Focus On: Drones and the Commercial Sector Businesses have set their sights on new applications for drones (unmanned aircraft) that could speed product delivery, monitor crops or capture claims data among dozens of other uses, but technical, legal, regulatory and risk management issues could present challenges. Munich Reinsurance America, Inc. 555 College Road East P.O. Box 5241 Princeton, NJ 08543-5241 Tel.: (609) 243-4200 Fax: (609) 243-4257 www.munichreamerica.com Printed May 2015 This material was prepared based on industry sources for informational use only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc. No representation or warranty of any kind, whether express or implied, is provided with respect to the accuracy, completeness, or applicability of this material to any recipient’s circumstances. This material is not intended to be legal, underwriting, financial or any other type of professional advice. Munich Reinsurance America, Inc. and its affiliates disclaim any and all liability whatsoever resulting from use of or reliance upon this material. Sources available upon request. © Copyright 2015 Munich Reinsurance America, Inc. All rights reserved. “Munich RE” and the Munich Re logo are internationally protected registered trademarks. Approximately 30,000 commercial and civil drones could be circling the skies in America by 2020, according to the Federal Aviation Administration (FAA). The Association for Unmanned Vehicle Systems International (AUVSI) estimates that between 2015 and 2025, the drone industry will create 100,000 jobs and contribute US$ 82bn to the US economy. Technically referred to as unmanned aerial vehicles (UAVs) or unmanned aircraft systems (UASs), drones can be classified by: Navigational autonomy that includes: – Piloted devices under human control via a sophisticated ground control system – Unpiloted devices with autonomous capabilities using advanced software systems and Global Positioning System (GPS) navigation systems Type of operation, which the FAA describes as: – Public uses performed by governmental agencies – Civil uses of non-governmental entities which must provide detailed information on design and use of the device in order to obtain a special airworthiness certificate – Recreational uses that are limited to 400 feet above ground level and barred from certain populated areas Physical characteristics include: – Micro/small multi-rotor drones – Large multi-rotor and helicopter drones – Small fixed wing drones – Large fixed wing drones Emerging uses The list of potential uses for drones in the commercial sector seems to encompass an ever-growing list of possibilities. Agriculture According to AUVSI, precision agriculture is expected to account for 80% of the commercial drone market. The association estimates that in the first three years after the FAA allows commercial use, agricultural drones will be a US$ 3bn market. Over the next decade, this market could be 10 times as large. The advantages of precision agriculture stem from efficiencies that drones can deliver in three areas: – Distribution of fertilizers and pesticides – Irrigation levels – Crop health With drone capabilities, farmers may be able to reduce the amount of pesticides and fertilizers sprayed over fields and therefore reduce the cost and environmental impact of these substances. Drones would also be a more cost effective alternative for crop imaging than manned aircraft. but have run afoul of the FAA’s ban on commercial usage of drones. Insurance Drones may play a role in casualty underwriting but they might be even more useful in property underwriting where they could provide high resolution imagery of the exterior condition of a property. Drones equipped with infrared cameras also could detect leaks and other sources of water damage or provide a bird’s-eye view of a building’s heat signature. Real estate Real estate agents are using drones to show homes as well as to provide an overview of the neighborhood and routes to local schools among other amenities. Land and farm brokers also see drones as a relatively inexpensive way to show potential buyers their properties. On the claims side, drones could capture aerial surveys of a neighborhood after a catastrophe, which could be used by claims professionals to evaluate ground conditions and develop cost efficient response plans. On a smaller scale, a drone could be deployed to a traffic accident to capture photos of the automobiles and road debris. Drones could also be used for surveillance to detect fraud and validate claims, though some privacy issues might have to be resolved. Communications Drones may also be the answer to two critical challenges journalism faces today: a growing appetite for original, cost-effectively produced video and the difficulty of obtaining footage or even access to obstructed or dangerous areas. Equipped with high definition 3-D video cameras and global positioning devices, drones could go into disaster-crippled or battle-ridden areas that would be dangerous to photojournalists. Some journalists have experimented with small camera-equipped drones Drones have also appealed to videographers who have used them to film weddings in the US. Although not sanctioned by the FAA, drone aerial photography is currently offered by many photographers. Weather Converted military drones have already been used by the National Aeronautics and Space Administration (NASA) to track hurricanes and provide data to better understand how storms intensify. Drones’ ability to collect evolving meteorological data could improve weather forecasts and lengthen advance storm-warning times. Construction Drones could be used to track the progress of a large project, identify potential hazards or inspect hard-toreach places. The drone industry has identified oil and gas companies as a key sector for its products, which are highly suited to survey pipelines, monitor wells, inspect fuel emission and detect offshore leaks. The FAA has granted permission to several oil and gas companies to utilize drones. Environmental monitoring Agile ‘eco-drones’ or ‘conservation drones’ that produce quality imaging of difficult-to-access areas may be used as a mapping tool for environmental monitoring. Delivery At this point, retailers’ plans for using drones for delivery is logistically hampered by a lack of advanced systems that are needed to prevent midair collisions or flight failure. Obstacles The future of drones however is not without its challenges. Technical limitations Drone communication for command, control and transmission of data requires a portion of the electromagnetic spectrum. This spectrum is already overtaxed