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But no formal system of adjusting rates based on safety levels was put into effect at that time; the primary means of seeking compliance was he personal influence of local insurance (agents on local government officials. The inspection reports were, however, distributed to rate-making associations, as well as to local officials.In 1902 a member of NBFU’S Fire Department Committee suggested that a standard “for perfect equipment and water works service” be developed, to serve as a guide for rate making. The National Fire Protection Association wasasked to “formulate standards of fire protection in cities and properly guide them so as to form a basis for rating.” The resulting document, “Standards for Grading Town Public Fire Protection,”was published on October 29, 1903. It established seven classes of fire departments and set down standards for equipment, water supply, and other factors. Over the next 12 years the standards formed the basis for a considerable upgrading of the NBPU’S inspection work,and several engineers were added to the staff. Finally, in December 1915 a Standard Schedule for Grading Cities and Towns of the United States was issued to insurance companies and rating bureaus across the country.The results of NBPU’s grading of a city were then used by the rate bureaus to assign each city (or portion of a city) to a specific insurance rate class. Thus, the better a city scored, the lower its insurance rates would be. This basic system, upgraded periodically to reflect new knowledge, technology, and procedures, continues to operate today. Responsibility for conducting the periodic grading of cities was transferred from the NBFU to the American Insurance Association in 1966. In 1971 a nonprofit service agency, the Insurance Services Office (ISO) was created, and responsibility for fire grading became one of its primary duties. Every city and county in the United States graded approximately once every seven years by an ISO engineering team, using the Grading Schedule for Municipal Fire Protection-a direct descendant of the earlier schedules. The Grading Schedule provides for a detailed technical evaluation of a city‘s water supply, fire department, fire service communications, and fire safety control. Within each category, deficiency points are assigned for each instance in which a particular feature falls short of the ideal set forth in the schedule, and insurance rate bureaus then set fire insurance rates accordingly. This system provides a direct economic incentive for the city managers to invest in safety. There is no conflict between economics and safety and no need for a regulatory bureaucracy to issue edicts and threaten fines. To be sure, trade-offs are made, as they always will be. There can be no guarantee of absolute safety, under any system, and there will always be some additional safety investments judged not worth what they would cost. But the value of the ISO system is that it provides positive incentives via lower insurance rates for taking reasonable safety precautions. cities are not forced to follow the ISO’s recommendations, but they (their citizens) must pay the price, in higher rates and loss potential, if they don’t. What works for fire insurance could also work for airline property and liability insurance as well as for aircraft product liability insurance.
If there were no FAA, the insurance underwriters would have a substantial incentive to follow the fire underwriters’ example and get into the safety standards business in a serious way. An Aviation Underwriters Safety Organization (AUSO), similar to ISO, would very likely come into existence, developing standards for aircraft design, maintenance and operation. Airlines and manufacturers would have an incentive to work with AUSO’s engineers and inspectors, since doing so would lead to lower insurance rates. But wouldn’t the AUSO in time come to resemble the FAA—a cumbersome bureaucracy that’s capturedby the industry? Although such an outcome is conceivable, it must be viewed as highly unlikely. To begin with, the Auso would be free of political control and of civil service rules, so its tendency to operate as a cover-your-tail bureaucracy would be minimized. Second, as a voluntary organization, its standards would not have the force of law and would probably not be minimum indeed, it’s quite possible that several alternative levels of safety would be specified (as with the ISO), among which airlines and manufacturers could choose, with corresponding differences in insurance rates. Because of this, the perceived value in “capturing” an AUSO would be Far less than in the case of the FAA. In addition, AUSO’S value to the insurance industry would be only as good as its reputation for integrity—as in the case of Underwriters Laboratory. If it began compromising its safety judgments under pressure from airlines, for example, strong corrective pressures would be exerted by the underwriters. Why hasn’t the insurance industry taken on such a role already, given the FAA’s deficiencies? To begin with, any direct industry-wide system for linking insurance rates to safety practices would be illegal under present US law!
