Insurability of UAS and UAV For Private and Commercial Use

By: Terry Miller – Transport Risk Management, Inc.Terry

Insurability of UAS and UAVAttracting Insurance Capacity to the UAS Market

Insurance – What is Insurance Actually? Expense? Asset?

Risk – Identifying the risks associated with UAS Hull Physical Damage and Third Party Legal Liability.

Insurance Market – The condition of the global insurance market

How much capacity is available and how to divert it to UAS?Innovation – Attracting insurers to the market. Show Insurers that UAS are a way to grow in an evolving market.

Benefit – Benefit to operators and regulators Develop a product that effectively transfers risk and draws financial capital to the market.

InsuranceInsurance

Underwriting – How to determine level of risk and premium Finding the balance between affordability and profitability

RiskRisk

UnderwritingUnderwriting

Insurance Market

Insurance Market

InnovationInnovation

Benefit Benefit

UAS – NEW CLASS OF AVIAITON RISK

• What is the exposure? How much capacity is need?• Vehicle Hull Physical Damage.• Third Party Legal Liability.

• What are the risks?

• What is the financial condition of the insurance industry?

• How much capacity is needed to cover the UAS class?

• How much capacity can be diverted to the UAS class?

• Requirements of underwriters to provide capacity?

• What level and breadth of coverage is required by the class?

• What are the prospects for profitability to insurers?

• What level of coverage is required by capital providers?

Insurability of a new class of aviation risk and exposure

RISK – EXPOSURE AFFORDABILITY PROFITABILITY

RISK – EXPOSURE AFFORDABILITY PROFITABILITY

Insurance

• Insurance is a promise to pay.

• The individual can transfer the risk of a possible large loss to the insurer in exchange for premium thereby converting the uncertainty of a large loss into the certainty of a smaller fixed annual loss.

• Policyholders most likely identify insurance as an expense.• Insurance can be among the most vital and valuable of assets.• Insurance replaces a substantial amount of capital the operator

would other wise be required to have on its own balance sheet.

What is insurance actually?

VEHICLE HULL PHYSICAL DAMAGE

• Who’s qualified to fly them?• Who’s qualified to train them?• What are the values of the

vehicles?• Who can repair them?• What level of damage occurs on

average?• What support and parts

inventories are available?• What is the cost of repair?

• Who’s qualified to fly them?• Who’s qualified to train them? • What type of damage can they

cause to property?• What type of bodily injury can they

cause?• What failure mode measures are

built into the systems?• Any known losses?• Privacy & Personal Injury?

THIRD PARTY LEGAL LIABILITY

RISKIdentifying the risks associated with UAS

UNDERWRITINGWhy should UAS insurance be undertaken by insurers?

• Insurers know that in spite of risks and the unknown exposures involved with a new class of business, a substantial number of UAS are already in operation in various parts of the world.

• Many are in, or will be in civilian use for pleasure, business and/or anticipated commercial use.

• Because civil UAS constitute a new market and source of revenue to insurers trying to profit in a soft insurance market and a poor economy.

UNDERWRITINGWhy shouldn’t UAS insurance be undertaken by insurers?

• The market is very limited, in fact too limited to permit the actual application of the fundamental principles of insurance.

• Rating is a pure matter of conjecture at this point and all rates will be reached without substantial actuarial data.

• A single loss at policy limits would eliminate profitability for the foreseeable future.

• Should that occur, capacity in the market would certainly be redirected elsewhere resulting the rising premiums and limited availability.

• UAS Operator / Consumer

• Premiums must be reasonable and affordable.• Coverage must be broad and provide adequate protection.• Coverage must meet minimum standards to draw capital.

• Insurer• Premiums must exceed losses to ensure

profitability.• Coverage cannot be overly broad resulting in

unanticipated or unintended loss. • Risk must be pure and unexpected.

UNDERWRITINGStriking a balance between affordability and profitability

UNDERWRITINGFactors that impact insurance rates.

Money and Insurance Markets

• The availability of capital (capacity),

• Interest rates and available rates of return on investments,

• The availability and price of re-insurance, and

• Competition within the insurance market.

UNDERWRITINGFactors that impact insurance rates.

Factors applicable to the class as a whole.

• The claims experience for the class as a whole,

• The size of the risk exposure (e.g. fleet value and number of vehicles operated),

• Type of UAS operated, their, use, value and complexity.

• Country/region of the world where the risk is domiciled.

UNDERWRITINGFactors that impact insurance rates.

Factors specific to the risk.

• Specific claims experience, • Specific exposure profile, and • ‘Technical factors’ such as crew training, maintenance,

equipment, safety, culture and financial health.

• “Technical factors” for the risk are listed last because they probably have the least impact on the operator’s insurance rate. Aviation and UAS underwriting probably owes more to art than science and the final rate charged depends upon the underwriter’s judgment in respect of a number of ‘soft’ factors.

UNDERWRITINGFactors that impact insurance rates.

The free market effect.

• Whatever rate an underwriter has calculated for a risk there is one other very important matter to consider. Will any other underwriter offer a lower rate, and if so is the business of such a quality that we do not wish to lose it?

