As regulators open the skies to commercial drone use, insurance companies are starting to take notice. The demand for insurance policies that cover drone operations is expanding significantly. Commercial entities that fly drones want their new aerial assets to be protected, and they also want to be sure that they will be covered should an incident result in damage to a third party’s property. Insurers are still working to figure out how to design policies for such a new technology, a challenging task, especially given the uncertain regulatory environment. Insurance companies themselves are also eager to get their hands on the technology for their own operations; for example, small camera-equipped drones can be used to conduct damage appraisals of elevated structures such as rooftops. The Federal Aviation Administration predicts that insurance will be one of the top five applications for commercial drone use in the near future.
It is no surprise, then, that Tom Karol has been spending a lot of time thinking about drones. Karol is the general counsel – federal for The National Association of Mutual Insurance Companies (NAMIC), which represents 1,400 U.S. insurance companies that provide over 170 million policies to customers across the country. NAMIC has become a vocal stakeholder in U.S. commercial drone integration, regularly weighing in on the rulemaking process. Karol and his team work to track national, state, and local regulations, assess the potential applications of drones for the insurance sector, push for beneficial laws, and help the industry plan for the future. We spoke with Karol to learn about the challenges and opportunities at the intersection of drones and insurance.
Interview by Arthur Holland Michel
Center for the Study of the Drone When did you first start working on the issue of drones as it relates to insurance?
Tom Karol NAMIC has been looking at this issue since 2012. It’s obviously grown in importance in the last year or two, but it’s been an issue that we’ve kind of kept our eye on, and we’ve seen much greater interest from our membership in the last year.
Drone What is NAMIC’s mission and how does it serve its members?
Karol NAMIC is the National Association of Mutual Insurance Companies—that’s mutual companies—insurance companies that are not stock companies. The policyholders are who we answer to. We are the largest property casualty insurance trade association. We work with 1,400 member companies—40 percent of the total market; we serve more than 170 million policyholders, our members account for 54 percent of homeowners, 43 percent of automobiles, and 32 percent of business insurance market. We have some of the largest insurance companies in the country as our members, and then numerous smaller companies, including as small as one single county.
Drone Can you tell me a little bit about what the landscape looks like for someone who’s currently seeking to insure their drone for a commercial operation? Is it easy to find drone insurance? Is it expensive? Is it relatively cheap? Is there no way of judging what expensive or cheap means since this is such a new field?
Karol The current outlook is that it’s not that easy to find a drone insurance policy. There are some out there, but they are limited in number and the coverage offered. Some players have gotten into this market. It has predominantly been aircraft insurers who have modified their policies to cover unmanned aircraft. Generally, commercial property casualty insurance does not cover aircraft—it’s an exclusion, particularly to homeowners policy—so this is kind of a unique business that most of our members are not familiar with. Basically, a few of our members have been able to actually enter into this business at this point; my understanding is that probably nationwide there might be a dozen companies that do provide policy, but those policies are limited in terms of its scope. I have not looked at the individual policies, but my understanding is that they tend to be rather expensive. I’m sure the companies that operate this would debate that, but from what my limited experience has been, it’s not easy or cheap to get coverage for drones, particularly on the commercial side.
Drone What sort of eventualities do these policies cover?
Karol I can’t speak to the individual policies themselves because I haven’t really done a detailed analysis of all of them. You could cover the “hull” that is, the drone itself—for instance, if the drone crashes, you could obviously cover that. The bigger question, and much more complex question, comes into the liability issues. If this drone crashes into something, what permissible operations on your part would be covered, and then what is negligence, or criminal, or otherwise not-permitted conduct or behavior that would not be covered under the policy? And then the extent of the coverage varies widely in that it could cover your own property, it could cover third-party property, it could cover third-party injuries or properties up to a limit. So there are hundreds of different variations that could be in these policies.
“What is trespass? What’s a privacy violation with respect to drones? What is negligence and nuisance with drones? These concepts are very unclear, so it is difficult to assess what is permissible—what is allowed and what’s not allowed.”
Drone When you talk about that challenge of assessing what counts as an appropriate use of a drone, are you referring to the fact that there isn’t clarity at the moment in terms of what the regulations look like and where those regulations are enforced? Is that causing part of the confusion?
