Drones Take Flight

Hilary Tuttle


April 1, 2015

drones risk management

The Association for Unmanned Vehicle Systems International predicts that, between 2015 and 2025, drones will create up to 100,000 new jobs and about $82 billion in economic activity worldwide.

Also known as unmanned aircraft systems (UASs) or unmanned aerial vehicles (UAVs), drones can range in size from passenger pigeons to passenger jets and are already used in the United States in public safety, agriculture, environmental and climate research, and to monitor disasters, the AUVSI reports.

“The original concept behind drones was to perform tasks that are dull, dirty and dangerous,” said Chris Proudlove, senior vice president and team leader for complex risks at insurer Global Aerospace. “The dirty and dangerous parts involve doing jobs that people have done in the past and put themselves in danger to perform.” From that perspective, adopting UAV technology seems like an exercise in good risk management.

Essentially, these vehicles are mitigating the use of more intensive aviation equipment—predominantly helicopters—and replacing them with small, lightweight, inexpensive alternatives. “Anywhere you’re using an aircraft right now where you’re not transporting people, you could do that job with a drone and do it a lot more cost-effectively,” said Patton Kline, a senior vice president in Marsh’s space and aviation practice. “There are also a lot of people who would like to use aircraft right now who just can’t afford it, but they will be able to once drones come into use more widely.”

Although drones have become the subject of feverish speculation as improving technology and falling price points have led every industry to contemplate the possibilities, the basic premise is not new. Internationally, they have been used for years in a variety of industries, most notably agriculture. In Japan, for example, drones have been used for crop-dusting for a decade. The American Farm Bureau Federation has been one of many organizations lobbying for commercial UAV use, since drones would allow farmers to more efficiently scout fields, determine cultivatable land, and understand the extent of loss and actual crop yield to improve performance or file insurance claims.

Municipalities could also gain more control in their struggle to monitor and repair dangerous aging infrastructure. Surveying bridges, for example, demands the time of engineers in the field and the allocation of already scarce resources to address the deficiencies they find. Some of the robots currently entering the market can scale dangerous structures like bridges or towers, take high-resolution images to assess conditions, and even make some elementary repairs if outfitted with the proper tools.

The energy industry and utility companies can also reduce manhours and expensive surveillance operations, such as having employees hover in helicopters near power lines to conduct visual inspections. “You can adapt a fairly rudimentary, inexpensive platform with a pretty sophisticated payload like a camera or sensor, and get some very good images and data,” Proudlove said. “For certain roles, drones can achieve in an hour what it would take a team of people on the ground a week to accomplish.”

Reducing danger seems like something of a slam-dunk for risk professionals looking to better protect the workforce. “When you take people out of dangerous situations and use robots instead, you are exercising great risk management,” he said. “You’re essentially using a much safer platform to perform the same tasks.”

unmanned aerial vehicle industry

Out in the Field

According to a report from IT firm Cognizant, “With drones poised for commercial use, insurers could use them specifically to help reduce operational costs and gather better-quality information. This could help improve the productivity, efficiency and effectiveness of field staff, such as claims adjusters and risk engineers, and improve the customer experience by resolving claims faster, especially during catastrophic events.”

Organizations from aid groups to media companies are actively considering how to use UAVs, but the insurance industry holds some of the most compelling possibilities. As a result, insurers are among the 30 or so entities to date that have applied for and been approved by the U.S. government to deploy drones for commercial purposes.

“Unfortunately, after casualty events, structures can be compromised, or access to portions of the property may be blocked due to flooding or debris,” Erie Insurance wrote in its December filing for FAA permission to adopt the technology. “Sending a person in to inspect the upper portions of a damaged structure may not be practical or safe. These are the types of situations where UASs can provide a safe and effective alternative that not only permits an inspection, but can fully document the results.”

In Boston, brokerage WGA launched its first drone this February to assist in performing risk assessment, risk management evaluations, claims and loss prevention for its clients. A staff engineer and loss control specialist will operate the UAV to gather data of rooftops, large real estate properties and other areas that are difficult to assess.

Some of the firm’s clients, including real estate developers, already use UAVs to evaluate and market properties. It seemed like a natural extension to adopt the same technology to protect them. “In a claims situation, it is a huge help to have good video and images to better tell the story from the client’s perspective—it helps us advocate for them,” said Susan Forbes, WGA’s chief innovation officer. “I see this becoming a really helpful tool for expediting settlements and conducting other transactions with insurance carriers.”

