Mobility and Transport

Unmanned aircraft are taking off

The use of drones for commercial, non-military purposes is strictly limited in many countries. Yet as civilian use of these unmanned aircraft increases, the associated risks are becoming a major focal point for insurers.


Although much more expensive, devices for professional and commercial use are gradually gaining a foothold in the market, as are less expensive leisure drones for hobby users which have been used for many years. As a rule, drones for professional/commercial use generally carry a larger payload, have a greater range and more stable flight characteristics. They are equipped with electronic control systems of varying complexity, such as GPS systems to facilitate navigation. All unmanned flying systems can be classified according to weight, altitude, flying time or maximum distance (reach). Size is another key distinguishing feature: it ranges from the dragonfly-like micro-drone DelFly with a wingspan of 10 cm to drones with wings as long as those of commercial aircraft, which are used for military purposes. According to the yearbook of UVS International, an association of drone manufacturers, there are more than 1,600 different types of drone worldwide, only 20% of which are used for purely commercial purposes.

The use of drones for commercial, non-military purposes is strictly limited in many countries. Yet as civilian use of these unmanned aircraft increases, the associated risks are becoming a major focal point for insurers.

Drones for all

Until recently no more than a gimmick in science fiction films, they are now very much reality. These unmanned flying objects with between four and eight rotor blades are small and highly manoeuverable, featuring battery-powered motors and capable of carrying small payloads. No wonder then that the commercial use of drones is increasing, for example to monitor technical installations or agricultural production. What changes can the insurance industry expect with the advent of this new technology? How are drones used and which risks could arise? Click here to scroll through different application scenarios.

Large variety of potential uses

Thanks to new technologies, some of which are of military origin and have been adapted by mobile communications and model-construction engineers, more efficient flying objects are being created at ever-lower costs. These devices are equipped with sophisticated electronic systems, as well as small lightweight motors which nevertheless deliver sufficient uplift. The final technological hurdle at present is battery capacity, without which extended flying times are not possible.

On a personal level, the use of small unmanned copters or “model aircraft” – often fitted with cameras and controlled by smartphone – has become an increasingly popular hobby. Provided that certain conditions are met, they do not even require a licence to operate. Commercial use of unmanned aircraft, however, is less widespread, particularly in certain markets such as the USA, due to the lack of uniform regulations at present. In some markets, however, they are already used in agriculture and forestry to control pests or identify diseased plants. Drones have also been used in the film business, as they are less expensive than helicopters and more flexible than camera cranes.

Other potential uses include aerial photography for surveyors and for monitoring pipelines, electricity pylons, dykes or construction sites. Firefighters have experimented with drones to fight inaccessible fires without risking firemen’s lives, and insurers are working on ways of using drones to asses risks and survey losses following natural catastrophes. Delivery applications are still in their infancy, though logistics firms have already conducted initial tests. Likewise, projects designed to provide internet access to people in countries with poor technical infrastructure have yet to make it beyond the test stage. According to the US Federal Aviation Administration (FAA), commercial drones will soon become an everyday phenomenon. More than 10,000 unmanned flying objects are expected to be airborne in American airspace by 2020. In view of the growing number of potential uses, the market research institute Radiant Insight has estimated that the global market volume for drones will expand from US$ 600m in 2014 to US$ 4.8bn by 2021.

Technical advantages

Rotary-style drones are extremely manouevrable, making them attractive for a multitude of applications. Unlike helicopters, drones stabilise themselves automatically, permitting simple and intuitive control within a short space of time. This is due to sophisticated technology in which gyroscopes and acceleration sensors constantly measure the longitudinal and transverse attitude, and transmit the signals to a microprocessor. Many additional electronic safety elements are conceivable or are currently being developed.

Regulatory obstacles

The biggest obstacle preventing the spread of commercial drones is the absence of a practical legal framework permitting the safe integration of unmanned flying objects into civil airspace. At present, the regulations cover only private use, but differ from one country to the next. Weight, altitude and reach are usually important here. The commercial use of drones is not approved on a broad basis but rather only in specific circumstances (e.g. special case-by-case approval in the USA) or countries (e.g. France).

In 2002, Australia issued CASR101, the world’s first statutory framework regulating the use of drones. In Japan, the Japan Agricultural Aviation Association under the aegis of the Ministry of Agriculture, Forestry and Fisheries, issued standards governing the use of drones in agriculture. What is needed, however, are rules improving safety to the same level as in manned aviation. There also needs to be a uniform definition of unmanned flying systems and of the legal situation involved. There have been clear moves in this direction in both the EU and the US, but numerous legal hurdles still need to be overcome. US authorities are currently taking a fairly restrictive stance on drones.

