Daniel Katz - Daniel@Aerotas.com
When we begin working with clients considering commercial UAV operations, one of their first concerns is about insurance for this nascent technology. The critical question for a business considering drone insurance is what drives insurance cost. We did some exploring to understand how underwriters evaluate risk and premium cost.
Background: UAV Insurance
All of our clients already have a constellation of insurance policies in place. While the arrangement of policies varies widely depending on industry and business practice, the one consistency is Commercial General Liability (CGL). The crucial first thing for any business looking into safe UAV operations note is that almost no CGL policy covers aviation activities. Put simply: if it flies, it is not covered. While this exclusion arose out of the high liability of manned aircraft operations, it will also apply to unmanned aerial vehicles for the foreseeable future. This means that businesses operating drones commercially will need to put in place aviation insurance. Fortunately, some trailblazing insurance underwriters are creating UAV-specific policies that are feasible for small businesses.
Before delving into the drivers of cost, it is important to note that because UAV insurance is such a new product, the process of determining risk profile and thus insurance premium cost is still very manual for underwriters. Insurers are working to make the process more efficient and linear, but for now the relative lack of data on risk profiles for UAV operations means that evaluation is highly qualitative.
Key drivers of risk and premium cost
While each application is considered holistically, it is valuable to understand which factors of an application are given the most weight.
1) Number of UAVs Scheduled
The single greatest driver of insurance cost is the number of drones that an applicant wants scheduled. In this way, drone insurance is similar to auto insurance. Though the number of drones an applicant owns does not impact the risk profile of any given operation, a greater number of UAVs does confer greater risk; even a UAV at rest in an applicant’s office is a source of potential liability.
2) The Quality of Counsel
In such a new industry, risk factors are not yet well proven. In this environment, insurers are looking for which signals give them the most assurance of an applicant’s efforts to minimize risk. One of the main things they look for right now is who is assisting the applicant in establishing their UAV operations. If an applicant has an agreement with a company the underwriter has vetted, then the underwriter considers them lower risk. There are many good ways to establish UAV credibility, from UAV training schools to UAV trade associations to working with consultancies like Aerotas, but the message is clear: if your business keeps good company, then insurers are more inclined to rate you favorably.
3) Operating environment
One area where insurers look closely in determining an applicant’s risk profile is the operating environment. If an applicant is scheduling custom aircraft and relatively untrained pilots, but predominantly operating in unpopulated and non-sensitive areas, their risk profile is likely to be considered lower than a trained pilot operating well-vetted hardware but flying in a densely populated environment.
Factors of surprisingly little importance
Two factors commonly thought to bear significantly on the cost of UAV insurance are actually of much less concern to insurers.
1) 333 Exemption
As Logan covered in his last blog post, the legality of commercial UAV operations right now is a complicated question. In large part, this is because the current regulatory regime is by nature a stop-gap, and new rules are expected to come out this summer. The good news is that insurers are well aware of this. Whether or not a company has a Section 333 Exemption factors only minimally in their risk profile. It is important to note that part of the reason insurers are less concerned about 333 Exemption is because they do not cover legal liability; the drone insurance policy would not cover a fine by the FAA.
What insurers are much more concerned about than whether an applicant has a 333 Exemption is being assured that the company knows how to fly safely and is diligent in enforcing safe operating procedures. The benefit to an insurer of a business having a 333 Exemption is not that they are in full legal compliance, it is that they have committed to following the FAA’s operating procedures, and are thus more likely to routinely fly safely. However, the 333 Exemption is much less important to underwriters than the certainty that the business has good operating procedures and flight/mission checklists -- something Aerotas implements for all of our clients.
2) Pilot experience
Insurers are aware that the requirement that all commercial UAV pilots have pilot licenses is almost certainly going away this summer. What matters much more than provable piloting experience -- manned or unmanned -- is knowing that a business is being diligent about ensuring their operators are safe. This can take the form of reporting hours of experience on the scheduled UAV aircraft, attending one of many UAV flight training programs, or having worked with a partner that offers training and procedures (as Aerotas does). If the insurer is concerned by the lack of experience of a scheduled pilot, they are still not likely to refuse coverage or even raise the premium; instead, they are likely to require the pilot attend a training program before coverage takes effect.
The Bottom Dollars
Despite the novelty of the technology and the dynamism of the regulatory environment, insurers are figuring out how to make UAV insurance attainable. While expensive by comparison to auto or most CGL policies, it is not prohibitive.
The biggest takeaway for businesses considering UAV operations is that insurance need not be a roadblock. Smart businesses will start out by seeking advice from reputable sources, and begin by building their drone program with the minimum number of airframes and operating in the lowest-risk project environments as they learn to optimize their UAV operations.
Are you interested in learning more about how to operate commercial drones safely? Send us an email at firstname.lastname@example.org.
Daniel is cofounder and Head of Strategy of Aerotas. He has a rich background in strategy and innovation consulting, helping businesses from startups to the Fortune 500 identify opportunities for innovation. Daniel is passionate about helping organizations see and incorporate new ideas into their business operations.