This week saw Amazon testing its new drone service, Prime Air, in a secret location in Canada.

Delivery drones are unmanned aerial vehicles utilised for commercial purposes, delivering packages, food and other goods. Drones have enormous potential in agriculture, mining and real estate amongst numerous other industries. Amazon hopes that it will improve efficiency, with its drones able to handle 86% of its deliveries. With Google, Domino’s Pizza and other major corporates also developing similar projects, delivery drones should be taken seriously. In the UK, the House of Lords published a report on 5 March 2015 on the Civilian Use of Drones in the EU. But whilst the developers believe that the sky’s the limit, there is still significant turbulence ahead.

The advent of drones has had a mixed reception from different jurisdictions and their regulators. The US Federal Aviation Administration has issued permits for the use of drones for police and government agencies, but it’s prudent approach to commercial approval has led Amazon to trial north of the border in Canada. Australian law by contrast allows the use of unmanned aircraft for commercial use. In France, La Poste have successfully completed initial tests for package deliveries by drones. The UK has issued permission for about 600 drones for commercial use. It is rumoured that civilian air space in the US may be opened up to all kinds of drones by the end of the year, with Europe set to follow in 2016. This may be a little too ambitious, with regulators still looking to find the right balance between innovation and safety, but what is clear is that sooner rather than later the drones are coming.

The insurance implications of delivery drones are highly significant. Indeed insurance has been referred to as the “gorilla in the room” that must be dealt with before businesses can incorporate drones and reap the potential rewards. Risks include privacy, bodily injury and property damage. The delivery revolution retailers such as Amazon envision will require drones to fly over densely populated areas and land at people’s homes. The House of Lords report highlights that whilst drones offer rich commercial opportunities, a single accident could permanently ground the industry. The near collision between a drone and passenger plane at Heathrow Airport only underlines the risk here. Drones do not yet have the levels of environmental awareness required to avoid flying into people. There are also security risks. The unmanned vehicles will not be able to protect their goods and so theft could increase rapidly.

The House of Lords report highlights that the lack of information regarding the risks associated with drones partly explains the high cost of premiums. Companies currently offering bespoke insurance for commercial drones businesses are few, and have expensive premiums because it is difficult to analyse the risks whilst the commercial use of drones in its infancy. Some insurers have developed drone coverage, whilst others are adapting their existing aviation policies. Indeed, the report goes so far as to say that underwriters and regulators could possibly be underestimating the risks involved. Regulation and a better understanding of the implications of commercial drones will surely see these premium costs come back to earth.

Whilst there is some way to go before the use of commercial drones truly takes flight, insurers must be ready to take advantage of this potential growth.