Canadian Underwriter

Drone/UAS sector has “phenomenal” potential; regulation the biggest barrier to widespread use: Marsh

June 3, 2015   by Canadian Underwriter

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Insurers are testing the waters around the drone or unmanned aerial system (UAS) industry as the opportunities and advantages afforded by using this type of machinery become more apparent, suggests a new report from Marsh.

By 2025, it is estimated that integrating UASs in the U.S. airspace could have an economic benefit worth more than US$82 billion and create 100,000 jobs

The sector’s growth projections “are nothing short of phenomenal,” states Dawning of the Drones: the Evolving Risk of Unmanned Aerial Systems, issued Tuesday by Marsh, a global provider of insurance broking and risk management.

Marsh cites figures released in 2013 by the Association for Unmanned Vehicle Systems International, which estimated that integrating UASs in United States airspace alone would have an economic benefit worth more than US$13.6 billion and create 70,000-plus jobs in the first three years. “By 2025, it estimated this could reach US$82 billion and 100,000 jobs,” the report adds.

However, not everything has received the all-clear. “Regulation is undoubtedly the greatest barrier to widespread UAS use, as regulators worldwide attempt to keep place with this new technology,” the research shows. “Clear and harmonized regulation would enable start-up operations to plan with certainty, public perception to improve, and entrepreneurs and businesses to expand.”

Related: Drone use could soon become common practice for 40% of businesses: Munich Re survey

Fear, though, continues to be an element linked inextricably to issues surrounding autonomy, privacy and military operations. “Without solid regulation, confidence in these aircraft is likely to remain low,” the report emphasizes.

“For UAS operations to be commercially viable, national and international aviation laws may need to be overhauled and/or a set of international regulations developed to take UAS use into account in a consistent way,” notes the research. The International Civil Aviation Authority plans to deliver standards on the subject in 2018. “Once approved, these standards will set out guidelines for the members of ICAO to set their own requirements/national regulations.”

All that said, Marsh points out that the overall process could take more than a decade.

Looking specifically at Canada, the report notes that Transport Canada has offered an online advisory briefing, which lays out the responsibilities of operators and where compromise can be made against existing air law. [click image below to enlarge]

Transport has offered an online advisory briefing, laying out the responsibilities of operators and where compromise can be made against existing air law

The report also cites recommendations from the National Research Council of Canada, which among other findings, noted the adoption of a broader set of UAS regulations remains a key factor for Canadian companies to continue to grow and be globally competitive in this emerging sector; the first priority of research and development should be solving the sense-and-avoid issue, based on clear regulatory policy of what these systems must accomplish; and as the sector grows, further R&D support should be focused on the miniaturization of sensors and other UAS components.

The rapid development of the UAS/drone industry “is underpinned by the insurance market’s willingness to provide cover for the deployment of the fledgling technology,” notes a statement from Marsh. “Insurers are actively underwriting policies to secure an early foothold in the sector, despite many regulators struggling to expedite comprehensive regulations that permit drone use.”

Marsh notes in the report that the majority of manned aircraft operators in countries around the world must hold adequate levels of insurance to meet their liabilities in the event of an accident. “At present, the situation for UAS operators is not as clear.”

While capacity remains plentiful, expertise and historical data are not super-abundant, prompting insurers to use “their experience of the manned class to assess the risk and/or limiting their exposure by selection against size, uses and values of the aircraft, or the type of coverage offered,” the report states.

“Traditional policies for manned aircraft are being brought up-to-date and many only need tweaks to be usable for drone technology and deployment,” John Hanslip, senior vice president of Marsh’s Aviation and Aerospace Practice, says in the statement. [click image below to enlarge]

Risks covered include physical loss and liability

What risks can be covered? The report cites physical loss – the UAS itself (airframe, propulsion unit, operating system and flight controls), the payload (camera equipment, sensors and packages/slung items), the ground station/control unit, spares and transit coverage; and liability – third parties (bodily injury and property damage) and product liability (re-seller or manufacturer, for example).

