FeatureNovember/December 2017

Wild Blue Yonder—With drone use on the rise, insuring against associated liability is a big unknown

By Michael G. Malloy

The boom in both commercial and recreational drone use in recent years has raised questions regarding how insurers treat the rapidly growing technology. Drones, also known as unmanned aircraft systems (UASs) or unmanned aerial vehicles (UAVs), are being used widely in many fields. The Federal Aviation Administration (FAA), which last year passed a regulation requiring commercial drone operators to have a remote-pilot license to operate a commercial UAV, estimates that by 2020 major commercial drone use will be seen in the agriculture, industrial inspections, real estate, and insurance fields.

Growing drone usage is raising questions about everything from privacy to liability and has insurers and users alike seeking and offering options to address those issues. New regulations—coupled with rapidly advancing technology—are resulting in an ambiguous approach to the issue of insuring drones, particularly in recreational use, while commercial use under an insurance policy is fast becoming the norm, according to drone experts and industry analysts.

Contingencies contacted numerous insurers, consultants, data experts, and trade groups to ascertain where the drone insurance market is now—and where it’s going.

Germany-based Allianz has been insuring drones for over a decade, said Thomas Kriesmann, the company’s senior underwriter for general aviation. While regulations are different in every country, the rationale behind each national regulation is driven by similar insights into the hazards in drone operation, he said, estimating that with growth projections for the commercial industry, there is potential for the U.S. drone insurance market to be worth $500 million by the end of 2020 and approaching $1 billion globally.

A 2016 Allianz report, “Rise of the Drones,” notes that the FAA projects at the end of 2016 that more than 600,000 UASs were deployed for commercial use—three times the number of manned general aviation aircraft—with an estimated 1.9 million drones in recreational use. That number is expected to triple by 2020, according to the report.

Globally, UAS market volume is forecast to reach at least 4.7 million units by 2020, with the market for commercial application of UAS technology estimated to soar to $127 billion from $2 billion, the report states, driven by drones becoming cheaper, smaller, and easier to use, as well as regulatory progress.

In the United States, Allianz is insuring “thousands of drone operators,” said James Van Meter, aviation practice leader for Allianz Global Corporate & Specialty in Atlanta. It also insures manufacturers, distributors, repair stations, and training organizations. FAA Part 107 regulations, which were passed in August 2016, provide the regulatory framework for U.S. commercial drone operations and provide for clear licensing and operational rules, he noted.

The insurance industry is largely focused on the commercial side of the market, Van Meter said, adding that currently in the United States there is not a strong demand from recreational users for insurance products. “But recreational users are responsible for property they damage or if they injure someone and should strongly consider obtaining insurance to cover this risk,” he added.

The recreational market, which is booming in the United States and around the world, is an area in which insurers see potential for risk—and therefore opportunity in insuring drones. Experts agreed that commercial drone users should have adequate insurance, while the recreational side has had lower uptake thus far.

The recreational market has existed since radio-controlled aircraft models were used by hobbyists and enthusiasts, Kriesmann noted—long before drone usage became more widespread. But due to the new technology that has made drones more ubiquitous, “new commercial usage became possible as well and caused the [growth] we see today,” he said. “Here, insurers probably see larger potential than in the recreational market. If all recreational drone operators should have insurance is a matter of if we, as the society, want them to be able to fulfill their obligations once they become liable for what they do.”

Even a scenario involving a pilot losing control of a drone during a building inspection could result in a loss in excess of $5 million, according to Allianz’s report. Damages from “foreign objects,” such as birds, already an issue in the aviation sector, is the fifth-largest generator of insurance claims—and a collision involving a UAS striking an airliner’s engine could cause $10 million in physical damage alone, the report states.

Allianz is also the primary sponsor of the Drone Racing League, which has grown rapidly in the past few years and has seen competitions televised by major networks. (See sidebar.)

One industry veteran noted the importance of insuring commercial drone operations. “If you’re going to operate as a certified, accredited, commercial drone user, you need to have adequate insurance to cover not only your asset and the general operation of your business, but your general liability for anything that you overfly and the risks that you are taking,” said Chad Swann, a longtime drone industry executive and founder and lead consultant of the UAV Consulting Group.

“If you have a 55-pound UAV with a 12-foot rotor span and fly over a venue with a lot of people, you could kill people,” he said. “Is your insurance going to cover $20 million in lawsuits?”

Drone forerunners go all the way back to the early 1900s, said William Mauro, director of commercial casualty product development, a drone enthusiast and a general liability insurance expert with Verisk Analytics, a data analytics provider serving customers in insurance, natural resources, and financial services.

