The insurance industry has a significant role in the rapid expansion of the commercial drone market. Meanwhile, there are also opportunities for more innovative insurers, brokers and loss adjusters to change the way they operate in this growing space. Helen Yates reports

When Storm Desmond caused extensive flooding across Cumbria, the Scottish borders and Northumberland in early December 2015 some of the first media footage of the inundated city of Carlisle was captured by an unmanned aerial video. Increasingly, across all industry sectors, the commercial use of unmanned aerial vehicles (UAVs) – otherwise known as unmanned aerial systems (UASs) or drones – is quite literally taking off.

From agriculture to real estate, the global commercial market for UAVs is expanding rapidly. By 2020 the worldwide market for such systems is set to grow from £3bn today to over £30bn for military and £100bn for civil applications, with regulatory restrictions expected to loosen as technology such as sense and avoid (SAA) becomes more widespread.

Literally thousands of drones could be up in the skies a decade from now, carrying out a wide range of commercial activities. A House of Lords report has predicted the UAV sector could create 150,000 jobs in Europe by 2050. And as the sector expands, inevitably it will boost demand for specialist drone insurance.

“A colleague of mine said it’s another Wright brothers moment within aviation and I think he’s right,” says Marsh UAV expert John Hanslip. “We’ve not seen anything like this for some time. Since last year the growth has been about 250 per cent in terms of the number of enquiries relating to UAVs.”

Aerial drones can be either fixed wing or rotary wing. For current commercial use, rotary wing craft is by far the dominant type, accounting for around 70 per cent of the market. With their ability to hover and manoeuvre quickly, these are primarily are used for imaging and surveillance, along with some ability to deliver small packages.

Restrictive regulation

Currently, regulation remains somewhat limiting in the US where the Federal Aviation Authority (FAA) has taken an “incremental approach” to UAVs, requiring that they remain “within line of sight” and that they must stay 500 feet from people. There, frustrated tech firms, including Amazon and Google, are lobbying for the rules to be relaxed so they can realise their vision of operating fleets of delivery drones.

In the UK the environment is already less restrictive, with the Civil Aviation Authority’s CAP 722 setting the standard for how UAVs can be used commercially.

Over 600 non-military entities are now authorised by CAA-stamped certification bodies to operate commercial drones, up from just 120 in 2012, including companies providing services such as photography and land surveying.

Amazon is free to test its drone delivery service in the UK, so long as machines fly below 400 feet and do not exceed 100mph. In November, the retail giant unveiled its new “Prime Air” prototype which sense and avoid systems to prevent collisions with other vehicles. However, battery life, weather, unreliable location data, aggressive birds and the risk of packages being intercepted by thieves are other hurdles that need to be overcome before delivery drones become a reality.

So far, government applications have dominated the global commercial UAV space, constituting over 40 per cent of market share in 2014, according to Grand View Research. Increasing applications in law enforcement, security and surveillance, R&D activities, infrastructure, disaster management and environment studies have led to the high demand for UAVs from government agencies.

Agriculture is the fastest growing sector for commercial drone use. It is projected to grow at a compound annual growth rate of over 18 per cent between 2015 and 2022. Fixed wing drones can be used for applications such as watering, spreading seeds, fertilisers and pesticides over large farming areas, drastically reducing the time required.

In addition to the efficiency that UAVs offer in many sectors, there are also safety improvements. For the oil and gas sector for instance, inspections that would have once been carried out by engineers with safety harnesses or manned helicopters, can now be done by UAV with operators standing firmly on the ground.

“ If I was a helicopter pilot training at the moment I’d be quite worried about where the future lies, because unless you’re actually carrying passengers your job could potentially be done by an unmanned system,” says Jay Wigmore, aviation underwriter at Tokio Marine Kiln. “Interest from major Hollywood productions companies, television channels and blue light services mean that those operating commercial helicopters are seeing a segment of their business threatened by the UAV sector.”

“A power line inspection is a potentially hazardous task,” he continues. “The cost of running an aircraft is upwards of US$2,000 per hour and then you’ve got the associated labour costs. This is now being carried out more safely and efficiently by UAVs. We also see oil and gas platform inspections, which would traditionally have been done by helicopters or with people dangling off the sides of oil rigs, being done by UAV.”

Even within the insurance world, UAVs have the potential to change the way business is conducted. Loss adjusters are already making use of them to survey damaged property and as the Cumbria floods demonstrate, the use of drones post-disaster is one way of assessing losses before claims staff can get into an area.

This was particularly helpful for insurers, brokers and loss adjusters dealing with the aftermath of the Tianjin explosion in China in 2015, where an exclusion zone meant they were unable to access the immediate blast zone. Those insurers that do not adapt the business models to encompass this new technology will be left behind, warns AM Best in a report.

“Akin to hand-held digital technology already used by some loss adjusters as well as property inspectors, it is likely not too far off into the future that drone operations could be an extension of their job descriptions and capabilities,” it predicts. “High availability of supply and low cost make this technology even more appealing.”

But the technology is not a panacea, warns the rating agency: “Trained and certified operators are needed to pilot the units,” it says in its briefing document. “Their flight activities must be totally under the control of and be within the line of sight of the operator, which means that there still will be some insurance company representative present locally at the damage sites.”

Insuring a disruptive market

As the market has grown, insurance has played an important role in the expansion and application of the commercial UAV market. “We underwrite many different classes of aviation and have the benefit of years of back data to help us take an expert view on the future, and with UAVs we don’t really have that,” says Wigmore. “But what we do have is a need to support an innovative industry which is looking to develop and will be the future of aviation.”

“If you’re a UAV operator or manufacturer and you don’t have insurance or the correct insurance in place then a one off event could break your business.” he continues. “For example, if you’re an operator doing power-line inspections and as a result of an incident cause a loss of power to a region, you could be responsible for a liability claim from the power company.”

Insuring a UAV is very different from insuring a manned aircraft, explains Wigmore. “If a 20 kilo machine bounces into the side of a building it’s probably not even going to break the glass, it would just fall on the floor. But if an aircraft hits a building it does a great deal of damage.”

“In some respects they’re very similar and in others it’s very different,” he continues. “At the moment UAVs are required to operate below 400 feet and not close to airfields. Once regulation eases and the skies start to be shared with manned aircraft then that will create a very different risk.”

Insurance needs to encompass all the potential uses of a UAV. “Physical loss to the aircraft itself is classed a hull exposure,” says Hanslip. “Traditionally within aviation markets the hull exposure also encompasses the payload which can be very expensive (frequently more than the UAV itself) and also the ground station.”

“Liability is the other main exposure and this covers so many different areas,” he continues. “There is third party liability comprising bodily injury and property damage which is pretty self explanatory. In some parts of Asia we’ve been looking at operators who use UAVs for the aerial application of pesticides so there’s a chemical drift liability element to those activities.”

To date, insurance claims include one in which an eagle attacked a drone in mid flight and another where a low-flying UAV at a game reserve in South Africa was pounced on and carried away by a cheetah.

“It’s a learning curve,” says Hanslip. “We’ve had anecdotal evidence from other broking houses that their risk volume has been quite high, but the quantum in respect of claims data attached to each is quite low, so it will take time to evolve.”

“Some insurers are waiting until more claims data is available so that they can make more meaningful underwriting decisions,” he adds. “It’s not hampering the market because there’s so much capacity and we’ve got some very knowledgeable underwriters within aviation who know what they’re talking about. But I do believe what constitutes the unmanned market today will look quite different in 12 months.”



This article was published in the January 2016 issue of CIR Magazine.

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