Something Special

Look up in the sky. Is it a bird? A plane? No, that would be a drone.

And maybe that is a little less surprising to most Canadians than it would have been just a year ago. Drone sightings are becoming more common in Canadian skies as individual enthusiasts and businesses alike embrace unmanned aerial vehicle (UAV) technology and its potential.

Canada’s regulatory framework for drones or UAVs is emerging as a world leader. Draft regulations are currently working their way through the system and are, in part, designed to incorporate commercial UAV use. Some recent incidents involving UAVs interfering with planes and helicopters have some calling for Transport Canada to sanction unlawful use.

As announced by the federal transport minister on May 28, 2015, the goal of these new proposed regulations is to support the enjoyment and development of this budding sector while keeping people on the ground and in the sky safe. The Association for Unmanned Vehicle Systems International notes some experts believe that over the next decade, the US$13 billion current industry globally is expected to expand to more than US$140 billion with thousands of jobs.

To support such industry growth, the specialty insurance industry is also looking to ensure UAVs are used safely, especially the companies that are finding growing use for UAVs.

The growing need for UAV insurance presents opportunity, but the latest technology also poses unique risks that specialty insurance markets continue to observe. Most common UAV risks include hull damage to the UAV itself, bodily injury and property damage to people on the ground, or other aircraft.

To date, there is not yet a lot of data about

accident rates for unmanned vehicles. And up until now, there has been little consideration with respect to liability coverage. If an unmanned vehicle is operated in the far north, there is little concern. But if it is operated over downtown Toronto, how much damage might it do to people or property if it went down?

There are still a lot of “what ifs” surrounding UAVs, their capabilities and their risks.

INSURING MANNED AIRCRAFT

Specialty insurance markets, particularly carriers with aviation expertise, are continuing to watch and look to design appropriate insurance coverage to address the “what ifs” of burgeoning industries like UAVs, as well as their usage and effects on some of Canada’s major industries. Growing UAV usage is a strong example of how the risk complexity of Canada’s major industries, the country’s major employers, grows daily.

Consider the Canadian aviation industry. It is a strategically important contributor to the Canadian economy in terms of employment, innovation, productivity, research and development, gross domestic product (GDP) and trade. The industry consists of over 700 companies of all sizes from coast to coast. It employs more than 180,000 Canadians, contributes $29 billion of GDP to the Canadian economy annually, and reached $27.7 billion in direct revenues in 2014.

Concerns about UAVs sharing the skies with manned aircraft have resulted in some countries, including the United States, taking a slower approach in approving commercial UAV usage. Some recreational UAV incidents interfering with search and rescue, and forest firefighting, have raised further concerns.

Likewise, today’s aviation underwriters are sharing their “airspace” with more aviation insurance providers. That is creating a fiercely competitive market.

Premiums and loss trends, both in general aviation insurance and commercial airlines insurance, have been on a downward trend since 2005. That is despite several major losses from incidents, including war hull losses, the first that the aviation industry has seen in a while, and closer to home, one of the worst years in memory for forest fire-related aviation losses.

Intense competitiveness in the marketplace is not lessening any risk for aviation businesses. In fact, complexity continues to intensify. This is requiring underwriters and brokers to create innovative insurance offerings.

It is also requiring aviation businesses to access the expertise of their carriers to assure capabilities match up to their needs. Fortunately, a good number of aviation underwriters have been in pilot seats themselves and understand the nature of aviation business.

ENERGY FUELLING THE ECONOMY

Aviation is not alone in risk complexity especially when one considers Canada’s energy sector. Canada is one of the most important and reliable energy providers to the world. It exports much of the energy and energy products it produces: 63% of its crude oil; 61% of its marketable natural gas; 55% of its coal; and 20% of its refined petroleum products.

The energy industry requires considerable underwriting expertise to manage its complexity, continued growth and use of new technologies.

And, yes, uses of UAVs are being considered for everything from checking pipeline security to inspecting wind turbines. But that is the least of it.

The energy industry is diverse and each insured has its own unique risks – physical size and location of the plant, regulations, use of new and potentially unproven technology, regulated versus non-regulated companies, project finance arrangements and ownership structures. Plus, the power industry has to manage the transmission and distribution grid to get the power where it needs to go.

The industry’s risks are compounded by extreme weather conditions, periods of high demand or commodity price fluctuations. And it is also finding itself vulnerable to more risks, including environmental liability, contingent business interruption risks and emerging cyber liability concerns.

Data security company Symantec notes in its 2014 report, Targeted Attacks Against the Energy Sector, “the energy sector has become a major focus for targeted cyber attacks from cyber criminals, hacktivism, disgruntled employees, among others, and is now among the top five most targeted sectors worldwide.”

CONSTRUCTION IS CLIMBING

There are signs that the large and varied construction market in Canada is picking up steam, maybe at an even quicker pace than its growing enthusiasm for UAVs. The construction industry accounted for about 7.3% of Canada’s GDP in 2013 and increased at a modest rate of 1.1% between November 2013 and November 2014. It ranks second in number of jobs created within the goods-producing sector, employing 1.4 million people and accounting for about 7.7% of the Canadian workforce.

With all this construction activity, there is a growing need for specialized insurance to cover the myriad of risks associated with large construction projects and the new methods of delivery that the industry is using to get them done. For instance, Canada has been a leader in using public-private partnerships, also known as P3s, to accomplish much-needed infrastructure projects.

Yet, it continues to be an insurance challenge for contractors involved. While insurers could fulfill the insurance contract requirements for pre-construction and design in a P3 project, they could not historically address contractors’ risk for operating and maintaining the project upon completion.

Some construction insurance specialists, however, are stepping up to address P3’s complex contract insurance and capacity needs, including coverage to address the required operations and maintenance (O&M) insurance. Some insurers are providing terms on this at the outset of the project, allowing contractors some cost certainty for the O&M phase that is to come.

As a result of new delivery methods like P3, the number of parties with a financial interest in the project has grown more complicated, along with the revenue derived from the project.

Brokers and underwriters have to ensure the needs of both project owners and contractors are fully addressed in comprehensive insurance solutions. Specialty insurance providers need to stay abreast of key developments and trends.

Another concern that is posing a growing risk to the construction industry is a shortage in skilled labour to meet the growing demand in projects. And the industry appears enthusiastic about the potential uses for UAVs, another new risk exposure for the industry.

SPECIAL ATTENTION NEEDED

Highly technical, complex global industries like aviation, energy and construction play a pivotal role in the Canadian economy and require specialized insurance solutions and risk management expertise to help them protect profits, lives and reputation. New technologies will help drive the Canadian economy, helping it grow in size and complexity.

UAVs provide one example of how something new adds to the complexity of the industries that insurers serve. Just think about the others risks that are weighing heavily on business today and how those risks are changing – political risk, supply chain, social unrest, terrorism, cyber, recalls, fraud and pollution, to name a few.

The reality is that today’s fast pace and complexity requires new levels of collaboration and forward-thinking among brokers, underwriters and their clients to create the kind of innovation needed to match the very complex problems faced by Canadian industries. With increasing capacity in the market, every type of coverage can be more tailored to suit client needs and the ability to do so, regardless of industry, will become more important in the future.

Looking at the type of industry, the scale, the number of employees and responding with specialization and customization will be the most valuable service the Canadian insurance market can provide to clients.