The future seems limitless for commercial drones across the United States, but could their expected legalization in 2015 result in more harm than good?
Congress has directed the FAA to prepare for the commercial use of drones in U.S. skies by 2015.
In other countries, legal drones are used to apply pesticides on crops and spot wildlife poachers.
A 2013 report suggested commercial drones in the United States could result in more than 100,000 new jobs by 2025.
Will the unleashing of drones in American skies result in the hovering of high-definition cameras capable of documenting our every move—especially when we forget to close our window shades? If a flock of geese flying into a jet airplane engine can cause one of the most tragic airliner crashes in history, can we be sure a radio-operated drone won’t also be sucked into a jet engine with similar results?
The commercial use of drones—also known as Unmanned Aviation Systems or Unmanned Aviation Vehicles—in U.S. airspace is currently illegal, although Congress has directed the Federal Aviation Administration to prepare the rules and regulations necessary to allow commercial access by 2015.
Drones have been used in this country for decades to guard the U.S. border and assist law enforcement and first responders with search and rescue operations, among many other uses. In countries where drone use is already legal, the pilotless vehicles are used for the precision application of pesticides on crops in areas inaccessible by vehicles or manned aircraft. In Africa, drones equipped with heat-sensing imaging are used to spot wildlife poachers.
At the recent Winter Olympics in Sochi, Russia, drones provided aerial coverage of downhill ski events.
In the United States, Amazon is working on a way to use drones to deliver packages. Commercial photographers want to use drones to take aerial photographs—with some jumping the gun and providing the service before it’s even legal. Newsgathering organizations want to use drones to provide better coverage by getting closer to events as they occur. Even insurance companies are considering how to use drones for claims adjustments or for gathering precise imagery of factories and plants before they underwrite those risks.
The possibilities are limitless, and entrepreneurs are eager for the FAA to ease the way and kick-start the U.S. drone industry, which in turn could provide a lift to insurance brokers. Just what would that lift look like?
“That’s the multimillion-dollar question, isn’t it?” says Roger Maldonado, vice president of the Aviation Practice Group at Wells Fargo Insurance. “I read somewhere that the market could grow 500% to 700% in five years. We’re talking between 20,000 and 30,000 units 10 or 15 years from now. The uses are infinite, so you can just imagine that they won’t be able to build them fast enough.”
The commercialization comes at a good time for aviation insurers, which have seen business contract as the industry has been slow to recover from the economic downturn.
“It’s a positive thing for our industry,” says Peter Schmitz, CEO of Aon Aviation. “We’ve seen the effect of the economy on general aviation. Quite frankly, it’s a bit of a breath of fresh air for us. Our market has been pretty much depressed rate-wise, so this gives us and the underwriters an opportunity to have a new type of exposure come into the marketplace. Hopefully it’s one that will carry on for a while and the underwriters see profit in and it’s a good thing for us.”
We’re talking between 20,000 and 30,000 units 10 or 15 years from now.Tweet
A 2013 economic impact report from the industry’s largest trade association, the Association for Unmanned Vehicle Systems International (AUVSI), suggested the commercialization of unmanned vehicles in the United States could result in more than 100,000 new jobs by 2025 and an economic impact of more than $82 billion.
“The UAV/drone market is what the aviation market was in 1920,” Maldonado says. “The aviation market has gotten a 100-year head start on the drone market, but the time frame and the learning curve is going to be so much shorter for the unmanned because the technology basically is already there. It’s just applying it properly.”
There are already a handful of ways to operate a drone legally in U.S. airspace. One is for a public entity to receive a waiver from the FAA for specific uses the agency deems to be in the public interest, such as firefighting, disaster relief, search and rescue, law enforcement, border patrol, military training, and testing and evaluation. There were 545 waivers in effect at the end of 2013, according to the FAA.
Hobbyists may operate drones if they are flown below 400 feet, away from populated areas and at least three miles from an airport. The FAA allows drone use on a limited basis for targeted purposes, such as agriculture and oil and gas exploration, provided they are not used in urban areas and other precautions are met.
Although most commercial use is currently prohibited in this country, unmanned aviation systems have been in use for decades.
“Remarkably, remotely piloted unmanned vehicles have been around a lot longer than folks think,” says Brad Meinhardt, area president and managing director of aviation at Arthur J. Gallagher & Co. “They’ve got autonomously operated, GPS-enabled mini-helicopters flying in Japan that have been doing it for 20 years. They’re spraying insecticide on crops and are extremely effective in a controlled environment, where dispersing is done not only on top of the leaf but underneath the leaf.
“These UAVs are much more accessible, at a very low cost, to the common man, but if you look at how long these systems have been doing remarkable things, it’s fairly shocking how effective they’ve been. The Predator is not new. The Global Hawk system is not new. I think it’s just the fact that the technology is so readily available and so inexpensive that it’s led to an explosion of an ability to manufacture these things broadly.”
But first the FAA must determine how to safely integrate drones into U.S. airspace.
“There’s probably no other place in the world that has balloons, airships, commercial airlines, private airlines, pleasure and business aircraft all operating in very congested environments,” Meinhardt says. “You’ve got the potential for these vehicles to lose control, and in a place like Los Angeles you could very realistically have one of these fly through the windshield of a car on the 405 Freeway and do a lot of property damage and maybe bodily injury.”