• Many underwriters will lower their rate if they believe that, despite what their limited statistics tell them, the risk in question is much better than other similar ones.

• Often their intuition may be correct but in many other instances they can go very wrong.’

• Money and the insurance market.

• Available capital and capacity.

• The free market effect.

• The UAS class as whole.

• Loss ratio between gross premium generated / losses paid.

• The individual operator / Insured

• Loss ratio between gross premium / Losses.

UNDERWRITING – PUTTING IT TOGETHERFactors impacting rates.

The price of insurance for the aerospace industry continues to fall. Despite five years of falling prices, there is little sign that the bottom of the market has been reached.

Recent analysis of both the airline and aerospace markets points to continued excellent claims performance and an abundance of underwriting capacity looking to participate. These two driving factors in the market are combining to deliver reduced premiums for buyers despite increases in their exposures.

Global Aviation Insurance MarketSimple economics.

As the global economy has generally stabilized, a third factor has come into play. The natural catastrophes witnessed in 2013 and 2014 had very little direct impact on the aviation sector generally, but the stability of the aerospace sector has meant that it is particularly attractive from an underwriter point of view.

Even in comparison to the airline sector which is down 2.4%, the class as a whole has proved itself to be a safe haven, ensuring that high level of capacity continues to suppress any attempt to increase insurance prices.

These two driving factors in the market are combining to deliver reduced premiums for buyers despite increases in their exposures.

Global Aviation Insurance MarketLots of capacity.

There were 28 total losses of western built aircraft in airline service in 2014, down from 46 in 2010 and the lowest number recorded.

Passenger numbers increased 7% from 2010, yet overall passenger fatalities continued a steady ten year decline.

The five-year average fatality rate per million passengers decreased to below 0.2.

The improvement in the industry’s safety record is attributed to the use of advanced safety avionics, plus improved pilot training standards.

Global Aviation Insurance MarketRecord levels of safety.

Increased competition, rising cost inflation, emerging risks, and changing customer preferences are all pushing the aerospace insurance industry to look for ways to innovate as a way to grow overall business.

Creativity and innovation in the insurance industry are now seen as necessary and key to long-term success.

Insurance Product Innovation To survive, insurers must innovate.

Most analysts agree that exploiting nearby market opportunities that are adjacent to a strong core business offer one of the surest paths to new growth, whether industries are stable or changing rapidly.

That is the true value of drawing the aerospace insurance market into the UAS landscape.

Aviation Insurers Best Suited to UASAviation policy forms fit best – Coverage Interchangeable

The U.S. Insurance market currently provides Unmanned Aerial Vehicle (UAV) and Unmanned Aircraft Systems (UAS) Insurance and Non-Owned Unmanned Aerial Vehicle and Unmanned Aircraft System Insurance for Manufacturers, Military, Law Enforcement, Film Production and Commercial Aerial Work uses. At least seven major global insurers are in the market with four taking highly innovative approaches to developing coverage and product lines.

Those insurers understand the risks involved in manufacturing and operating Unmanned Aerial Vehicles and have spent considerable time understanding the mechanics and properties of UAV and UAS themselves. As such, they have a detailed insight into the insurance requirements of such aerial units and have developed several insurance products that are immediately available to the consumer.

All policies are provided by A to A++ Rated Aviation and Aerospace Insurance companies on Aviation and Aerospace Insurance Policy Forms. These are NOT adapted commercial general liability policies (CGL) written by property insurers who know nothing about aviation and aerospace risks and exposures.

Most analysts agree that exploiting nearby market opportunities that are adjacent to a strong core business offer one of the surest paths to new growth, whether industries are stable or changing rapidly.

That is the true value of drawing the aerospace insurance market into the UAS landscape.

Aviation Insurers Best Suited to UAS Aviation policy forms fit best – Coverage Interchangeable

UAS / UAV Manufacturer, Owner and Operator Coverage Territory: Worldwide Territory

Loss or damage to the UAV and associated equipment on an agreed value basis.

Third Party Legal Liability Coverage - Limits to $100,000,000 Combined Single Limit and Higher

• Manufacturer Product Liability • Third Party Legal Liability • Premises Liability • Aviation and Premises War Risk Liability• Aviation and Premises Medical Payments • Fire Legal Liability• Independent Contractors Liability• Personal Injury• Advertising Liability• Contractual Liability• Fellow Employee Coverage

Most analysts agree that exploiting nearby market opportunities that are adjacent to a strong core business offer one of the surest paths to new growth, whether industries are stable or changing rapidly.

That is the true value of drawing the aerospace insurance market into the UAS landscape.

Aviation Insurers Best Suited to UAS Aviation policy forms fit best – Coverage Interchangeable

Non-Owned UAS Third Party Legal Liability Coverage - Limits to $100,000,000 and Higher

Territory: Worldwide Territory

Coverage’s:

• Third Party Legal Liability • Premises Liability • Aviation and Premises War Risk Liability• Aviation and Premises Medical Payments • Fire Legal Liability• Independent Contractors Liability• Personal Injury• Advertising Liability• Contractual Liability• Fellow Employee Coverage

THANK YOU! - THE END