UAS risks are now being written worldwide by Lloyd’s markets and companies alike, “although appetites are proportional to the comprehension of UASs risks in general, ratings, wording development and the clients themselves.”

The report points out that the largest growth area is expected to be for VLOS operations – particularly for unmanned cargo – that require as much as US$1 million physical loss sums insured.

Related: FAA partners with industry on next steps in drone operations

“Where off-the-shelf wordings for manned aircraft exist, most need only tweaks to be applicable for the latest technology or terminology,” the report states. “Beyond these aesthetics, the debate continues with regard to agreed value versus insured value basis.”

Insurer considerations include the following:

• Size and weight of the aircraft: The levels of coverage required, whether by regulation alone, by airport requirement, or client choice, generally increase exponentially with the size and weight of the aircraft. Until the particulars are addressed, however, underwriters may find it difficult to offer the
required limits of cover against their clients’ requirements, resulting in a disparity between the levels of cover being offered and the premium levels that their clients feel are acceptable.

• Fraud/theft: The main growth area in operations is in the sub-US$250,000 value category, where UASs are usually small, highly portable electronic devices. Since many airframes do not carry serial numbers, theft is a higher threat relative to larger manned aircraft and remains an ever-present possibility, particularly with interchangeable airframe parts and components, which are untracked, unlike those for manned aircraft.

• Advanced technology: Many UAS manufacturers may not have the longevity to cope with the constant development required to sustain their market position. As a result, replacement parts for obsolete machines may become difficult to locate, further fuelling the agreed value versus insured value debate, which could mean a relatively low-damage UAS accident could turn out to be a total constructive loss in financial terms.

• Broad uses: Most rotary-wing UASs are manufactured as utilitarian lifting vehicles by design, with most capable of carrying out a variety of tasks using different payloads. Broad uses pose an issue for the underwriting community, as insufficient knowledge of the aircraft’s risk profile and its many different uses may make it extremely difficult to accurately rate the risk against the exposure.

• Privacy: Privacy-related claims are currently excluded by all insurers; some haphazardly, others by use of a definitive exclusion. A market exists for this type of cover, although without a precedent having been set, sum insured and terms and conditions are likely to be considered contentious by those who feel they require it.

There are also other hurdles – related to sense-and-avoid technology, training/engineers and funding – that need to be cleared to get to large-scale commercial use of UASs.

• Sense-and-avoid technology: Currently, commercial UAS operations are relatively low-scale VLOS, requiring user input to guide them over and around static or other airborne objects. Sense-and-avoid technology is an integrated set of sensors and avionics designed to enable a UAS to see and avoid obstacles in its path. The commercial application of such technology is essential to guarantee more complicated, yet safe, commercial beyond-line-of-sight UAS operations at low altitudes within civilian airspace. While a number of companies are working on this technology, producing a large-scale, sense-and-avoid system remains several years away.

• Training/engineers: UASs will also require a new generation of aviation engineers to be trained. These engineers will need to be conversant in both the vehicle itself and the ground-station technology.

• Funding: Companies need investors and researchers require funding. However, sustainability is required to ensure that these companies and organizations achieve their goals.

“While clear and harmonized regulation is being developed, insurers are in the meantime filling this gap by providing their own safety guidance for clients, based on their experience of manned aircraft,” Haslip says in the statement. “In the U.S. alone, several insurers are already writing policies on thousands of drones across the country,” he reports.

There are currently “insufficient precedents set in terms of claims and education to enable underwriters to accurately assess the risks involved in UAS operations,” the report states. “However, with time, this data will eventually be generated (beyond the collation of data surrounding these machines and their performance reliability) the hard way, albeit at the smaller end of the scale.”

Even still, the report notes, “When looking at some of the predicted economic benefits of large-scale, commercial UAS operations, it appears only a matter of time before international regulators adopt a consistent approach to UAS use.”

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