Karol The information we’ve gotten from our members is that the biggest impediment right now is the lack of clarity in terms of what’s permitted and what’s not. There are rules at the federal level and then there’s the state level, and then there’s the local level. And as you know, the small UAS rules still have to come out this summer. We’ve been tracking more than 300 state and local drone-related, insurance-related permissions just in 2016 alone. And then there are issues in terms of, What is trespass? What’s a privacy violation with respect to drones? What is negligence and nuisance with drones? These concepts are very unclear, so it is difficult to assess what is permissible—what is allowed and what’s not allowed.
To add to that, the underlying goal of insurance is to gauge the risk involved—and to figure out how to charge premiums and apply those risks—and right now, there is absolutely no data on frequency or severity of damage that small unmanned aircraft can cause. There’s no authoritative information in terms of how many of these things have crashed, and, when they do crash, how much damage they can cause. Add onto that the fact that the Association for Unmanned Vehicle Systems International has a database of 2,400 different types of drones, and these are changing by the day. Everyday it seems like someone comes out with a new type of drone. So, you have to look at this particular aircraft, and its ability, and its controls, and its communications, vis-a-vis the operator, local law and regulation, and then some sort of basis of what’s the likelihood that bad things are going to happen. And none of that information is there.
So insuring drones at this point is very, very difficult. It’s very, very difficult to get hard data and analysis on drone incidents, the severity of the incidents, and the frequency of incidents. That also is complicated by the fact that insurance commissioners, who look at the policies and make an assessment as to whether or not premium coverage is appropriately priced and fair, would find it hard to justify those assessments in terms of not having any data or support for the information where you’re providing this kind of policy.
Drone Is that uncertainty, complexity, and lack of data turning insurers off from the idea of actually becoming involved in offering policies?
Karol I don’t think anybody has said that they don’t want to offer them. Particularly with mutual insurance, you’re basically not dealing with investors’ money here—with a mutual insurance company all of the policyholders put their collective investments together, so you’re risking other policyholders by making a type of policy that’s not based on data. We need to be very conservative in terms of when we make these types of coverage and how we’re risking the existing assets of the company. It’s an area that insurers know they have to assess at some point, but there’s not enough facts or data right now to make assessments that are sufficient.
Drone Has there been any discussion around the implications for insurance if a drone were, say, to be involved in a mid-air collision?
Karol If you’re flying near commercial traffic, near an airport, or in commercial air traffic lanes, you’re in violation of the existing requirements for permissible drone use, either at a hobby level or a commercial level. Insurance policies, like all contracts, do not cover illegal actions, and a mid-air collision with a manned aircraft would require the drone to be in violation of existing FAA regulations.
Drone This would be a good opportunity to look at the other side of the equation: insurance companies that are looking to actually use drones. Why are insurance companies interested in using drones? What are they looking to use them for?
Karol I think that NAMIC is in a unique position in that our members are both looking to be users and providers. There are a few areas where insurance companies have been looking to use drones. One is the run-of-the mill home inspection, if you will, or business inspection, where we could go up on the roof and take a look at things, whether it’s just to assess the property before insurance, or whether it’s claims management. The easiest example of that is if your individual home has a tree branch that smashed through the roof. Right now, it would require one of our appraisers to go up on the roof and take assessment and figure out what the damage is. That is the classic case for a drone, in that it’s fairly dangerous in some cases for someone to be in an elevated position like that. We had one member who reported they had five people fall off roofs in the month of December alone. To be able to use it to go up there and take images and do that assessment safely and cheaply is one of the areas that really is of great interest to our members.
The other area is probably related to disasters or catastrophes. And clearly, the use of drones to collect information and data during a Katrina or a Sandy is clear, but the more in the business case applies to the what I’m calling the “small d disaster,” where you have a dozen houses in rural Texas, that are damaged by a hailstorm, or a small town in Montana, has an entire neighborhood hit by a flash flood. What our memberships have seen is the possibility to be able to use drones to quickly get into the area, that may not be accessible by people at that point and quickly assess the damage done to policyholders. Our idea is to work with the local incidents commander to get the assessment, to get the repairs there as quickly as possible, to mitigate the damage and get out policyholders back on their feet as quick as possible.
“Right now, there are about a dozen insurance companies that have FAA 333 exemptions in hand, probably another 10 who have applied so far.”