“We first began to closely look at drone technology, with an eye on insurance, when large retailers made announcements about possible package-delivery services using drones. We started asking ourselves if this is going to be something that we need to pay attention to from a commercial liability insurance standpoint, or will this technology be limited to a small number of businesses,” Mauro said.

As drones have become more prevalent, less expensive to purchase, and equipped with better technology—and as the FAA has become more involved—Verisk began to see drones as a rapidly emerging technology that’s “very accessible to a range of potential users,” from the recreational user to the commercial side, Mauro said. “The writing was on the wall that these were going to be popular.”

Some in the industry wonder whether drones should be considered a type of technology that would be best insured in the aviation liability market, or whether they would become so prevalent that they could be considered another piece of equipment a contractor would use on a job site.  “Do you need an extra policy to cover your exposure related to drones,” Mauro asks, “or it something that would be covered in a standard liability policy such as a general liability policy?”

Companies that provide insurance for drones “are a budding industry,” Mauro said. “When we look at drones, we look at them from the coverage angle—what is the language needed in the policy to create the coverage product, which our actuaries can then develop loss-costs for.”

On the recreational side, “drones have gotten to the point where department stores can sell them for $20 or $30; anybody can pick up a drone and start flying them. It creates a whole different type of exposure when your 7-year-old can fly a drone in your backyard, while not really understanding [regulations about] what else occupies the airspace,” Mauro said.

That can lead to “homeowners’ policy concerns,” he said, in which an insurance policy needs to be analyzed. “When you’re looking at it from the lens of an insurance carrier, their underwriting operations may be vastly different from the commercial to the personal side of the business given the expected user of the drone, such as a professional versus a hobbyist.”

Pay-As-You-Go

Boutique insurers offering pay-as-you-go insurance offerings are becoming more popular as the FAA has made it easier to operate drones in different areas, Swann noted. About four years ago, “they wanted you to list every place you’re operating, but that’s difficult,” he said. “The credible insurance companies that morphed from general aviation insurance … know and understand that, but there’s a gap in communication between them and the FAA, though it’s closing.”

One insurer offering pay-as-you-go insurance, similar to emerging types of automobile insurance, is Verifly. Jay Bregman, the company’s CEO, said that several years ago when he was an avid recreational drone pilot, he met several commercial drone users who were beginning to ramp up their drone usage and operate commercially.

These operators consistently complained about what a hassle insurance was, Bregman said. “Part of this was because flying a drone for money is a quintessential gig-economy profession—few people can make a living flying drones full time, but you can have a lot of fun doing it on the side” using drones as photographers, contractors, or real estate surveyors.

“The idea of having an annual policy doesn’t fit their lifestyle as well,” he added. “Also, drones are really advanced technology, and these guys are being asked to look up and call an aviation insurance broker, and fill out an application form—that’s not the kind of experience people would necessarily like, especially if they get a quote for a couple of thousand dollars to insure [a few] drones.

“We thought that was really crazy,” he said, so Verifly offered an “opportunity to produce high-quality episodic insurance technology—the idea that you can buy hourly liability insurance for your drone, whether you’re a recreational or a commercial user.” Verifly developed an app to allow users to punch in their name and information, buy a policy on the spot, and get a certificate to show or email to potential clients proving they have a valid drone insurance policy.

This provides a business advantage, as uninsured operators “are losing business because they’re uninsured,” Bregman said. “They’ll go up to certain real estate brokers, or construction companies, who basically say, ‘I’ll give you the job—but I need to see [that you have] $1 million in insurance.’”

The commercial use case is driven by requirements of clients, who treat drone operators as they would any other business-to-business supplier, Bregman said. “Whether a real estate broker is hiring a plumber, or somebody to fly a drone around the house to take pictures, it doesn’t matter to them—they want a million-dollar policy,” he said.

As for recreational users, one misconception is that their potential drone use liability is covered by their homeowners insurance, but that’s not always the case, Bregman said. There is an aviation exclusion applied to drones, which are regulated by the FAA, he noted. “If you know what these things can do, you can get a little bit of fear into you—even if it’s in your own backyard,” he said.

Drones are “technical devices, and they can malfunction; that’s how most crashes happen,” he said. “So even if you’re doing everything right, it could still fly away and anything can happen,” he said, giving an example of a case in England in which a drone went off course, resulting in a toddler losing an eye. “If that happened in America, that’s a $10 million case,” he said.

