Federal Insurance Program Needs Improvements to
Ensure Success (GAO/RCED-94-151), July 15, 1994. 

Military Airlift:  Changes Underway to Ensure Continued Success of
Civil Reserve Air Fleet (GAO/NSIAD-93-12), December 31, 1992. 


*** End of document. ***