Drone How widespread is the use of drones by insurance companies at the moment? And do you have a sense of how widespread it is likely to be in the future?
Karol Well, I actually can answer that fairly authoritatively!
Karol Right now, there are about a dozen insurance companies that have FAA 333 exemptions in hand, probably another 10 who have applied so far. Of the 5,000 or so 333 exemptions that have been granted, there are about 300 plus that have referenced insurance. So there are a great number of third parties that are looking to offer drones for insurance purposes to insurance companies, and about a dozen who are actively using them right now.
Now, where do we think that’s gonna go? The FAA recently has forecast that by the year 2020 that insurance will be one of the top five uses of commercial drones.
Drone And do you think that’s a pretty fair analysis, or is it optimistic, or is it on the conservative end?
Karol I don’t know how the FAA did their forecast, but I think there’s clearly an insurance interest in this, and as it develops it’s something that’s certainly possible. I can’t guarantee it. But the way the FAA listed the top uses, they put industrial inspection first, which I think could probably include some insurance, followed real estate, followed by agriculture, followed by insurance.
Drone Are there significant savings involved in putting a small UAS over a damaged property as compared to the alternatives?
Karol The insurance companies haven’t shared their individual business cases, but there’s sufficient interest to have caused substantial investment. These are not the riverboat gamblers. These are very conservative business people. The business models vary company to company, but they clearly see efficiencies and cost savings involved in using drones.
“The number-one thing we’re looking for is clarity in terms of the regulations and laws.”
Drone What are NAMIC’s goals in terms of policy, at both the federal and local level? What are some of the broader goals for drones in the insurance industry, and how is NAMIC looking to help that along?
Karol We’ve been acknowledged as the leaders at the intersection between drones and regulation and law, both on the federal and state level. We’ve gone before Congress, we’ve met with FAA, part of the Commerce Department’s privacy group, and at the state level we’re involved with all that. We clearly see that regulation and law are going to be important to the development of this sector, and we want to facilitate, above all a safe business both for ourselves and for our policyholders. The number-one thing we’re looking for is clarity in terms of the regulations and laws—we want something that’s understandable so that this business can develop. The FAA has done a great job so far, but there are a lot of new fields to be plowed. Some of the areas in terms of differentiating hobby versus commercial are very unclear, and the more clarity we can have on that, the better we can do. We’re looking for regulations that are not overly conservative, that would allow our members to basically do business without undue risks to others (I’m referring to some of the requirements around flights over people, requirements to stay a certain distance away from structures, and things like that). We can respect the conservatism of regulators, but at the same time, some rules may not be necessary, and may actually impede practical use. Privacy is a big thing that we’re interested in, from both the retention of data ourselves, as well as the liability of our policyholders. And again, one of the key interests is the allowances for the use of drones to help our policyholders during the disasters. We’re very concerned that we not be unduly restricted or prohibited from getting in there and helping out policyholders in whichever way that we can.
Drone What are your predictions for the future of drones and insurance? Do you think there’s going to be a significant growth in the number of policies that are available to drone users? And do you see significant growth in the actual use of drones by insurers?
Karol Well, I think a lot’s going to depend on the FAA’s rule this summer and the FAA reauthorization. That could easily change the picture rather quickly. But I think that on the commercial side, a reasonable business would need to have liability coverage for its use of a drone. That’s just a given. If you’re out there without any liability or insurance coverage, it’s probably not a prudent business use, so the development of commercial drone use is going to require the participation of insurers. I was told by a senior FAA official that insurance may be the future of regulation of the drones. When insurers decide that they will insure this type of drone and this type of drone use, that’s going to cull the herd a bit. The less safe drones and less safe uses will not be covered, so the responsible use will weed out that group, and we’re going to be the forefront in terms of what happens going forward.
If you can’t insure your drone and you can’t insure your drone use, you may look to other uses and other drones. I think based upon that knowledge and understanding, we actually have kind of a leg up, in terms of our ability to use drones for the insurance industry. That helps us protect our policyholders, which, on the regulatory site, has been seen very favorably. When we go in and advocate for a law or a regulation, we’re not just trying to make a buck. We’re trying to make sure that our policyholders are protected, that we can mitigate the damage and get our policyholders back on their feet as soon as possible.
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This was a very informative interview, Arthur. Thanks to Mr. Karol for sharing your insights.