This may also result in significant savings for insurers. Cognizant estimates that efficiency could increase up to 50% in the insurance industry alone as the ability to combine notes with photos and video collected by drones reduces the need for follow-up visits, for example. Forbes cautioned against adopting the technology just to boost the bottom line, however. “The technology can definitely save in the long run, but we’re still at a point where it needs to be a manned technology—it’s not like we’re sending our drone off to a location without a loss control engineer or claims adjuster,” Forbes said. “It definitely helps control inspections costs and time, but we are not at a point where it can operate on its own.”

Between the small size of WGA’s drone and the limited uses currently intended, Forbes is not overly concerned about the risks it presents, although the company has procured insurance as a precaution. “It can’t cause that much damage, and it is pretty durable equipment itself, “ she said. “Plus, we are insurance people and the person who is operating it is a loss control expert—he’s one of the most safety-conscious people on our staff. From an insurance perspective, you could not have given the technology to a safer industry to try it out.”

Insuring Drones

Insurance coverage for drone operators and clients will likely be a practical requirement for any commercial use, but the FAA wisely chose not to make this a federal requirement,” Jimi Grande, vice president of federal affairs at the National Association of Mutual Insurance Companies, told Reuters. NAMIC plans to work with the FAA and state and local regulators to assure that UAS regulations enable coverage that is “appropriate to address the risk and liabilities of commercial drone use in a given area.” However, until the rules are finalized—which could take a year or longer—the FAA will still need to grant exemptions for the commercial use of drones.

The interest has been pouring in, especially after the FAA released its proposed guidelines in February. “The business is out there and we are getting inquiries more and more,” said Paul Chance, a senior vice president in the aviation and space practice at Marsh. “On average, I see at least two to three prospects every other week related to drones.”

But obtaining the right coverage is more challenging. “There are two markets that have their own product that addresses drones,” Chance said. “The rest are addressing them on an aircraft hull liability program, tweaking some of the terminology related to aircraft and trying to cut the process down to fewer forms that only apply to drones.”

He added, “I anticipate more specific products and companies coming out with specific policies for drones because the coverages will differ. You’re not going to see things like medical expenses and baggage handling on a drone liability policy, and insurers are going to try to make their lives easier. They already have a strong basis to start with.”

Tailoring policies to meet the ever-changing applications for these devices is a daunting but critical task, and many clients may not be satisfied with the piecemeal solutions currently available. According to James Johnstone, a UAV insurance specialist with Willis Aerospace, “It’s difficult to keep up to speed with what the needs are for clients. A lot of operators at the moment are from small entities, so they would like to be able to wrap all of their insurance up into one—employer’s liability, professional indemnity insurance, data protection needs and aviation liability—and that remains a work in progress among insurers.”

In this way, the increased demand has been a double-edged sword for the insurers and brokers. “It’s only now, as the industry becomes more mature and more developed and as there is a greater requirement for appropriate rather than just available insurance, that these issues are coming to the fore and being addressed,” said Steve Doyle, global head of sales and marketing for transportation at Willis.

This opens the door for tremendous opportunity. “The insurance industry needs to recognize that the drone industry is going to grow and, as it does so, is going to require insurance solutions that develop and will grow alongside it,” Doyle said.

The constant evolution of both the technology and the industry itself present clear challenges to establish and write risk. “We’re clearly focusing on the quality of the equipment, the qualifications of the people flying it, and the environment in which they’re operating that equipment,” Doyle said. Those three factors are really key and we’re in a situation where all of those are developing at once.”

Proudlove said one of the biggest challenges in this field is that there is not yet a clear picture of which systems work well and which ones do not. “There just isn’t the data at the moment to allow us to underwrite the risks in a truly analytical way,” he said. “That’s a risk, but it’s a relatively small risk because the values of the drones and the limits of liability that most operators are buying are both fairly low.”

The benefits of that uncertainty may outweigh the risks, with favorable pricing encouraging both buyers and prospective competitors in the insurance market. “Right now there is very little data available and insurers have to assess each risk individually,” Proudlove said. “While they are being cautious, most aviation insurers appear keen to establish themselves in an area that promises great potential for the future. In most cases, there is competition for the business and the pricing reflects that. Currently, operators can expect to get a range of quotes but once the risks factors become clearer and regulations are enacted, you can expect pricing to stabilize.”