Bregman offered the evolution of the automobile as a past lesson for drones, citing a story of the first death from a passenger car, when authorities said such an event would never happen again. Auto technology evolved from being unregulated, to cars having license plates, and to more recreational use—“the next phase after that was mandatory insurance,” he said.

Because data on drone accidents is still relatively new, insurance pricing “is really cutting-edge,” Bregman said. His company’s app can see the area around the operating zone, which in turn affects the price. If a user is operating near an airport, school, or a nuclear power plant, that could boost risks, leading to higher costs.

“The system will be refined with more data,” he said. “Basically, what we’re able to do with this technology is price a new market before the data becomes available, because it will take years before there is enough data to price from the bottom up like that.”

Another company, Global Aerospace, has developed a drone insurance program for members of the Association for Unmanned Vehicle Systems International, a drone industry trade group.

“It’s an interesting environment for us as an insurance carrier to try to understand and make sure that we’re developing appropriate products and interacting with this user group in the appropriate way, because it’s certainly outside of what we have typically been used to over the past 90 years we’ve been in the insurance business,” said Chris Proudlove, senior vice president with Global Aerospace.

“Aviation is a highly regulated environment, and aircraft have to go through very lengthy and exhaustive processes in order to be certified,” Proudlove said. “What is different is there is no certification process at all right now for drones—a 55-pound drone, which is pretty heavy, can certainly cause a lot of damage. No regulator has had eyes or hands on that system to be able to determine if it’s robust and has necessary safety features on it … so it’s a different environment from that perspective.”

He noted that while traditional aircraft operate exclusively from airports and helipads, drones can operate either “from people’s backyards or the local football stadium. It’s certainly creating challenges for the FAA and other regulators to try to determine the best way to integrate drones into the airspace, but it’s also created some issues for us as an insurance carrier in trying to determine the best way to go about offering our products so that the right people are insured—i.e., those that are properly certified, operating good units, and doing so in a responsible and legal fashion.”

While some companies are trying to develop businesses around identifying issues and collecting accident data—and trying to provide a database of information to the insurance industry, manufacturers, user groups, and others about how different systems operate and how robust they are—“from a pure insurance perspective, there aren’t many carriers that have a big enough database of information at this point to be able to really perform good actuarial studies on the data to determine exactly what the rating should be, because it’s all still very new,” Proudlove said.

“We have as much data as anyone at this stage, and certainly use it when we determine our prices and coverage, but compared to auto or home insurance, we just don’t have anything like the same kind of data,” he said. “In our experience, most commercial drone operators are seeking out specialized insurance from the aviation market, rather than relying on a general liability policy.”

Proudlove said that taking extreme events—citing the terrorist attacks of Sept. 11, 2001, as an example—into consideration can be difficult. “I don’t think there’s any actuary around who could accurately determine how often that type of event will take place, and how you build that type of event into your five- or 10- or 25-year rating can be a challenge,” he said. “We’re used to dealing with catastrophe events that are hard to predict and hard to provide good actuarial support to, and drones are really no different at this point.”

Liability Issues

As to liability levels, Proudlove said he’s seen commercial drone operators buy from $500,000 to as high as $50 million, or more, in coverage. “Clearly we’re going to underwrite that type of exposure in a more granular way than we are someone buying $1 million,” he said, estimating that about seven specialist aviation insurers offer up to $1 million in coverage, while for $10 million, “it’s probably down to four or five—market capacity does drop off fairly dramatically as the limits go up; we’ve got one client who buys $300 million” in coverage for drones and other aviation assets.

“Right now the industry is really in its infancy, and there’s a lot that can go wrong,” Proudlove said. “The vast majority of the claims we’ve had so far have been first-party damage, [although] we’ve definitely had some third-party liability claims as well. It’s probably only a matter of time before there’s something a bit more serious or significant—fortunately, for the time being it’s mainly been smaller claims that have been more on the property damage than the bodily injury side.

“I don’t know if any one company or association has been successful in collating data to date,” he added. “But what’s unique in many senses is that drones have onboard telematics and the ability to record where they are and the speed they’re going—from that, you could collect a lot of accident data and analytics. How you get that all into one central place and disseminate it is the real challenge.”

The FAA set up a voluntary working group under the U.S. Commerce Department in 2015 to develop best practices, with a myriad of interests represented by lobbying groups becoming involved, said Tom Karol, general counsel for the National Association of Mutual Insurance Companies (NAMIC). He said NAMIC’s annual poll of its members showed their biggest concern regarding drone liability—or writing a policy for drones or drone damage—is the privacy-trespass nuisance.

