Drones are making the news. To take one example, the use of drone technology in the fight against Islamic State in Iraq and Syria has been a constant source of recent controversy. But the increasing prominence of unmanned aerial vehicles (UAVs) has extended far into the civilian sphere too.
Google announced this week that it plans to use drones to deliver packages to customers by 2017. Indeed, in London, drone delivery services already exist and in Japan, over 2,400 drones spray almost half of the country’s rice crop. As drone technology continues to evolve, insurance will inevitably be required to protect against these emerging risks. In developing the necessary insurance products to meet this growing demand, insurers will need to deal with a vast array of legal, regulatory and commercial uncertainties.
Various different types of insurances are needed. Most standard forms of drone insurance cover third party liability, physical loss and damage to the components during transport or operation. Since drones have numerous different applications, policies may need to be tailored to include D&O liability; professional indemnity; employers’ liability; product liability; cargo liability; terrorism; war and hijacking. Intellectual property cover is also needed, as manufacturers seek to protect their innovations from theft by competitors. Drone insurance is often viewed under the general umbrella of aviation products, but there are key differences between drone and general aviation risks. Drones, for example, can be used for surveillance and data-gathering, and the risk of a privacy or cyber breach could present potentially ruinous aggregation issues for insurers.
Insurers face numerous difficulties in assessing the profitability and risk of providing drone insurance. Statistical data about safety are very limited. Drones are vulnerable targets for cyber attacks, as they mostly use unencrypted data links for their command and navigation. Moreover, insurers cannot easily assess the competence of the operators they insure. Therefore the development of a central database and standardised CAA licensing for drone operators are likely to be important features in the future.
In addition to these commercial issues, drone insurance presents various legal and regulatory headaches. Regulation of drone insurance is in its infancy. EU Regulation 785/2004 has established a minimum third party insurance requirement of €660,000 for commercial drones that weigh between 20 and 500kg but, in a report published in March 2015 (the EU Committee Report), the EU Committee of the House of Lords recommended that this minimum be increased. The EU Committee Report also recommended that national aviation authorities in EU member states should share incident statistics in order to improve the information required to determine premiums.
As to regulation of drones themselves, the current approach of correlating level of regulation to weight is problematic: the weight of a drone may have little correlation with the scale of losses that could be incurred were it, for instance, to suffer a large data security breach. Regulation is patchy between international jurisdictions and there are no harmonised international standards on third party liability requirements. The pressure for compulsory registration of commercial and civilian drones is likely to intensify. The EU Committee report recommended that all commercial drones should be registered online but the government’s response was cautious, recommending careful consultation and suggesting that over-regulation should be avoided in order to prevent a “a situation where the full weight of regulation is applied to the lighter end of the industry, killing it off or stifling growth before it has a chance to be properly established.” The EU Committee will debate the government response during this current parliament.
At the EU level, progress is currently being made. In July, the European Aviation Safety Agency (EASA) published a consultation paper (A-NPA 2015-101) as a first step in the creation of common European safety rules for operating drones regardless of their weight. The consultation closed on 25 September and EASA is currently preparing a technical opinion for submission to the European Commission by the end of this month In the USA, similar regulations for unmanned aircraft are expected to be finalised in 2017.
Thomas Jefferson once said “with great risk comes great reward”. With expenditure on drone acquisition expected to reach $91 billion by 2024, drone insurance premiums could indeed be very lucrative for insurers. But until there is greater harmonisation of laws and better regulation, licensing and statistical data, it will remain challenging for insurers to know what price to put on that risk.