Canadian Underwriter

Lack of understanding the overarching risk of uninitiated companies looking to seize benefits of drone use: Zurich Canada

September 28, 2015   by Angela Stelmakowich, Editor

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The expanding interest in drones means many companies and industries considering their use will be engaged in an aviation activity for the first time, necessitating that they have a firm grasp of associated risks before moving forward, suggests a new white paper from Zurich Insurance Company Ltd.

Producing drones has gone from the sole domain of the United States and Israel just 15 years ago to now also having China, Russia, Iran, Australia, Brazil, Germany, Turkey and Canada step up their development programs and start to export systems internationally

First-time engagement likely means companies will be operating outside of their core competencies, notes Hovering Over Opportunities, released by Zurich Canada Monday during Panorama: RIMS Canada Conference 2015, being held Sept. 27-30 in Quebec City.

That initial lack of competency may, in fact, be the overarching risk with respect to drones and those looking to capitalize on their use, Urs Uhlmann, CEO, Global Corporate for Zurich Canada, notes in the forward of the paper, meant to serve as a conversation starter for insurance brokers, risk managers and chief financial officers (CFOs) interested in exploring drone risk mitigation strategies.

Rapid development of technology has created a global industry for commercial and civil unmanned aircraft systems (UAS) that one European consulting firm projects will be worth US$777.7 million in global spending in 2015.

Producing drones has gone from the sole domain of the United States and Israel just 15 years ago to now also having China, Russia, Iran, Australia, Brazil, Germany, Turkey and Canada step up their development programs and start to export systems internationally, notes a 2014 market report by INEA Consulting. INEA’s 2013 market breakdown indicates that North American (mostly the U.S.) manufacturers were responsible for 61% of global drone sales, Asia-Pacific for 20% and Europe for 17%.

North American (mostly the U.S.) manufacturers were responsible for 61% of global drone sales, Asia-Pacific for 20% and Europe for 17%

“At the current rate of development, the Teal Group projects global spending on drones will represent US$91 billion by 2024, largely driven by civil and commercial use,” the paper states.

Related: Zurich Canada launches drone insurance package

Consider that drones are already in widespread civil and commercial use: in Japan, an estimated 2,500 drones are currently being used in the agricultural sector to monitor and fertilize crops; oil and gas companies are employing drones to monitor pipelines; mining firms are using them to survey topography; film and television crews are affixing cameras to small drones to gather aerial footage; and government-approved drones are being used in emergency response efforts.

However, as has been the case with other new technologies, Uhlmann points out that users may be tempted to rush in before gaining a full appreciation of the new risks the technology may introduce. “In the case of drones, the overarching risk is a lack of understanding that operating a drone is a serious aviation activity, which requires training, staffing and operational procedures that may lie outside an organization’s core competencies,” he emphasizes.

Gaining that understanding will necessitate that companies adapt basic procedures from the aviation industry and access expertise to help understand and protect themselves from drone risks, the paper notes.

One obvious fit for drone use is risk management tasks that involve reconnaissance, monitoring and inspection. “Commercial construction and civil engineering firms are able to map and monitor land and structures more rigorously with the assistance of drones, making them more resilient in the event of disaster,” states the paper.

Related: B.C. government to introduce legislative amendments related to drone operations near wildfires

Citing a 2015 study carried out by the American Red Cross and Measure, “aerial drones are one of the most promising and powerful new technologies to improve disaster response and relief operations,” authors noted. Beyond being used in dangerous work, “drones can also deliver needed supplies and relay Wi-Fi and cellular phone service when communications are needed the most,” they added.

“As drones have become smaller, cheaper, more intelligent and more accessible, they now offer unprecedented opportunities as a risk mitigation tool,” Zurich reports. “Besides their serviceability to regularly monitor everything from rail lines to the integrity of bridges and buildings, drones can be quick to deploy to verify the safety of environments and structures in the wake of a catastrophe,” the company paper notes.

