Aviation

Drones, on Demand

More lenient FAA regulations allow drone pilots to launch new businesses in the U.S.
By: | November 2, 2016 • 7 min read

When the Federal Aviation Administration eased licensing requirements on piloting drones in late August, conditions ripened for explosive growth in their use. Yet the vast majority of drones are not insured, according to experts.

More than 600,000 drones will be sold this year for commercial use in the skies over the United States, according to FAA estimates. That’s three times more than manned aircraft such as airplanes and helicopters. An additional 1.9 million drones will be sold to hobbyists for recreational use, the FAA forecast earlier this year.

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Look ahead to 2020 and the FAA expects there will be more than 4.7 million drones flying worldwide.  Each and every one has the potential to crash into buildings, wires or worse, people. The downstream effect of these accidents could be more worrisome than the crash itself.

Increasingly, drones are a standard business tool used to survey crops and construction sites, photograph properties for real estate listings and insurance assessments, and even to deliver goods. Expect them to become much more commonplace as companies discover new and creative uses, and drone manufacturers find ways to make them smaller, cheaper, safer and easier to use.

Yet, 80 percent of all drones in use today may be uninsured, according to one estimate. Many are piloted by neophytes who sat on the sidelines until the FAA’s less restrictive guidelines opened the door for them to soar the skies this year.

“For the first time in aviation history, you’ve got tens of thousands of people bringing flying lawn mowers up into the air without any formal background in aviation training or any understanding of the international air space system,” said Alan Perlman, the founder of UAV Coach, a website offering industry information and training certification to drone pilots.

Swiss Re brought together drone experts, hackers, business leaders and insurance experts to discuss the risks and insurance underwriting of drones.

More drones taking to the skies add new risks and vastly change the insurance business, according to a report by Allianz Global Corporate & Specialty (AGCS): “Rise of the Drones: Managing the Unique Risks Associated with Unmanned Aircraft Systems.” The U.S. drone insurance market may be worth more than $500 million by the end of 2020, according to the report. Globally, it could approach $1 billion.

Global Aerospace Inc., a leading provider of aircraft insurance and risk management solutions, was one of the first to offer drone insurance under an aviation policy just four years ago.

“The sheer volume of requests for insurance is fast becoming overwhelming, and I think it will continue to grow at an exponential pace,” said Christopher Proudlove, senior vice president, general aviation team leader of the Northeast regional office at Global Aerospace.

“Covering the hazards and coming up with the appropriate products is probably the easiest part; dealing with the volume is going to be a challenge.”

Insurers are working to offer affordable products to the growing crowds of drone pilots. Niche brokerages aimed at commercial drone pilots are springing up, as are tech startups offering on-demand insurance apps, Uber-like drone pilot searches and safety features for night or long-distance flying.

On-Demand Drone Insurance

One company, Verifly, developed a mobile application offering on-demand drone insurance at hourly rates.

Verifly was launched in August in a partnership with Global Aerospace. It offers $1 million in liability insurance for as low as $10 an hour on any drone weighing less than 15 pounds and flying up to a one-quarter mile away from the pilot. Users order the insurance on their phones and receive instant approval.

Christopher Proudlove SVP Global Aerospace

Christopher Proudlove, SVP, Global Aerospace

Verifly uses geospatial mapping to assess the risks based on location and current weather conditions to provide a real-time quote. Users can purchase third-party liability insurance instantly. Coverage includes injury to people and property damage, unintentional invasion of privacy and unintentional flyaways.

“We are assessing ways to make the process of buying drone insurance easier because we recognize the fact that the vast majority of operators are millennials who rely on their smart phones,” Proudlove said.

“We definitely have some projects in the works that will help facilitate buying insurance. This is a user group that won’t be walking down to the local insurance office to fill out an application with a pen.”

FairFleet, developed in partnership with Allianz X (which helps develop new business ideas in the insurance space), is another new product that could be described as Uber for the drone business. Currently available in Europe — and planned for the U.S. next year — it connects “drone for service” pilots with nearby businesses in need of one-off jobs.

The FAA Requirements

Under the updated FAA rules, commercial drone pilots must pass a written test to receive certification. In the past they were required to obtain a manned aircraft pilot’s license first and submit detailed logs for each flight.

