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PREPARED STATEMENT OF WALLER B. SMITH, RISK MANAGER TO THE PANAMA CANAL
COMMISSION
The core issue to be determined by this study is whether the current arrange-
ments of the Panama Canal Commission for handling risks arising out of the oper-
ation of the Panama Canal, are adequate and cost effective.
In reaching an answer to this question, it appears rational to pursue four subsidi-
ary inquiries:
1. Is the present method of self-insuring and self-administering recurring and rea-
sonably predictable claims the most efficient and cost effective method of financing
and handling this level of risk?
2. Are there risks, of a size or nature, that are not provided for, adequately, or at
all, by the present program? Is so, are they of such a nature that provisions should
be made? What, if any, program should be implemented for such risks?
3. What effect does Public Law 96-70 have on the categories of risk set forth in 1
and 2 above?
4. What steps to abate, or finance risks are available, and what advantages do
they offer?
It is unlikely that many absolute answers can be supplied, since we are dealing
with changed circumstances in a rapidly changing world.
The fact that the Canal has been operated for 70 years without a major catastro-
phe does not guarantee that a loss of major proportions will not occur tomorrow, or
next week. To rely on such an assumption would be like assuming that because a
building has stood for a like number of years, it is immune to fire, windstorm or
earthquake.
Once one accepts the possibility that a loss of major proportions can occur, for
which the Commission would be responsible, it becomes rational to explore what
steps can be taken; what alternatives are available, and what are the relative ad-
vantages and disadvantages of those alternatives?
At this juncture, it is neither possible nor important to make a quantitative judg-
ment as to the immediacy or enormity of major losses. It is sufficient to accept the
fact that the possibility does exist. With such acceptance in mind, let us probe the
four questions raised.
1. Is the present method of self-insuring and self-administering recurring and rea-
sonably predictable claims the most efficient and cost effective method of financing
and handling this level of risk?
The Commission and its predecessors have traditionally accepted responsibility for
damage to vessels while in the care, custody and control of the Commission. The
present method is to provide $1 million a month as a reserve for claims for such
damage. Settlement is pursuant to Chapter 4 of Public Law 96-70.
It would appear that the present methodology for financing the payment of such
claims must, in the long range, be the most cost effective method of disposing of the
risk of recurring claims. Self insurance as employed by the Commission eliminates
any of the overhead and profit add-ons present in insurance. It further provides ulti-
mate cash flow advantages, since no funds leave the government's hands until the
claim is paid.
The foregoing paragraph does not deal with the advisability of self-administration
of claims handling. First impressions argue that the nature of the claims, and the
interplay with the Congress is of such a unique nature as to preclude successful del-
egation.
However, the volume of funds expended strongly suggests a claim analysis of a
sufficiently large sample to determine if revisions in methods of claims handling
(e.g. the use of a professional claims service) would materially reduce costs, and
permit more accurate projections of future costs, and areas where less control might
be successfully applied.
2. Are there risks, of a size or nature, that are not provided for adequately, or at
all, by the present program? If so, are they of such a nature that provisions should
be made? What, if any, program should be implemented for such risks?
There is no question but that there is a clear and distinct possibility that an acci-
dent of catastrophic proportions could occur under circumstances which would make
the Commission liable. The loss of a multi-million dollar hull, coupled with the loss
of very expensive cargo, and/or the loss of multiple lives could produce claims in
the megamillion dollar category. Financing for such an eventuality is impractical
and imprudent, except through a device which such risk would be shared with many
others with similar risks.
In the private sector, the Commission would determine the cost of a number of
insurance plans; then compare the cost against the risk of remaining uninsured.