While the FAA considers rules and regulations for drone use, hundreds of companies have jumped the gun and operate commercial drones illegally.
In a place like Los Angeles you could very realistically have one of these fly through the windshield of a car on the 405 Freeway and do a lot of property damage and maybe bodily injury.Tweet
“There’s a lot of ambiguity right now with companies that are not really sure of what the rules and regulations are,” says Jesse Kallman, head of business development and regulatory affairs at Airware, a San Francisco company that developed a platform for commercial drone development and operation that includes hardware, software and cloud services. “Unfortunately, there are people operating outside the limits, and the FAA is working to set guidelines. That’s what is holding up the industry. People are waiting, but some companies have not waited and have started to operate. The FAA is going after those that are operating in an unsafe manner, but it’s difficult to go after every single one.”
And there are privacy concerns to address.
“What if they inadvertently take a picture of something they shouldn’t take a picture of?” Maldonado says. “That becomes a legal issue. How do you insure against that?
“As cameras get bigger and better and are able to read license plates from space, you can imagine the capability of somebody taking pictures that they shouldn’t be taking. Moving forward, we’ll see how the market will react to the first claim. When that gets brought out and the settlement is paid and there is a legal precedent set, how does the market react to that?”
Brandon Packman, a board member of AUVSI’s Cascade Chapter, is helping the organization prepare its own guidelines for operating drones. Packman says the guidelines will insist that privacy is assured.
“If you fly over someone, are you allowed to collect data at any time?” asks Packman. “The answer is no, of course not. Not without their permission. But what if you have inadvertent data collection? Destroy it. These are things we know the public is acutely aware of and they are scared, but the public doesn’t realize how much privacy is at the forefront of the mind of the folks in the industry.”
AUVSI, in cooperation with major insurance carriers and other players in the drone industry, is preparing a set of standards for its members. Packman says the standards, expected to be released this month, will incorporate best practices and help member firms assure insurers of their safety.
“The goal is to eliminate the bad actors,” Packman says. “You establish yourself to the insurance market and then with this little stamp of approval that you’ve met this bar; you tell your customers that you’re trying to be a good operator, that if your company hires this person you’re not going to end up on the news for hiring someone who is acting inappropriately.”
The commercialization can’t come fast enough for those in the U.S. drone industry, who note that drones already are legal in many Western countries and that the United States is in danger of losing jobs and market position the longer it waits. For insurance brokers, the new market would be a welcome new business line.
“The insurance industry has really moved rapidly with open arms to be honest with you,” Meinhardt says. “We started placing physical damage and liability for drones—I think the first one I did was five years ago—and we were surprised at how robust the market was at that time. We found a fairly affordable and robust insurance market a number of years ago.”
If you fly over someone, are you allowed to collect data at any time? The answer is no, of course not.Tweet
There are still questions about how to determine the appropriate amount of coverage.
“Some of these UAVs, especially on the commercial side, can carry extremely expensive sensors,” Kallman says. “Some companies can actually have fleets of hundreds of them, so you can imagine it’s a lot of money and it’s a lot risk. Insurance companies are looking to how do I quantify this risk; how do I write policies; what are the things I need to look at; how do I write policies for the operators themselves as far as liability.”
Schmitz, however, says it won’t be difficult to determine how to write the coverage.
“I think the exposure itself, being a hull and liability exposure, is similar to the pleasure and business aspect of general aviation now throughout the world,” Schmitz says. He notes that drones come in widely different forms, from inexpensive lightweight models to multimillion-dollar machines with fixed wings or rotor wings.
“I don’t see that the values of these drones are going to present any challenges for the underwriting community,” he says. “It really comes down to payloads and what is the purpose of the drone and what types of payload do they carry?”
Meinhardt suggests brokers and clients tweak the language on existing policies to clarify what is covered.
“We have been taking existing insurance coverage for universities and municipal organizations and expanding the existing aviation wording to make sure the definition of aircraft includes UAVs and drones, so there is no confusion there,” Meinhardt says, “and we’re running into absolutely no difficulty doing that whatsoever.”
Brokers who believe their clients want to use drones when the FAA eases the way should start talking to their customers now.
“Figure out exactly what their exposure is and how that needs to be protected,” Maldonado says. “The underwriting information that the underwriters are going to need to see is going to be much more comprehensive compared to what brokers are used to handling. You have to remember that there is literally no information as far as actuarial data from loss statistics, so the rating is going to be all over the place. Because we’re in such an infancy stage in this market, you’ve just got to be prepared for change and expect to see the capacity increase as the market matures and people get more comfortable with this kind of equipment.”
In the end, brokers say, the new market may not be so novel after all.
“It’s almost becoming mundane,” Meinhardt says. “When it comes down to the basic element, the insurance is not that much different. It’s an aircraft. A number of underwriters from a product liability standpoint consider them airframes just like any other aircraft manufacturer, and you’re looking at third-party bodily injury and property damage, just like an aircraft, only without the passenger exposure.”