Actuaries and Airspace: The Liftoff of Commercial Drone Insurance?
Policymakers have overlooked the importance of commercial drone insurance
By Jennifer Huddleston Skees and Anne Hobson
Drones are now acting as couriers, pets, wedding photographers, and even first responders. What was once primarily the purview of the military is now increasingly used in commercial applications in a variety of industries as well as by individual hobbyists.
By 2021, the FAA anticipates more than 3.5 million small hobby drones and as many as 1.6 million commercial drones will occupy the free space above our heads. In the name of safety, policymakers have proposed several bills at the state, local, and federal level targeting drone usage restrictions. However, policymakers have overlooked the importance of a key innovation-enhancing mechanism to achieve safe skies: commercial drone insurance.
So far, incidents of physical damage caused by privately-owned drones have been limited. For example, inexperienced drone pilots have hit unsuspecting bystanders in the head. Some near-misses have been reported by the FAA and captured on video, and there are concerns from privacy advocates that existing laws do not fully protect individuals such invasions. Some of these incidents have been newsworthy, such as the time a drone landed on the White House lawn or the collision between a hobbyist drone and an Army helicopter. Overall, however, drones have been operated safely and many of the “near-misses” reported with private drones are merely sightings.
The history of military drones shows that these concerns aren’t new or reserved to private usage. In more than 400 accidents, military drones have caused damage to homes, roads, and other aircraft in addition to intended targets.
The market to provide insurance for drone-related risks remains an emerging one and there are some barriers to its growth. Pricing risk in an industry with limited data is difficult and the scope of drone-relevant law complicates the underwriting process. Drone users could face fines and injunctions from the FAA, lawsuits for physical damage and bodily injury, nuisance and trespassing, not to mention the net of state privacy laws. Until the extent of such risks are more easily quantified, the emerging drone insurance industry will face challenges in accurately pricing premiums and may be slow to devote a significant amount of capacity to this evolving sector.
Drones, like most aviation technology, are an example of a technology that was “born captive.” “Born captive” technologies, as Adam Thierer describes, are those technologies that emerge in sectors that are already heavily regulated like transportation or health. Since becoming accessible to private use, drones have been highly regulated by the FAA, as well as subject to additional state and local regulations.
Many of the same prohibitions apply to commercial drone operators registered with the FAA. They must request a waiver from the FAA’s Part 107 rule. Further, all drones are subject to temporary flight restrictions (TFRs), which are regularly issued by the FAA to clear the airspace above wildfires or floods following a hurricane for emergency personnel. Because of these restrictions, the United States lags other countries that use drones to provide valuable services like health care during disasters or to remote regions.
These restrictions on drone use impact not only affect Good Samaritan hobbyists, but stifle the United States’ ability to be an innovation leader in the potential commercial applications of the drones. Strict regulations on commercial drone applications pushed Amazon into testing their drone delivery service in the United Kingdom, rather than deal with the red tape and regulatory burdens of the United States. A budding insurance industry could offer incentives that encourage drone safety without disincentivizing innovation.
Congressional hearings on drones have focused on retrofitting existing FAA requirements that were originally designed to govern manned flight, but little attention has been paid to what role insurance could play in mitigating risk from drone incidents.
A mature market for drone insurance would allow states to emerge as test fields for commercial drone applications while alleviating the safety and privacy concerns of regulators. On the margin, the opportunity to insure against potential catastrophic costs could encourage entrepreneurs to experiment and induce investment to get fledgling firms of the ground. A functioning insurance market rewards firms and individuals that maintain good safety practices with the promise of lower premiums. In this way, it would incentivize drone owners be more safety-minded with no added cost to taxpayers or additional regulatory requirements. There is no telling how quickly the drone insurance market will liftoff and policymakers and drone enthusiasts alike should be patient as it develops.
Last month, Starr Companies and SkyWatch announced a usage-based drone insurance product paired with telematics technology that allows drone operators to get real-time warnings and safety scores for each flight. The Association of Model Aeronautics offers supplemental liability insurance to an existing homeowners’ or renters’ policy to cover drone accidents or theft, but these offerings have remained relatively under-the-radar (pun intended). But insurers like AIG have started to take notice. In contrast with increased FAA scrutiny, access to accurately-priced insurance could be exactly what the private drone industry needs to takeoff.