by other forms of communications, which could be interrupted by the additional demand of drone signals. Munich Re America 2015 Drones Survey Which of the following do you think poses the greatest concern with the adoption of drones for commercial use? 69% Invasion of privacy 12% Inadequate insurance 11% Personal injury 8% Property damage The study was conducted on–site at the Risk and Insurance Management Society (RIMS) Conference in New Orleans, LA on April 27, 2015. It is intended to represent the sentiments of 100 risk manager attendees who participated through in–person interviews, primarily from large and mid–size companies. Integration into the US National Airspace System (NAS) The influx of drones into today’s crowded air space is expected to place demands on the current air traffic control system, which is already facing challenges in integrating an anticipated increase in traditional manned flights over the next 20 years. In response to the growing demands of manned aircraft, the FAA launched a project to replace the country’s aging radar-and-radio communication traffic control system with a satellite-based digital communications system, known as NextGen. Plans for the new system did not include provisions for integrating drones. Making the needed changes to incorporate drones into NextGen greatly complicates the project, which is over budget and years overdue. Training Training is comprised of various programs offered by several colleges and universities, for-profit organizations or drone makers that provide original equipment manufacturer (OEM) training. Many drone training programs are based on Department of Defense (DOD) training, international training or observed best practices that do not meet any US accreditation or FAA standards which are not expected to be finalized until 2017. Privacy Some believe that unlike traditional fixed-in-place surveillance systems, drones with their greatly expanded range of vision can compromise the privacy of individuals who may find it difficult to move out of the line of sight of a device. But others reason that drones are no more intrusive than other traditional aircraft. Responding to this debate, the White House announced plans to issue an executive order aimed at developing privacy guidelines for commercial drones. Legal environment Insurance implications In 2012, Congress passed the FAA Modernization and Reform Act, which requires the FAA to develop a plan to safely integrate drones into domestic airspace. But according to a 2014 audit report by the US Department of Transportation, unresolved technological, regulatory and privacy issues have caused the FAA to fall “significantly behind schedule” in meeting the deadline. Key elements of underwriting drones will include consideration of: – First party exposures to equipment, hull and payload – Third party exposures including bodily injury and property damage, personal injury arising from invasion of privacy, professional liability and director and officers liability – Other exposures such as cyber risks, terrorism and workers’ compensation According to the AUVSI, as of May 2015, fifteen states have passed bills regarding the use of drones. Eleven states have bills pending. Munich Re America 2015 Drones Survey When do you think drone use will become common practice for businesses (>60% of US companies using drones)? 48% 5–10 years 37% Less than 5 years 10% More than 10 years 5% Never The drone insurance market is still evolving. Both aviation and property/casualty carriers have shown interest in providing coverage. Aviation insurers are primarily focused on larger drone users who provide drone services to other entities. Property/casualty insurers are seeking ways to provide coverage for traditional industry segments that own and operate drones as an incidental part of their operations. Insurance Services Office (ISO) has released a series of optional endorsements to address some liability issues. The lack of credible loss information is also a critical issue for insurers. The study was conducted on–site at the Risk and Insurance Management Society (RIMS) Conference in New Orleans, LA on April 27, 2015. It is intended to represent the sentiments of 100 risk manager attendees who participated through in–person interviews, primarily from large and mid–size companies. Risk management techniques to mitigate the possibility of crashes include ballistic parachutes systems to reduce energy impact, redundant electrical power paths, distinct flight operator training and certification for recreational and commercial operations, maintenance standards and anti-hacking software. Exposure Checklist Use of drone –W hat is the intended use and frequency of use of the drone? Is the indicated use consistent with the specific equipment? – I n what airspace will the drone be operating and under what legal authority? Is the flying height greater than 400 feet? Is the distance capability in or out of line of sight? –W ere applicable state laws reviewed where the drone will be flown, prior to issuing the policy? –W hat security and safeguards are in place to protect against software/hardware failure and third-party system intrusion/disruption of the equipment? –W ill the insured provide drone service to others? Operator –D id the operator receive proper flight training for the drone? –D oes the operator have a certificate of compliance to fly the drone that is approved by the FAA? –H ow many hours has the operator logged flying the drone? What proportion of those hours have been accident free? Outline any prior accidents and losses. Equipment –W hat is the make, model and manufacturer of the equipment? – I s the manufacturer financially sound and do they provide an equipment warranty? –H as the drone been properly examined to determine the quality of the electrical, engine and propeller systems? If so, by whom? –D oes the insured formally restrict the drone’s flight operations to only preapproved and flight certified company personnel i.e., no permissive use? –D oes the equipment meet all federal, state and local government requirements for its intended use? How many drones will be operated from a single ground control station? –A re regular maintenance routines performed and recorded for the drone? If serviced by outside parties, are appropriate hold harmless agreements obtained? Focus On: Drones and the Commercial Sector Transfer of liability –D oes the insured contractually assume liability from others or provide insurance coverage to such parties? –H as the insured contractually transferred liability to others or are they protected by third-party insurance coverage by such parties?