In the late 1960s the major aviation insurance underwriters signed an antitrust consent decree forbidding any form of “collusion” in rate setting. Since that time, the personnel of the various underwriters have bent over backwards to avoid even the appearance of discussing business together. The consent decree does not prohibit exchanging safety information per se—and some amount of information transfer does take place. (Several major underwriters recently joined with the National Safety Council to write a handbook on ground safety at airports.) What’s lacking, however, is any attempt by the industry to set rates that reflect adherence to safety standards. Any joint attempt to do so would violate the consent decree. But what about individual company efforts? Spokesmen for the underwriters say this is simply not feasible under present conditions—which include taxpayers’ subsidization of safety, at several billion dollars a year. Under these conditions, insurers’ rates are much lower than they would be in a free market—where the insurers would bear the cost of safety-standard setting and enforcement. In fact, according to John Lind, safety director of the US Aviation Insurance Group, rates today are at “rock bottom” levels, making it economically infeasible for any one firm to offer discounts for customers adhering to higher safety standards than the FAA mandates. In addition to these factors, the industry structure also diminishes the underwriters’ incentives to make changes. Because the possible losses in a jumbo jet disaster are so huge, underwriters make extensive use of reinsurance. In other words, a particular insurance policy with large potential risk of loss is in effect divided up among companies that insure the insurers. A reinsurer—like Lloyds of London, Swiss Reinsurance Co., and General Reinsurance Co.—shoulders part of the direct insurer’s risk in exchange for a share of the premium. When the Pan Am and KLM 747s collided at Tenerife, for example, Swiss Reinsurance was responsible for 3 percent of Pan Am’s loss and 1.5 percent of KLM’S. Dividing the risks into such small packages makes reinsurance feasible and helps keep direct insurance premiums low. But at the same time it also reduces the incentive of underwriters to police individual airlines, manufacturers, or governments. That incentive will not exist at all until the insurance industry‘s subsidies are removed-by getting rid of the FAA. There would also be other pressures promoting air safety in the absence of the FAA. As noted earlier, the existence of FAA certification casts a kind of security blanket over the entire aviation industry, destroying any real safety consciousness on the part of consumers-light-aircraft purchasers, corporate transportation departments, and individual ticket buyers. This false sense of security has removed safety entirely as a factor in the competitive marketplace, much to the delight of manufacturers and airlines, who since the 1920s and the beginning of commercial aviation have felt the need to sidestep people's fear of flying. Yet safety ought to be a vital factor in consumer decisions --at least as long as the real differences of the kind that exist today among planes and airlines. Several existing organizations serve as illustrations of the kind of information services that would be in demand in the absence of the FAA. The Aviation Safety Institute in Worthington, Ohio, gathers information on safety-related incidents from pilots and air traffic controllers. These people can call a toll-free hot line and report, anonymously,on near-misses, inoperative instrument landing systems, radar-scope failures, etc.
The ASI feeds these data into a computer for later analysis and publishes a fortnightly newsletter warning of unsafe conditions (see box). Only a handful of people subscribe to the newsletter today, but in the absence of the FAA, such a newsletter would be marketable and highly in demand, especially by private and corporate pilots. The Aviation Consumer Action Project is one of a variety of Ralph Nader-sponsored consumer activist organizations in Washington. It conducts studies of the ways in which the government is or is not serving the interests of aviation consumers, as opposed to those of airlines and manufacturers.Needless to say, it has a very fertile field to explore. In the absence of the FAA, an organization like ACAP could do a great deal to keep public awareness focused on safety differences among various airlines, thereby providing consumer pressure aimed at improvements. Safety would become a marketing angle, much as steak dinners and flying pubs are today.
THE FAA’S FAILURE, in both air traffic control and air safety, is no mere academic issue. It is literally a matter of life and death. And it’s an issue of great urgency in 1979. Congress recently passed a deregulation law substantially relaxing the CAB’S economic control of the airlines. Over the next decade there will be a continuing increase in both the number of planes and the number of airlines in operation. More small airfields will get scheduled service. And one thing is patently clear. The FAA cannot cope with such expansion. In testimony before the House Government Operations Subcommittee last year, John Galipault of the Aviation Safety Institute stated: “We believe that the FAA has progressively taken itself out of the role of leader in aviation safety. ...We do not have confidence in the FAA’S ability to develop responsive, meaningful, and valid requirements for the new ‘deregulated carrier fleet.’ Not only will it bog down in this effort, but given that the new ‘fleet’ is defined and can function, the FAA will not have the means for performing certification, surveillance, and quality assurance that it rightly should be doing.” Congress, in short, must bite the bullet. It has finally seen fit to move toward restoring a free market in air transportation. But this new free market must not be shackled with an inadequate, out-of-date air traffic control system or a safety enforcement mechanism that doesn’t work. The FAA should be given a decent burial and the private marketplace allowed to take over its functions. An ATC corporation and an Aviation Underwriters Safety Organization can do the job—if only they’re allowed to come into being. The alternative is increasing chaos and carnage in the skies.