The presence of drones, or unmanned aircraft systems, flying overhead is increasing dramatically and fast becoming a multibillion dollar business.
Piloted remotely on the ground via control stations, drones are increasingly used for routine or dangerous tasks in a variety of situations such as industrial inspection, aerial photography, agriculture crop surveillance, border patrol, fire fighting and law enforcement. Emerging uses include delivering blood and vaccines to remote locations and even delivering pizza and coffee.
Insurers are also increasingly using drones to survey loss damage from earthquakes, floods and other catastrophic events to help victims more quickly.
Insurance options
Insurance can protect both operators and the public from the risk of mid-air collision, as well as physical or property damage or injury to others. Manufacturers, owners and operators of drones, as well as businesses that sell and service drones, are also exposed and need to understand their insurance options.
Commercial insurer Allianz Global Corporate & Specialty estimates that the U.S. drone insurance market could reach more than $500 million by the end of 2020. Globally, its value could approach $1 billion.
AGCS recently released the report, "Rise of the Drones: Managing the Unnique Risks Associated with Unmanned Aircraft Systems," examining the key issues and trends related to the growth in use of drones and discusses potential risk exposures related to their deployment in the private, public and commercial realms.
As recreational and commercial drone use explodes, the following 10 risk exposures are of most concern:
(Photo: iStock)
1. Mid-air collisions
A mid-air collision could happen if a drone pilot can't see and avoid manned aircraft, other drones or objects.
The manned aircraft that are most at risk from drones are those that normally fly below 500 feet, such as helicopters, agricultural aircraft and aircraft landing or departing from airports.
Commercial aircraft are at the greatest risk of an drone incident during takeoff and landing. Also, aircraft could be forced to make a precautionary or emergency landing, resulting in flight delay or cancellation, incurring significant economic loss.
A collision involving a small drone striking the engine of an airliner could cause $5 million-$10 million in physical damage alone, according to AGCS.
Damage from foreign objects
Damage from foreign objects, such as bird strikes, is already an issue for the aviation sector, as it is the fifth largest generator of insurance claims.
Reports of drone sightings from pilots, citizens and law enforcement have increased five-fold over the past year in the United States. There have also been a number of near-miss incidents around the world including in China, Dubai, France and the United Kindom.
(Photo: iStock)
2. Loss of control
Losing control of a drone can result from a system failure or if the unit flies beyond the signal range or into an area where communication is interrupted.
AGCS sees a major risk in the loss of control because of frequency interferences as there have already been numerous such incidents, including injuries.
(Photo: iStock)
3. Malicious acts
An emerging peril is the potential threat from drones being used to target critical infrastructure. There have been a number of incidents of drone overflights at power and nuclear stations. There are also concerns that drones could be used to attack sports stadiums or other events where large crowds gather.
After more than a dozen overflights of reactors in 2014, French authorities announced the expenditure of $1.1 million to "detect, identify and neutralize small aerial drones."
A sign near the Washington Monument informs people that the area is a "No Drone Zone." (Photo: iStock)
4. Spoofing or cyberattacks
The term "spoofing" refers to attempts to take control of a drone by hacking the radio signal and sending commands to the aircraft from another control station. This is a very real risk for drones since they are controlled by radio or Wi-Fi signals.
Companies that claim to sell devices to specifically bring down or take control of drones can be found online.
There's also the potential threat of loss or theft of data security. Valuable recorded data can be lost during the flight when the drone is transmitting information to the control station. Data can also be obtained by cyberattack when it has been stored by the company gathering the data.
(Photo: iStock)
5. Privacy, trespass and nuisance
Public concerns over drones around such issues as privacy, trespass and nuisance, are common.
The Federal Aviation Administration has indicated it will provide drone owners with privacy guidelines. The National Telecommunications and Information Administration in May released best practices that promise to safely integrate large numbers of drones into the national airspace while guaranteeing personal privacy of people on the ground.
Related: Don't shoot that drone!
(Photo: iStock)
6. Lack of regulations
The primary concerns for insurers are the lack of international, regional and local regulations for the safe operation of drones, and the risks posed from sharing the same airspace as military and civil aviation operations.
In many locations, there are few or no drone maintenance standards.
Drones have not been largely integrated into local or global aviation networks or standards.
Related: The latest on drone regulations
(Photo: iStock)
7. Pilot/operator skills
Hobbyists account for the majority of drone owners, yet remain largely unregulated in many countries, raising safety concerns, as many can be untrained and inexperienced.
In many locations, there are few or no pilot training standards.
(Photo: iStock)
8. Rapid growth and numbers
The FAA forecasts that by the end of 2016 in the United States, more than 600,000 drones will be deployed for commercial use alone — three times the number of registered manned aircraft. In addition, 1.9 million drones are expected to be in use for recreational purposes.
The number of drones is set to triple by 2020.
Globally, the drone market volume is forecast to reach at least 4.7 million units by 2020, with the market for commercial application of drone technology estimated to soar from $2 billion to $127 billion. Such projections are driven by drones becoming cheaper, smaller and easier to use, as well as regulatory progress.
(Photo: iStock)
9. 'Drone for service' vendors
A consequence of more companies discovering the potential benefits of drones is the emergence of third-party "drone for service" vendors, who "rent out" systems to commercial operators who may find it more convenient and cost-effective to utilize drones in this way.
Fairfleet, an on-demand aerial inspections marketer, has created the first-ever online pilot-to-business marketplace via cloud technology which links qualified pilots with customers in need of drone services, offering realtime data upload and analysis to customers from a range of industries, including construction, media and insurance.
Allianz offers this new pilot-to-business initiave insurance coverage and claims settlement services.
(Photo: iStock)
10. Liability
More drone safety incidents are likely to occur once regulations are finalized that encourage more widespread drone use. The possiblity exists for multimillion dollar claims against businesses, operators and manufacturers.
Unmanned aircraft owners and operators have an exposure for the aircraft hull and liability. Manufacturers of unmanned aircraft have a products liability exposure. Businesses that sell, service, and train operators of drones have a general liability exposure.
In many locations around the world no registration of the drone is necessary, causing a problem for insurers and claimants. "However, in future, identification of both (drone) and operator will be essential for maintaining proper liability in general," according to Brent Terwillinger of Embry-Riddle Aeronautical University.
Challenging to insure
Drones can be challenging to insure. An underwriter must look at unmanned aviation risks differently compared with manned aviation, as there are significant differences that affect the insured valuation and loss adjustment.
The most expensive parts of any drones are the electronic components and sensor payloads. At the higher end of the equipment spectrum are advanced cameras and sensors costing up to $500,000.
A variety of drone insurance products are available:
- Physical damage (hull) for the vehicle, cameras, sensors, control stations, etc.
- Liability.
- Aviation commercial general liability.
- Aviation products liability.
- Non-owned aviation liability.
Allianz generally sees $1 million as the most popular policy limit purchased, although it does see higher limits needed to meet contractual requirements of large corporate clients.
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