The FAA released a draft proposal of regulations in February 2015, which presented what many viewed as very conservative rules (e.g. maximum height 500 ft, only daylight flights permitted, flying near bystanders prohibited, must remain in the operator’s visual line of sight). The FAA process allows the public 60 days to provide feedback on the proposed rules. Over 4,000 responses were received by the FAA, which they indicate may take them 12 to 24 months to work through before final rules can be published. One item that received strong pushback from many industries was the visual line of sight requirement. In response, the FAA has engaged UAV manufacturers and technology experts in an effort to examine the viability of safely using BVLOS (Beyond Visual Line of Sight) technology.

This is part of the FAAs “Pathfinder Initiative”, which will also explore technology that may allow urban and long-distance use of drones as well. The main stumbling block to this is the development of “sense and avoid” technology for drones. The systems used in commercial aviation are too large and heavy, and the technical problems involved in miniaturisation still need to be resolved. Requests for specific exemption permits continue and are increasing (as are approvals), even as the authorities continue to work on broad-based regulations governing commercial use. Uniform statutory regulations are not expected before the middle of 2016 at the earliest (and may be delayed further), and Europe is unlikely to follow suit before the end of 2016.

Harmonised regulations – or preferably an international agreement – are vital. Increasing pressure from various key industry segments may accelerate the development of workable rules, but that is not a certainty at present. Potential risks which lie beyond the scope of personal or public liability must also be taken into account, for instance in conjunction with professional liability. A cyber policy could be relevant if hackers penetrate the control system and cause the drone to crash, or use it for a targeted attack. Systemic faults in production or programming could lead to serial losses under the manufacturer’s product or professional indemnity policy. Infringements of data protection laws (violation of personal rights through unauthorised images) are also classified as risks by the licensing authorities.

Underwriting aspects

Drones that are used for commercial and private purposes are classed as original aviation risks. Traditional aircraft usually need to be insured. The insurance requirements for drones are not as straightforward. EU regulation 785/2004 requires a minimum sum insured of SDR 750,000 (€942,000) for model aircraft weighing 20 kg or more. In the US, however, there is at present no standard requirement for the insurance of drones, whether commercial or model in nature. This may change when the FAA releases its final rules. In principle, unmanned flying objects would be well served (whether required or not) to carry the same cover as general aviation, but without passenger insurance – in other words, aircraft hull including the control station, freight insurance, public and product liability.

The problem today is that insurers are faced with completely new risks and are required to provide cover without the legal security of a consistent regulatory framework. This is also the reason why a genuine market for such covers has not yet developed. Only a handful of specialised insurers have built up a small portfolio of covers for drones within the framework of aviation insurance. The sums insured range from US$ 1m to US$ 10m and are therefore nowhere near the liability limits normally found in aviation insurance. For smaller devices weighing up to 5 kg, covers are sometimes also requested and granted within the context of private liability or commercial liability, subject to certain conditions. Inclusion in existing private or commercial liability coverage is generally advisable, however. Other large or more complex drone exposures may be better suited for special covers. The advantage of special covers is that they may permit a rapid response to changes in expected claims, for instance following changes in the regulatory environment.

A special cover may also be advisable whenever drones constitute the main risk. Assessment of the individual risk is always advisable in the case of drones weighing over 5 kg. Product liability and drone hull are of no particular significance. However, these areas will become more important as systems become more widespread and more expensive. Potential risks which lie beyond the scope of personal or public liability must also be taken into account, for instance in conjunction with professional liability. A cyber policy could be relevant if hackers penetrate the control system and cause the drone to crash, or use it for a targeted attack. Systemic faults in production or programming could lead to serial losses under the manufacturer’s product or professional indemnity policy. Infringements of data protection laws (violation of personal rights through unauthorised images) are also classified as risks by the licensing authorities.

