When the Federal Aviation Administration (FAA) released its Small Unmanned Aircraft Rule (Part 107) last August, it opened the floodgates for the insurance industry to tighten up the underwriting process for small commercial drones.
In addition to easing the process for insurers that were already covering drones, Part 107 paved the way for “more carriers to come to the table to offer products,” says Jim Pinegar, vice president of insurance services at the Aircraft Owners and Pilots Association. “They were already developing it or getting the policy forms approved in all the states, but this really sealed the deal.”
Now, insurers can cover “almost every operation that a drone could be used for—as simple as real estate, as difficult as pipeline or windmill,” Pinegar says. “We can insure liability only, we can insure the drone itself, we can insure payloads, high-end cameras, cargo—we can insure nearly anything that’s legal.”
Since August, how have insurers proceeded with their approach to this booming industry? And what’s the best way to secure coverage for your drone-using clients?
Specialty or Standard?
Because drones are regulated by the FAA and involve licensing procedures, “it’s now absolutely clear, without a doubt, that drones are aircraft, and that the appropriate place to cover and insure these risks is in the aviation insurance marketplace,” says James Van Meter, aviation practice leader at Allianz. “These are not tractors; these are not pieces of construction equipment; these are not pieces of inland marine. These are not your typical property.”
“In the beginning, we didn’t really know if the standard markets were going to craft some ISO endorsement to pick up this exposure—that’s what was going on a year or two ago,” agrees Travis French, aviation practice leader at Arlington/Roe. “I never really was a fan of ‘We’re going to cover this by removing an exclusion,’ or ‘Here’s an endorsement that covers it,’ or ‘We’re going to cover it with this one-page change.’ I want an insurance product that addresses my needs, not just a Band-Aid.”
“We do see the ISO forms being used by a number of non-aviation markets, and that’s going to be short-lived once they start paying claims,” Van Meter predicts. “A lot of regular p-c insurers may not be fully comfortable paying aviation losses. There’s a really good reason why aircraft and aviation is excluded under just about every standard GL policy and every standard products policy. Those companies don’t have the expertise to write this business, and most of the time they’re going to have reinsurance treaty issues when they start paying claims.”
French is already noticing the endorsement approach start to fade away as “more people want to buy coverage specific for the drone—a policy that’s been created with that type of exposure in mind.”
“We have custom-made specific forms for this class of business, and we have specific definitions for the aircraft, for the ground support equipment, for the payload—these forms are meant to be broad for this category,” Van Meter agrees. “We address the pilots, we address deplorable payloads and we’re very comfortable at this point writing physical damage coverage and liability coverage.”
A note on personal lines: If you have clients who are using drones recreationally, make sure you warn them that most homeowners policies exclude drone risks. “Just like your homeowners survey asks, ‘Do you have a trampoline, swimming pool, Rottweiler?’ I think a lot of those risk surveys for homeowners are going to start asking about drones and unmanned aircraft,” Van Meter predicts.
Some homeowners carriers provide endorsements for recreational drone use, and Van Meter, who owns two recreational drones himself, recommends pointing your clients toward the Academy of Model Aeronautics for coverage—members gain access to a $2.5 million umbrella policy.
Underwriting and Coverage
Commercial drone forms vary between insurers, but most are based on a standard aircraft policy that’s “been refined to the point now where it addresses more of the exposures common with drone operators as opposed to standard operators,” French says.
The Allianz form, for example, includes straight hull liability in addition to important supplementary coverages like medical payments, premises liability, privacy and war, Van Meter explains.
And as loss data continues to grow, underwriting accuracy will only improve. “In the beginning, somebody made it up—‘We’ll go with this and we’ll see how we do,’” French recalls. “A lot of people followed, so all the rates for the markets were fairly close.”
Today, “you’re seeing actual underwriting go on—applications being analyzed, questions being asked, really diving into the risk, understanding what this operator is doing, what they’re planning to do, what aspects of the risk are unique to them, and then rating it as such,” French says.
And the rates “are really reasonable,” says Pinegar, who sees liability limits ranging from $100,000 up to $5 million without any underwriting. “The rates are coming down significantly to be pretty competitive. A year ago, nothing less than $1,000 was foreseeable. Now, we can write them in the hundreds.”
But loss data is still relatively young by insurance standards. “We’ll need to compile several years of that before we can really put it into the hard and fast algorithms that everything else falls in these days,” French says. “But it is definitely developing—we’re seeing various pricing models developed from each of the markets, and the space is evolving quickly for the better.”
What’s on the horizon for drones? Next week’s Markets Pulse e-newsletter has the scoop.
Jacquelyn Connelly is IA senior editor.