“You can speculate that it’s a half-pound that goes so fast and can price that … but your casualty liability could be phenomenal,” he said, adding that a number of states have proposed requiring drone insurance.

“We’ve tried to educate people saying it’s something we’d like to do, and we can do it, but requiring it in all situations is not practical,” he said. “That’s hard to do,” given different types, applications, and jurisdictional issues regarding drones. “Commoditizing this is going to be very difficult,” he added, offering the comparison that in contrast to drones, automobiles remain fairly stable over time, while drones and drone technology are in a time of rapid evolution.

“Our position was that if you go back to 1946, the Supreme Court said you have the right to your own private airspace; you have the right to enjoy your front yard,” Karol said. “You can’t stop [a commercial airliner] from flying over your house, but you have certain rights in your airspace. The FAA basically took those away and said that, for drones, you don’t have any private airspace anymore. You can tell your neighbor to get off your lawn, or get their tree limbs off your lawn, but you cannot force your neighbor’s drone away from your picture window in front of your house.

“We’ve had a number of cases where there’s a drone flying, [and] somebody calls the police, and [the police] didn’t know what to do,” he said. NAMIC worked on drafting a law with the U.S. House and Senate to reinstate private airspace, recognizing drones in the context of traditional privacy laws, Karol said.

Out of Sight

The next big issues for drones could be moving operations beyond visual line-of-sight (VLOS)—that is, drones that can travel beyond where the operator can see—said Mauro of Verisk Analytics. “We’re going to likely be looking at a drastic shift in drones,” he said, especially as technology moves beyond current FAA regulations regarding VLOS, which are currently the rule for drones (with some exceptions).

“The pilot may be one of your key underwriting variables today,” he said, likening the operation to that of a professional truck driver, who knows how to stop a truck that’s carrying a load of several tons safely when approaching a red light. While an experienced drone pilot might see that it’s windy, a novice might not, “so the human interaction may rank high on one’s underwriting concern,” he said.

“The transition from [VLOS] to beyond line-of-sight is going to shift our attitude toward drones, and it may lead to underwriting differences as we focus more on the technology controlling the drone’s flight, as opposed to the pilot’s experience,” Mauro said. “It hasn’t yet, most likely due to current FAA regulations, but it’s something we’re expecting.”

Proudlove of Global Aerospace agreed that the VLOS issue will be a big one going forward. “Whether in package delivery, pipeline monitoring, or forward commercial operations that are really integrated into the national air system—that’s really the next big item,” he said. “It’s probably a couple of years off, and it’s no small task for the FAA and others to determine how that’s going to be done safely. But that will be another game-changer, and from there [the question will be] how many other areas from existing aviation infrastructure will robotics affect? I think the aviation sector in general presents a lot of opportunity for automation, and we’ll see more creep into automation in the aerospace industry.”

And with regulations in relative infancy, Proudlove said drone regulations in many cases will fall to the state, city, county, and local level in requiring insurance by drone operators, noting the complexity for operators to understand what is required. “I would hope with a new industry such as this there’s an opportunity to have the same regulations across all states,” he said.

Drones have performed many valuable services this year, with multiple hurricane and fire disasters (see sidebar). Going forward, their use can only be expected to go one way—up—as will the need to ensure, and insure, that their usage remains as safe as possible as this nascent technology continues to take off.

 

Off to the Races

People turning on their TVs to watch some sports this summer may have been surprised at what they saw—drone racing, with multiple rounds of “playoffs” in the United States and Germany and the final championship round in England. The Drone Racing League (DRL), which started two years ago, has taken off around the world with participants, sponsors, and broadcast outlets in many countries, including the United States. ESPN began televising the DRL in September 2016 and continued with coverage this year.

In the DRL, pilots fly quad-copter drones custom-built for speed, agility, and performance through three-dimensional courses at speeds approaching 100 mph. They steer from the point of view of the drone by wearing goggles that display a live image transmitted by onboard cameras. All the DRL drones are built to the same specifications, so the winners are determined solely by pilot skill.

Competitions are held indoors, which can help lower the risk to spectators, one drone industry analyst said. “I was very interested in seeing how they were using the indoor stadiums they were operating in,” said William Mauro, director of commercial casualty product development with Verisk Analytics, who closely follows the drone industry and related insurance issues. “I’m an insurance guy, so I was looking at the people, the spectators—all these innocent bystanders. They did a good job in keeping them as far away as possible. I thought it was pretty good of them to take that risk-management approach.”