Now, owners register when they fly an unmanned drone outdoors weighing more than 0.55 pounds but less than 55 pounds. Under FAA regulations, devices can’t be flown higher than 400 feet and should not fly over populated areas, near airports or after dark. The operator must be able to see the device at all times.

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The FAA is working with companies such as CNN (on using drones for newsgathering in populated areas) and BNSF Railroad (on using drones in rural/isolated areas out of sight of the pilot) to test safety technology under a program called Pathfinder.

While operators must have a drone pilot certification, there’s currently no rules on the actual drone, unlike the rigorous requirements the FAA places on manned airplane manufacturers.

“Certainly a great distinction can be drawn between that and manned aircraft,” Proudlove said.

“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.”

It’s an interesting dilemma for insurers who have to consider the safety of the drone in the absence of any federal oversight. If just one commercial drone crosses into the path of an airliner, the collision damage could exceed $10 million, not to mention the potential loss of lives.

“I see a lot of people missing a lot of steps and this is where insurance is really important,” said Perlman of UAV Coach.

“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.” — Christopher Proudlove, SVP, Global Aerospace.

Far too often, he said, people watch a “cool video on YouTube and think they can buy a drone, get unmanned pilot certified, and instantly have a profitable business.”

“There’s a lot of work to do,” he said.

“That’s where the industry is now; helping to facilitate that path for drone pilots,” Perlman said, noting that his drone insurance guide is the most popular page on his website.

Insurers routinely mandate higher safety standards than those set by the FAA for traditional aviation risks, Global Aerospace said in a report.    Merely meeting the legal safety requirements to become a pilot may not be enough to guarantee that a new operator will be a safe operator.

“The minimum FAA standard is a great starting point and new commercial operators may need additional training to be proficient and safe,” said James Van Meter, an aviation practice leader at AGCS who helped to write the AGCS study.

“We are used to dealing with certificated pilots, certificated aircraft, a different level of sophistication and sort of a shared fate; if we insure a pilot in an airplane, his fate is in his own hands when he’s operating his own aircraft.”

112016_11_insindustry_drone_use_chart

With drone use, the pilot may be minimally trained and newly certificated, and operating equipment that cost under $1,000, so “there’s no shared fate,” Van Meter said.

“There are some challenges there, but the new regulation provides good basic training on air space, risk management and some introductory safety issues,” he said.

Alexander Sheard co-founded Skyvuze Technologies LLC, a brokerage specializing in drone insurance, after he had trouble figuring out how to insure the drones he used in an aerial photography business.

Sheard said Skyvuze bridges the gap between drone entrepreneurs and the underwriters that offer unmanned aviation policies. He helps other drone pilots figure out what insurance they need and additional safety measures they should take.

“It’s really looking at all the risk and exposure and coming up with a complete package for these new operators that are popping up every day,” Sheard said.

Any commercial drone operator should assume that their customers and partners will eventually require them to certify that they are insured, Sheard said. Many experts also expect to one day see a type of vehicle registration similar to that required on cars.

“The ones that recognize there are risks as a key part of their business every time they bring this bird up into the sky, those are the ones that are going to be successful,” Perlman said.

“Those are the ones insurance companies are going to want to work with because they are mitigating their risks anyway and they have a ‘safety first’ mind-set.”

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“We don’t yet truly understand the hazards, we don’t understand the capabilities of the system, how long they’ll last, what type of experience an operator needs to safely operate a certain make and model of drone,” Proudlove said.

“We are learning all this as we go. It’s really unbelievable what we are going to see over the next couple of years as far as the drone pilots and continued innovations,” Perlman said.

“That’s really exciting but I’m worried for that one operator who loses control for whatever reason and, maybe it’s cynical, but these things are dangerous.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

RIMS Conference Opens in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.
By: | April 21, 2017 • 4 min read

As RIMS begins its annual conference in Philadelphia, it’s worth remembering that the City of Brotherly Love is not just the birthplace of liberty, but it is the birthplace of insurance in the United States as well.

In 1751, Benjamin Franklin and members of Philadelphia’s first volunteer fire brigade conceived of an insurance company, eventually named The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

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For the first time in America — but certainly not for the last time – insurers became instrumental in protecting businesses by requiring safety inspections before agreeing to issue policies.

