Drones Present Caution And Opportunity For Insurers
By James Auden and Christopher Grimes
Unmanned aircraft systems (UAS), more commonly referred to as “drones” are becoming more widely available for commercial and hobbyist users due to advances in both technology and affordability. This is creating opportunity for property/casualty insurers, not to mention potential benefits from drone utilization in underwriting and claims operations.
However as an emerging exposure with a very limited track record, pricing and reserving drone coverage comes with a few question marks. This is leading to underwriters not surprisingly taking a cautionary approach in this newer segment.
The government approval process for commercial use of drones remains a bit unsettled. The FAA published proposed rules for commercial drone usage in 2015 (Small UAS Notice of Proposed Rulemaking) but has yet to announce a final set of rules. Under current regulations, commercial drone operators typically gain legal approval by obtaining an exemption from the FAA, (Section 333: Special Use of UAS) of the FAA Modernization and Reform Act of 2012. The Federal Aviation Administration (FAA) has granted over 3,300 commercial drone exemptions in the last fifteen months.
A number of industries are already utilizing or testing drones in business applications. Among them include film production, agriculture, mining, utilities and real estate. Most approved commercial drone users are focused on aerial mapping, surveying and photography applications or research geared to topographical or geological projects. A greater value of drone use is in providing an ability to monitor and inspect locations that are hazardous or difficult to reach. Drone use by utilities and industrial concerns to mitigate safety and performance problems for facilities is likely to grow, namely from power plants, mines, pipelines, cell towers and bridges.
Amazon’s proposed plans to use drones for package delivery services is also receiving considerable attention of late. If this plan comes to fruition and is effectively implemented and duplicated by other merchants, drone traffic in populated areas could increase dramatically.
Drones are also assisting insurance company underwriting and claim operations. Several of the largest U.S. property/casualty insurance companies, including American International Group, Inc. (AIG), State Farm Mutual Group, United Services Automobile Association (USAA) and Erie Insurance Group were granted Section 333 exemptions for purposes such as, natural catastrophe response, roof inspections, risk assessment, and research and development.
Drone owner policies typically cover property damage to the drone, as well as risks such as personal injury and third party legal liability. The coverage can be in the form of a specific drone policy, or an endorsement to an existing general liability or property policy. In addition, product liability and professional liability policies can also be offered to drone manufacturers to cover claims against defective products and breach of warranty.
As commercial drone usage evolves, the need for insurance coverage relating to drones is growing accordingly, due to significant property damage and liability exposures that emanate from deployment of these vehicles. Commercial drone insurance coverage is offered by a growing number of commercial carriers in the U.S., at Lloyds, and in other international markets, including American International Group, Inc. (AIG), Tokio Marine and other aviation specialists.
Drone coverage can represent a source of new premiums for insurers’ challenged to generate revenue growth in a sluggish economy and a period of declining premium rates in many other market segments.
So why are insurers taking a more cautious approach to insuring drone exposures?
A big reason is limited claims history on drone related losses, which creates challenges in underwriting and pricing. To more confidently price risk related to drone coverage, insurers need to develop models that consider historical loss data along with policy exposure and terms information. Robust claims data is not readily available given the recent emergence of more active drone use.
Determining the qualifications of an individual drone operator is another important factor in the underwriting process. Multiple organizations are offering drone Pilot Training Certifications which would establish specific standards of operator training. Insurers could link attainment of a certification to pricing or willingness to insure.
Besides the potential to cause property damage or third party liability losses, drones create unique exposures, such as, risks of interfering or colliding with other aircraft, trespassing on government property or restricted areas, or allegations of privacy invasion or spying from camera borne drones that may fly over private property and collect photos or other information without proper authorization.
Conclusion
In a slowly growing property/casualty insurance market, drone coverage is a potential source of premium growth for insurers. But, drone insurance is likely to remain small in overall premium volume as more of a specialty niche product. While multi-line commercial insurers may include some smaller drone coverage within broader package policies, stand-alone coverage and policies for larger drone operators will likely be concentrated within specialty underwriters.
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