Conceivable loss scenarios

Credible loss data does not exist at present. Most of the few documented cases relate predominantly to drones used for private purposes or by the military sector, and offer little more than a rough indication. Spectacular cases, such as the drone which landed near the White House in Washington in January 2015, make the headlines but are only anecdotal. Based on the limited data that is available, the accident rate (frequency) appears to be higher for drones than is generally the case in aviation. After all, a drone may crash after the failure of a single motor and unmanned systems do not have the redundancies common in general aviation, nor the level of experienced operators comparable to traditional aircraft pilots. As their use increases, the following loss scenarios may emerge and must be monitored closely:

Crash and collision Property damage and bodily injury caused by errant or crashed drones must be considered here. The operator is a significant error source, particularly in the initial few years of growing use, as qualified operators may take time to be developed. Crashes may also be caused by carelessness, insufficiently charged batteries or by exceeding the range. In addition, faulty design or assembly of the drones may cause accidents. Potential sources of defects in the product itself include faulty batteries, motors or control units. Possible major loss scenarios could, for instance, involve a flying object crashing on a motorway and triggering a mass auto pile-up, or colliding with an aircraft and being drawn into the jet engines. Private model aircraft have a technical reach of well over 500 metres today. A drone can pose a realistic threat to air traffic, particularly during take-off and landing. Drones could also crash into crowds, buildings or power lines, causing extensive losses. In November 2014, the US aviation authority FAA disclosed that it receives about 25 reports each month of drones being observed close to aircraft.

Terrorism Unmanned flying objects offer a new means of penetrating sensitive industrial complexes or getting close to crowds in order to detonate a bomb. Experts are still debating whether civil unmanned flying objects could pose a threat to nuclear reactors. Numerous drones flying over nuclear power plants in France and Belgium have already alarmed authorities and operators.

 Drones fitted with cameras make it easy to violate other people’s privacy or image rights (accidently or intentionally) – for instance, when users pilot their devices over private property near windows, giving rise to the possibility to look inside people’s homes. As a rule, victims only file for an order to delete the images or for an injunction. Monetary indemnification is also conceivable, however, depending on the financial situation of the liable party and the severity of the intrusion.

Operational disruptions There is exposure near airports, if the sudden appearance of a drone results in temporary closure of the runways. Another potential scenario would be for a drone to damage a transmission line and cause a power outage.

Risk assessment

The main considerations for underwriting are operator qualifications, weight class, altitude, range, intended use and technical features. Potential damage on the ground depends on the kinetic energy resulting from the weight (including payload), altitude and speed. Form and material are less important. Even small drones crashing from a low height can cause serious bodily injury and property damage if they crash at full speed. Exposure increases considerably if the flying object is inside controlled airspace.

Opinions as to the safe distance to be maintained between an unmanned flying object and an airport range from 1.5 to 10 km. Exposure is considerably lower when drones fly over open fields or are used in agriculture than when they fly over densely populated or heavily frequented areas (sports stadiums/pedestrian precincts). Following a number of incidents, the FAA has explicitly banned flights in the vicinity of sporting events. Altitude is the decisive criterion in determining a drone’s controllability. It is generally agreed that operators can control their drones by sight up to an altitude of 120 m. What is disputed, however, is whether the maximum distance permitting good visibility and hence control is closer to 200 m or 500 m. This distance is reduced considerably if visibility is poor or obstructed. Technology is emerging that may make effective control possible beyond visual line of sight (BVLOS technology) and in the US the FAA is looking at such technology in depth. Drones capable of finding their own way and safely circumnavigating any obstacles do not exist at present. Until such time as fully automatic flying objects have been invented, the pilot’s skills, qualifications and practical experience remain the most important criteria (see interview on page 14). Safety systems which automatically prevent collisions, stabilise the flying object and are equipped with intelligent software would reduce the risk accordingly.

Conclusion and outlook

Both economically and from an insurer’s perspective, drones are of modest significance at present. However, this will change as soon as a practical regulatory framework is established and they are used more extensively for commercial purposes. As far as we know at present, there are no uses which would exceed the limits of insurability. At the same time, however, the risk landscape will change as the number of drones increases, the technology evolves and the legal landscape starts to emerge. Where private use is concerned, hobby pilots can be all too unmindful of the risks. They rarely know the limits governing the permitted use of drones; in the worst case, they may disregard the rules entirely.

In the commercial sector, strict regulations (once established) will help ensure that the claims frequency remains manageable. Users must expect to lose their licence if regulations are infringed; depending on the nature of the business involved, they can expect hefty financial penalties or may even be closed down. Attempts by the insurance industry to develop model insurance conditions for drones are still developing. In the US, for example, a series of optional drone endorsements has been filed by Insurance Services Office (ISO) and received approval in virtually all states at last count. At the same time, several carriers are developing their own independent coverage forms. Legislative action is needed to fill the regulatory vacuum. Munich Re supports its clients by providing the appropriate services for product development and risk assessment. We actively support our clients whenever insurance is required for the legal use of drones.