New risks, new opportunities: Drones could provide an important new underwriting
opportunity for insurers. On one hand, they bring to market a new, complex set of risks to write
as remote-controlled vehicles are enlisted for Commercial purpose or purchased for personal
use. On the Commercial side, the challenge is there is very little data on which insurers can
accurately price risk. On the Consumer side, most homeowner policies cover the use of radiocontrolled
aircraft; but if the risk characteristics of this category turn out to be very different
from that of more traditional radio-controlled vehicles, we would expect insurers to design a
drone rider to add to an existing policy that would extend coverage to drone usage.
Despite the limited amount of Commercial UAV usage thus far, we have already seen a
number of carriers offer standalone drone insurance, including AIG. As there remains
minimal Commercial drone usage domestically, today’s policies somewhat mirror standard
aviation policies. However, usage is growing rapidly, bringing in a new realm of risks for
carriers to navigate. Whether a drone is being used for agriculture, delivery services,
surveillance, media, or other services, the issues of public and operator safety, privacy
concerns, cyber risk, and property and access rights are likely to be on a long list of risks that
insurance carriers must consider when addressing UAV Commercial policies.
Today industry commentary suggests drone policies are being developed using the
general aviation market as a baseline. However, as the use of drones for Commercial
purposes becomes more widespread, risk underwriting is likely to take on its own form. In
a recent report, Lloyd’s identified five fundamental risks insurers must consider: (1)
invasion of privacy, (2) negligent or reckless pilots, (3) patchy regulations, (4) cyber-attack exposure,
and (5) effective airspace control and collision-avoidance technology. Although
some of these concerns have some overlap with standard aviation policies, the
pervasiveness of drone usage could dwarf that of commercial aircraft piloting and increase
the potential magnitude of these risks for the consumer– and thus for the insurance
provider. New regulatory guidelines are expected to be released and, depending on the
outcome, we could see a number of new carriers begin to write stand-alone drone policies.
Quantifying insurance premium opportunity from Consumer/Commercial/Civil:
Consumer: We assume there will be 28.1mn Consumer drones sold in the next 5 years.
Data is limited, but Zurich estimates premiums to be 5% of the value of the drone on the
Consumer side for plans that largely cover physical damage to the drone itself. This is just
one piece, and the number could go higher due to liability and other risk coverage. This
implies insurance premiums totaling $2.0bn through 2020 globally ($723mn per year by
2020). With the US share of UAV sales estimated at 40-45%, we think annual US Consumer
premiums will amount to $866mn through 2020.
Commercial: We see a total of 98,693 units on the Commercial side in the US and 613,617
worldwide excluding those owned by insurance companies and real estate. Our Insurance
team estimates that a typical premium for drones involved in light Commercial applications is
about $1,500 for a plan that covers only physical damage to the aircraft and minimal liability
coverage. Based on Zurich’s Consumer estimates, we see opportunity for an additional
$84mn in insurance premiums annually when insurance claims and real estate markets reach
full penetration. Together, this implies Commercial drone insurance revenue could reach
$175mn in the US and $1.0bn globally when the end markets fully deploy drones. But these
numbers could have major upside, as Commercial users in particular are likely to purchase
additional insurance to protect against a broader set of risks and outcomes.
Civil: We expect police and fire departments to insure their UAVs and we model insurance
for these groups as we do for Commercial UAVs. We expect insurance premiums to be
$24mn per year for police UAVs at the saturation point and $83mn for fire departments. We
do not model the insurance costs of federal agency UAVs or specialized drones for fire
departments like the K-MAX or ScanEagle.
Across Consumer, Commercial, and Civil, we could see premiums being higher for plans
that include liability coverage for property damage and bodily harm.
Drones to bring about changes in the claims handling process: Insurers themselves
may be among the first Commercial adaptations of drone usage. AIG and State Farm have
received permission from the FAA to test the use of drones in the claims process. Drones
can allow insurers to more quickly evaluate the magnitude of losses once they occur, but
can also provide a more cost-effective way to evaluate the condition of roofs on insured
homes or buildings. In catastrophic events, insurers could be able not only to more quickly
evaluate loss exposure, but also to bring needed resources to bear quickly and with better
knowledge of what is required.
Despite some progress, it remains early in the shift from humans to drones in the claims
process. Current FAA approvals have significant limitations attached around locations
allowed for use, and we expect that the FAA will use the results of these initial test cases to
determine whether or when to widen the scope of permitted use. In addition, consumers
may initially be somewhat reluctant to have drones involved in the evaluation of their
claims. Over time, however, if drone usage reduces the time between when consumers file
a claim and when they receive payment, we would expect that advantage to more than
offset potential privacy concerns.