August 8th, 2016

Unmanned Aerial Systems/Drones

Posted at 1:00 AM ET

Growth projections for the drone or Unmanned Aerial Systems (UAS) sector are nothing short of phenomenal, as the opportunities and advantages afforded by using this type of machinery in construction, agriculture, energy/utilities, mining, real estate, news media, film production and public safety become increasingly more apparent each passing day. Nevertheless, the potential economic benefits are considered to be vast, expecting to generate an estimated economic benefit of USD82 billion along with 100,000 jobs by 2025 (1). This rapid increase in the number of drones is prompting concerns for:

  • Heightened collision risk for commercial airplanes as reports of drones in close proximity continue to make the headlines in the United States and the United Kingdom
  • Privacy concerns from remotely controlled autonomous UAS equipped with cameras
  • Increased concern of drones being hacked or used as weapons by terrorists.

These are all real risks that need to be addressed by both regulatory agencies and the (re)insurance industry.

Regulators around the world had initially struggled to embrace and regulate this new UAS technology. In regions without adequate oversight, there would be an increased risk for collisions and accidents, thereby resulting in greater loss frequency and severity for (re)insurers. However, some progress is finally being made, as regulators weigh the potential benefits of using drones against issues surrounding public safety, privacy and national security. This is mitigating some of the worst case scenarios in play right now.

Meanwhile, the insurance industry is responding to demand at its own forward-looking pace. (Re)insurers are using their experience of the manned class to assess the risk and/or limit their exposure by selection against size, uses and values of the aircraft, or the type of coverage offered. In March 2015, a Bloomberg article titled “Insurers Step Up for Drone Pilots Unwilling to Wait on FAA Rules” noted that US-based companies interested in UAS operations are obtaining coverage from insurers that are writing their own safety rules for insureds. Despite the US Federal Aviation Administration (FAA) announcing that it intends to issue final regulations for small commercial UAS/drones by mid-2016, until which time none are supposed to fly without a formal waiver, the article stated that several US insurers are already writing policies for drones across the country. The FAA has been highly accommodative to commercial unmanned aircraft operations in US airspace through the granting of over 1,000 Section 333 exemption approvals.

This exemption provides authorization for certain unmanned aircraft to perform commercial operations. The FAA has also increased the issuance of “blanket” Certificates of Waiver Authorizations for new and novel approaches for inspecting power grids, railroad infrastructure and bridges. UAS risks that can be covered in the market include:

1. Physical loss to UAS/drone itself (airframe, propulsion, operating system, flight controls)

2. Payload (camera equipment, sensors, packages)

3. Ground station control unit

4. Spares and transit coverage

5. Fraud and theft

6. Third party liability (bodily injury and property damage)

7. Product liability (re-seller or manufacturer).

Drones have the potential to become one of the biggest risks for insurers, but also one of the most significant product development areas due to the rapidly expanding usage by companies, as well as the public. Although the insurance industry has begun covering these risks, many manufacturers (some of which are emanating out of less regulated markets such as China) may not be adequately covered. This was evident with Chinese drywall manufacturers who did not have adequate coverage for construction defect. The result was that their liability was shifted to the US-based contractors and distributors. Similarly, we see that the emerging risks associated with UAS and drones will involve highly complex liability scenarios that could encompass all aspects of the global UAS/drone manufacturing and service provider supply chain.

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Note:

1. The Economic Impact of Unmanned Aircraft Systems Integration in the United States, April 2015.

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