Keeping up with Drones

Drones, or unmanned aerial vehicles (UAVs), are an increasing feature of the commercial world. The US-based Association for Unmanned Vehicle Systems International predicts that drones will create more than 100,000 new jobs and around $82bn in economic activity between 2015 and 2025.

As the use of drones increases, so does the demand for insurance, although, in echoes of the development of the cyber insurance market, there is still much room for development and possible disruption to the insurance industry.

In recent years, Singapore has developed a reputation for exploiting technology as a way to develop its financial services market, from the high-tech structure of the national stock exchange (SGX) to the tech-friendly approach of central bank and regulator the Monetary Authority of Singapore (MAS), which is ever willing to promote fintech developments in the country.

So it is no surprise various MAS officials have spoken about the importance of technology-led emerging risks for the insurance industry. In 2015, managing director Jacqueline Loh, speaking at the opening of an innovation lab by Canadian life insurer MetLife in 2015, talked about the growth of driverless vehicles and the implications for risk management and, subsequently, insurance.

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“Behaviour may no longer be sufficient indicators of risk,” she said. For example, motor insurance may well change from personal lines to become liability insurance bought by the car manufacturer. Meanwhile, the global insurance industry has shrunk in terms of the amount of economic activity insured—some estimate that as little as 10% of global risks are covered by insurance. “Clearly, risk landscapes are rapidly changing and insurers must look beyond traditional products and innovate to address new and emerging risks,” continued Ms Loh.

Motor insurance is typically highlighted as an area that will undergo huge changes as a result of technology development. But while driverless cars are still at the trial phase in Singapore, the commercial use of drones is increasing all the time. In October 2015, Singapore’s national postal service, Singpost, delivered its first package via drone.

Photography remains the most widely used application for drones, along with inspection, film production, agriculture, mapping, and search and rescue.

Drone insurance, therefore, could prove to be a fascinating area of development for corporate risk managers to keep their eye on, both for its own sake and as a way to see how traditional general insurers and specialist startups are going to address the technology-driven challenges facing the industry.

Global demand

Globally, there are a number of factors driving underlying demand for UAVs and, subsequently, for UAV insurance, says David Boyle, AIG head of aerospace, Asia-Pacific. “The underlying technology used in UAVs has been around for decades, used primarily by the military, but has recently hit price points that have opened up a huge range of commercial and consumer use cases.

“The cost of these platforms continues to decrease quickly, while the sophistication of the vehicles and the software and post-image processing have been getting better and better.”

In addition, the regulatory landscape is also evolving quickly, though not as quickly as most commercial users would hope, says Mr Boyle. “Certain countries have put restrictions in place on who can fly UAVs, where and under what circumstances, with the intention of revising their rules as best practices begin to emerge.”

The changing regulatory requirements are also driving the insurance demand within Asia. Japan, for example, requires any UAVs to have coverage from a domestic insurer, as does the Philippines and Thailand. And Singapore may soon follow its lead.

A number of new laws around the use of drones are set to be introduced in Singapore, including the Unmanned Aircraft (Pubic Safety & Security) Bill, which will require anyone flying a drone more than 7kg in weight to have a permit. Similarly, anyone using drones for commercial purposes will require a permit.

The new laws also carry heavy penalties for any drones carrying hazardous goods or weapons, which are punishable by up to five years in jail or a $100,000 fine. However, as yet there is no measure that insists on the purchase of liability insurance.

That said, the demand for drone insurance is still increasing in markets where it is not a legal requirement, especially the US. And, says AIG’s Mr Boyle, demand in Asia for drone insurance continues to grow. “The UAV market is certainly growing as the uses for UAVs are endless. As such, demand for UAV insurance is growing. This new and developing mode of flight has meant that governments and civil aviation authorities have been—and are—getting to grips with how to regulate the use of UAVs. Some countries are more advanced than others.”

The agricultural, energy and real-estate industries have been early adopters around the world, including in Asia-Pacific. Also, many small UAV operators have emerged, providing surveys as a service. So even with the regulatory requirements evolving, the demand for UAVs and associated insurance has been strong.

“Drone insurance is an evolving area of the aviation market that is still finding its footing,” says Gary Moran, head of aviation, Asia, Aon Singapore. “The technology is evolving faster than any associated aspects such as legislation and insurance.”

Currently, most of the business in drone insurance is being underwritten by aviation insurers using established policy forms to cover the physical damage of the UAV itself and, within the same policy, providing third-party liability. For these insurers, the corporate market is the primary target rather than the private or recreational users of drones. For example, AIG offers coverage to commercial operators based on satisfactory underwriting information.

Capacity in the market varies, says Mr Boyle. “At AIG we have the capability of providing cover up to a maximum hull of $25m and a maximum liability limit of $650m. In Asia-Pacific, we have not deployed that level of capacity as generally the demand for limits is a lot less. For example, in Australia, where we have a large portfolio of business, we would see hull limits of between AU$3,000 to AU$25,000 for combined UAV/equipment (such as cameras, sensors and the like) and third-party limits of AU$20m.”

From the brokers’ perspective, there is enough capacity in the market to make drone insurance competitive says Mr Moran. “A number of markets have taken an interest in underwriting these risks and most will take 100% of the risk rather than share it out. This enables us to generate competition, which allows more competitive premiums to be negotiated.”

Liability limits are driven by country-specific regulations and also by the contracts that the operator enters into and as such can vary across the region, says Mr Boyle. “As the need for insurance grows, so will the capacity and coverage that is offered by insurers. The need for insurance is certainly there and as we have seen just recently, with the allegation of a UAV hitting a commercial airline, so is the need for tightening regulation.”

Brokers are also pushing corporates to consider drone insurance, for the liability coverage if nothing else. “Currently, while [still] an evolving product, the third-party legal liability aspect of coverage—where the maximum potential exposure lies—offers adequate protection in the event of a third-party claim,” says Mr Moran. “Whether the corporate is negligent or not, the potential for legal fees is always there and should be planned for.”

While the number of drone-specific insurance policies are increasing all the time, there is still a relative lack of historical data, as well as a regulatory environment unable to keep pace with the advances in technology and the widening range of instances in which drones are being deployed commercially.

Consequently, there are echoes of the cyber insurance market, not least in the way that insurers are looking to team up with specialist firms to offer more than simple coverage. For example, Willis Programs, a unit of Willis Towers Watson, has teamed up with the Association of Unmanned Vehicle Systems International to launch DroneGuard, which purports to offer safety assurance and risk management in addition to insurance coverage.

Risk assessment

While corporate risk managers may benefit from widening coverage for their use of drones, their existing insurance coverage may also benefit from their insurers’ use of drones. Increasingly, in addition to including safety assurance as part of the insurance programme and to identify risk proactively, insurers are using UAVs in the post-claims process, for example to survey a variety of properties that have experienced claims, says Mr Boyle.

“At AIG we see applications for inspections/engineering, claims handling and underwriting for a wide range of situations, including wind farms, condemned buildings, catastrophe sites, even hail damage on roofs. UAVs can augment our knowledge of properties and what we are insuring, as we can get access to places that our examiners may not be able to.

“In catastrophic situations, the use of UAVs will mean that we may not have to wait until a helicopter can survey property or we may not need to keep the same distance. For example, we’ve used UAVs to inspect a property after a wildfire loss while also reviewing the area for potential landslide risks due to the loss of vegetation.”