Germany-based Allianz—one of the 10 largest insurance companies in the world by revenue—is the DRL’s lead global sponsor. Company officials said they first approached DRL late last year and “very quickly signed on as the title sponsor of DRL’s elite racing circuit,” the Allianz World Championship, before the 2017 season kicked off. In addition to being on ESPN, the DRL is broadcast via Sky Sports, ProSiebenSat.1 Media SE, OSN, and other channels in more than 75 countries.

Jordan “Jet” Temkin of Fort Collins, Colo., won this year’s DRL championship in London in July, the second straight year the 25-year-old has won the competition. He defeated seven other pilots from four countries in the finals; last year’s win netted him a $100,000 contract from the DRL, allowing him to turn professional in the fledgling league.

Shortly after signing the partnership agreement, Allianz said its focus shifted and the company began discussing an equity investment into the DRL, which finalized in June. Other investors include Sky, Liberty Media Corporation, Hearst Ventures, and RSE Ventures. The DRL reached a deal announced in September to expand its television coverage into Asia next year.

“Drone racing is growing at a tremendous pace, and we strongly believe that DRL—with their sweeping broadcast reach—has great potential to engage fans around the world and expose them to one of the most exciting racing experiences out there,” Allianz said in a statement. “We’re excited to engage DRL’s global fan base; support their pilots across North America, Europe, and beyond; and more generally to be part of the grassroots movement of drone racing and of the fast-growing larger ecosystem of digital sports.”

 

Better, Safer, Faster

With drones becoming more popular, one benefit is their expanded capability of use, particularly in the insurance field. Drones were widely used to survey damage after Hurricane Harvey in Texas in late August. Perhaps the most famous hurricane reporter, Jim Cantore of the Weather Channel, sent one up in the eye of Hurricane Irma in Fort Myers, Fla., in early September for a live on-air look at the storm’s early damage.

Tom Karol, general counsel for the National Association of Mutual Insurance Companies (NAMIC), said NAMIC members have been using drones more extensively in insurance-related services. He offered a basic example of a tree falling through a roof, requiring an appraiser to inspect the damage, which could require a ladder, perhaps in inclement weather, that could result in injuries or even death. In addition to being safer, software applications can allow drones to do more than photography, such as spectrograph analysis of structures, he said.

“There’s a lot of work being done to develop those apps for insurance purposes,” Karol said. “It’s cheaper, too. You can do 10 houses in an hour versus two hours per house.” There’s also the ability to “triage,” or determine the most important and urgent needs first following a disaster, he said.

San Francisco-based Betterview uses drones for both underwriting and claims, said Chief Operating Officer Dave Tobias, a co-founder of the three-year-old company. It uses computer-vision technology on imagery captured from drones to detect things such as hail damage and missing shingles and has about 4,000 pilots that fly for insurance carriers. Betterview also licenses its software to carriers that use their own adjusters, said Tobias, who took over an insurance inspection company that his father started.

“I would much rather take the risk of putting a drone over a building than put somebody up on a ladder or another dangerous situation from a claims or loss-control perspective,” Tobias said. “There have been no significant injuries that I know of from a drone flying commercially. But people are falling off roofs and ladders every day when adjusting claims. … Drones actually can make humans safer when implemented the right way into these existing processes.”

The FAA’s Part 107 regulations that were passed in August 2016—in which commercial drone operators are required to take a test and get a pilot’s operating license—were a “big catalyst to get a lot of the bigger insurance carriers off the sideline” to use drones, Tobias said. The other advancement was in drone technology itself, with drones getting smaller, faster, safer, and more capable, he added.

Betterview has conducted about 7,000 roof inspections via drone and has seen a big uptick in its business in the past year, according to Tobias. “In the past few days, hurricanes Irma and Harvey have impacted businesses quite a bit,” he said in early September. “The combination of drones’ increasing capabilities and, most importantly, improvements in the quality of their output, has proven to be the most meaningful to our insurance-carrier customers.”

There has also been a big investment and advancement in artificial intelligence, which helps with computer­vision technology and leads to more opportunities to fly for carriers and “put drones in the hands of claims adjusters that are already out there,” he said.

“2016 was really a year of proof of concepts for a lot of insurers, and 2017 has been trying to figure out how they’re going to operationalize their drone programs,” Tobias said. “We’re still in the early days, but we’ve gone from kicking the tires and testing to how do we operate drones at scale as an insurance carrier.”

 

MICHAEL G. MALLOY is managing editor for member content at the Academy.

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