“Even some crude estimates of the economic benefits of using drones will be food for thought for many CFOs and CROs looking for quick wins in expense reduction, while still maintaining a robust enterprise risk management (ERM) program for their organizations,” the paper adds.

“As these devices become increasingly embedded into the fabric of everyday life, applications for their use will continue to grow, spurred on by increasingly sophisticated functionality and the imagination of those who would make use of them,” Uhlmann (pictured below right) maintains.

Urs Uhlmann, CEO, Global Corporate for Zurich Canada

But as those applications grow, so, too, do the associated risks, “particularly in light of undeveloped or underdeveloped regulations around their use in various jurisdictions,” states the paper. “Lack of skilled operators, untested technology, liabilities associated with use of (unmanned aerial vehicles) UAVs in crowded areas and privacy concerns present new types of risk that companies must be prepared to measure, assess and manage,” it continues.

“Many UAVs currently in commercial use are the same ones used by hobbyists,” the paper notes. “Operators are frequently ignorant of regulations or ignore them, and, unlike manned aircraft pilots, they lack training. A technology failure, system hack or operator error could easily cause a drone to collide with other aircraft, fall and injure people or damage property,” it cautions.

Related: Pilot reports of U.S. drone sightings soar in 2015, Federal Aviation Administration says

“Regardless of the size of the drone or the regulations by which an operator is governed, the critical thing to remember is that flying a drone is an aviation activity. Despite this, drones are not often treated with the same care and consideration as manned aircraft,” the paper points out.

“At the crux of market expansion is the implementation of regulatory frameworks in individual nations that can be harmonized internationally to integrate civil and commercial drones into broader use safely,” Zurich argues.

That said, regulations for drones have been developing at a variable pace in different jurisdictions. In Canada, for example, Transport Canada issued 1,672 special flight operations certificates (SFOCs) compared to 345 SFOCs in 2012.

Since November 2014, drones weighing less than 25 kg no longer require operators to obtain an SFOC (although they do need to satisfy Transport Canada’s exemption requirements). Still, “UAS boosters that want to expand the applications for drones would like quicker action on developing rules for beyond-visual-line-of-sight flights,” the paper notes.

In the U.S., the Federal Aviation Administration’s (FAA) “reform of its rules is moving in the direction of seizing the social and economic benefits that the FAA believes drones do indeed provide. The regulator anticipates that small commercial drones will be the greatest area of UAS growth in the next few years, forecasting that 7,500 small drones will have been approved to fly in U.S. airspace by 2018.”

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

For commercial customers looking to integrate drones into their operations, Zurich and Global Aerospace Underwriting Managers Limited – which partnered with Zurich on the development of its drones insurance package – recommend best practices for risk mitigation in five areas:

• training – UAV operators need to understand the hazards involved with operating an airborne vehicle and be trained appropriately;

• safety management – an established safety management system governing the use of UAVs is an integral part of risk mitigation, and standard operating procedures should encompass, among other subjects, interaction between the operator and observer, weather and environmental issues, and pre- and post-flight checklists.

• maintenance – some regulators are examining the potential of having regular safety checks conducted on commercial UAVs, while in the absence of regulation, companies must have a maintenance schedule in place for their drones;

• environmental factors – a number of regulators require drones to maintain a certain distance from restricted areas, such as airports, government buildings and anywhere people gather; and

• privacy – commercial users must respect rules related to maintaining a safe distance from people, capturing images, data or eavesdropping.

“A common feature of these rules is required minimums for liability insurance,” the paper notes. Tailor-made insurance products have emerged on the market, Zurich reports, advising companies bringing drones into their operations “to work with insurance and risk management providers that can help them understand and protect themselves from these new and evolving risks.”

Uhlmann cautions that finding the right solution for a particular organization will require a thorough analysis of exposures to be managed and strategies for doing so. Calling drones just another tool in the rapidly growing technology toolbox, he notes, nonetheless, that for “organizations that proactively manage and embrace new technologies, drones can be a very powerful tool.”