Johnstone agreed. “It’s very difficult for the insurance industry because there is very little data for them to write risks on an actuarial basis, so it’s very hard to write liability exposure and establish premiums,” he said. “With the very low premiums we’ve been seeing, they could easily get burned one day if one of the UAVs goes down and does serious harm. To be perfectly honest, I can’t see that situation developing much until we see more losses that are commonly known.”

Establishing protocol to use UAVs must take place at both the industry and operator levels. To that end, some insurers and industry groups are releasing their own best practice guidelines. Although these are not mandated for coverage, they may boost safety, public perception and insurance rate stability. “If an applicant demonstrates that they are really thinking about the risks involved and how to manage and mitigate them, and they present their standard operating procedure and plans for safe operations, then that gives them a big advantage in terms of pricing and choice of aviation insurers,” Proudlove said. His company, Global Aerospace, released a standard operating procedure manual in conjunction with the Unmanned Safety Institute in February.

That may be just as important for the proliferation of commercial drones as the coverage itself. “Our role is to ensure the safe development of the industry,” Doyle said. “We have people promoting the industry and the development of it and people who are working on the quality of that operation, and our role is to underpin that with sound insurance to allow people to develop their operations.”

In the meantime, many are proceeding cautiously. “Because this is an industry that is fast-growing, and because insurers are somewhat uncertain about how to write the risks, we are very careful to work only with operators that we know are going to work within the rules that are in place,” Johnstone said. “We have about 20 clients and have not had any losses yet, and I think that’s partially because we work with those who do actually follow the regulations. But the public perceptions aren’t quite the same as the reality, and that will take some time to adjust.”

Regulation and Perception

In a recent poll from Reuters/Ipsos, 73% of respondents said they want regulations for drones, 71% thought that drones should not be allowed to operate over someone else’s property, and 64% would not want their neighbor to have one. Respondents did widely support drone use in law enforcement, with 68% in favor of police flying drones to solve crimes and 62% to deter crime. Use by news organizations was more polarizing, with 46% opposed and 41% in favor.

President Obama has ordered the FAA and other U.S. agencies to draft rules to “make sure that these things aren’t dangerous and that they’re not violating people’s privacy.” Enforcing those rules is another matter, however.

The Federal Aviation Administration’s draft rules require unmanned aircraft pilots to obtain special pilot certificates, stay away from bystanders and fly only in daylight. They limit flying speed to 100 miles per hour and altitude to 500 feet above ground level. Pilots must also remain in the line of sight of a drone, which would prohibit some of the major uses companies envision.

“I think regulation is primarily what’s holding a lot of these new ventures and entrepreneurs and operators back,” Kline said. “There are lots of people who would like to go into business operating these in the United States, and it’s just hard to do that legally with the regulations that are currently out there.”

Proudlove noted, “There are operators at the moment who are operating outside the regulation of the FAA, basically operating without FAA approval, so that definitely creates additional risk.”

That risk also perpetuates one of the greatest challenges. “One of the big risks for the drone industry is the public perception and the fear of drones invading our skies,” Proudlove said. “If there was a midair collision between a drone and a commercial airliner, not only would it probably cause some notable damage to the aircraft, but I think the industry as a whole would be significantly set back in terms of public acceptance.”

Privacy concerns cause most of that resistance—and open up a Pandora’s box of potential liability that drone operators and insurers are not yet prepared to deal with. While some invasion of privacy coverage is available under existing policies, the new exposures that could result from remote-operated cameras may not fit the limitations of personal injury endorsements.

While Global Aerospace is examining the possibilities, Proudlove pointed out that the concern—and the need for such insurance—is shifting, as it did with more established technology that is now widely used: “I think the risk is there, but at the same time, we all carry smartphones in our pockets with the ability to take video footage. That seems to be an accepted part of society now. To what extent small drones will ever become accepted in the same way, I don’t know, but I think that’s a useful reference point when assessing the risk of privacy claims.”

As with smartphones, the potential and practicality of drones may outweigh any hesitation about privacy concerns. But even without clearing the perception hurdle, demand is increasing and the drone industry is ready for takeoff.

Hilary Tuttle is managing editor of Risk Management.