This article was published in the Winter 1996-97 issue of Formulations
by the Free Nation Foundation
Airline Safety Can Be Assured
by Insurance-Industry Incentives
by Robert W. Poole, Jr.

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This column is excerpted from an article, "Safety on the Fly," which appeared in Reason, October 1996, and is reprinted here with permission. Copyright © 1996 by Reason Foundation.

Imagine for a moment that there were no Federal Aviation Administration. What would prevent some airlines from cutting corners and taking risks few of us would want to accept? To find an answer, consider who would have the most to lose in such a world. Clearly, it would be insurance companies, who would bear the brunt of the risk. Since no one would operate an airline without insurance, the insurance companies could face ruinous exposure for liability and replacement costs due to an increased number of crashes. Therefore, the insurance industry would have to engage in aggressive loss prevention activities, as insurers currently do in factory safety and fire protection. (There is no federal agency that regulates your local fire department; that is done by the nonprofit Insurance Services Office.)

What would probably emerge is a nonprofit entity, funded by and answerable to the insurance industry, that would set air safety standards. And that would dramatically change air safety incentives. Consider the apparent cause of the ValuJet crash. One of its maintenance contractors improperly labeled hazardous oxygen generators and illegally loaded them aboard the doomed DC-9. It turns out that the nine different FAA regions have nine different hazardous materials policies and none has the authority to open or inspect packages to see if they contain hazardous materials. An FAA memo described this problem well before the ValuJet crash, but no action was taken because nobody's money or job was on the line.

If an insurance safety organization identified such a problem, it would have a strong financial incentive to solve it, in order to prevent future losses. And the airlines would have a financial incentive to comply with the insurance entity's safety standards because doing so would lower their premiums. (Today, airlines typically fight proposed safety requirements because of their cost.) Some airlines might opt for a higher standard than others, seeking the best balance between insurance costs and safety expenditures. They might be rewarded with a published safety rating from the insurance entity, analogous to the Underwriters Laboratories symbol on electrical appliances.

On the other hand, it's unlikely that an insurance safety agency would push standards that imposed exorbitant costs on airlines for minuscule benefits; that would not serve the interests of the airlines, their passengers, or the insurers. But since it would not be in anyone's interest to have planes falling out of the sky, we could expect reasonable, science-based tradeoffs between safety improvements and cost.

An insurance-based system would depoliticize airline safety. This should be the goal. D

Robert W. Poole, Jr., is Publisher of Reason magazine, and a former aerospace engineer.

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