“That included fire brigades and the knowledge that a brick house was less susceptible to fire than a wood house,” said Martin Frappolli, director of knowledge resources at The Institutes.

It also included good hygiene habits, such as not placing oily rags next to a furnace and having a trap door to the roof to help the fire brigade fight roof and chimney blazes.

Businesses with high risk of fire, such as apothecary shops and brewers, were either denied policies or insured at significantly higher rates, according to the Independence Hall Association.

Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business, University of South Carolina

Before that, fire was generally “not considered an insurable risk because it was so common and so destructive,” Frappolli said.

“Over the years, we have developed a lot of really good hygiene habits regarding the risk of fire and a lot of those were prompted by the insurance considerations,” he said. “There are parallels in a lot of other areas.”

Insurance companies were instrumental in the creation of Underwriters Laboratories (UL), which helps create standards for electrical devices, and the Insurance Institute for Highway Safety, which works to improve the safety of vehicles and highways, said Robert Hartwig, co-director, Center of Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and former president of the Insurance Information Institute.

Insurers have also been active through the years in strengthening building codes and promoting wiser land use and zoning rules, he said.

When shipping was the predominant mode of commercial transport, insurers were active in ports, making sure vessels were seaworthy, captains were experienced and cargoes were stored safety, particularly since it was the common, but hazardous, practice to transport oil in barrels, Hartwig said.

Some underwriters refused to insure ships that carried oil, he said.

When commercial enterprises engaged in hazardous activities and were charged more for insurance, “insurers were sending a message about risk,” he said.

In the industrial area, the common risk of boiler and machinery explosions led insurers to insist on inspections. “The idea was to prevent an accident from occurring,” Hartwig said. Insurers of the day – and some like FM Global and Hartford Steam Boiler continue to exist today — “took a very active and early role in prevention and risk management.”

Whenever insurance gets involved in business, the emphasis on safety, loss control and risk mitigation takes on a higher priority, Frappolli said.

“It’s a really good example of how consideration for insurance has driven the nature of what needs to be insured and leads to better and safer habits,” he said.

Workers’ compensation insurance prompted the same response, he said. When workers’ compensation laws were passed in the early 1900s, employee injuries were frequent and costly, especially in factories and for other physical types of work.

Because insurers wanted to reduce losses and employers wanted reduced insurance premiums, safety procedures were introduced.

“Employers knew insurance would cost a lot more if they didn’t do the things necessary to reduce employee injury,” Frappolli said.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Cyber risk, he said, is another example where insurance companies are helping employers reduce their risk of loss by increasing cyber hygiene.

Cyber risk is immature now, Frappolli said, but it’s similar in some ways to boiler and machinery explosions. “That was once horribly damaging, unpredictable and expensive,” he said. “With prompting from risk management and insurance, people were educated about it and learned how to mitigate that risk.

“Insurance is just one tool in the toolbox. A true risk manager appreciates and cares about mitigating the risk and not just securing a lower insurance rate.

“Someone looking at managing risk for the long term will take a longer view, and as a byproduct, that will lead to lower insurance rates.”

Whenever technology has evolved, Hartwig said, insurance has been instrumental in increasing safety, whether it was when railroads eclipsed sailing ships for commerce, or when trucking and aviation took precedence.

The risks of terrorism and cyber attacks have led insurance companies and brokers to partner with outside companies with expertise in prevention and reduction of potential losses, he said. That knowledge is transmitted to insureds, who are provided insurance coverage that results in financial resources even when the risk management methods fail to prevent a cyber attack.

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This year’s RIMS Conference in Philadelphia shares with risk managers much of the knowledge that has been developed on so many critical exposures. Interestingly enough, the opening reception is at The Franklin Institute, which celebrates some of Ben Franklin’s innovations.

But in-depth sessions on a variety of industry sectors as well as presentations on emerging risks, cyber risk management, risk finance, technology and claims management, as well as other issues of concern help risk managers prepare their organizations to face continuing disruption, and take advantage of successful mitigation techniques.

“This is just the next iteration of the insurance world,” Hartwig said. “The insurance industry constantly reinvents itself. It is always on the cutting edge of insuring new and different risks and that will never change.” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]