Last Updated 1/11/2023
Issue: The increasing commercial use of drones and their seemingly unlimited development potential and application in many fields has compelled many industry leaders as well as various federal and state regulatory agencies to contemplate how and when they are used. Insurance companies explore commercialization and coverage issues and opportunities while state insurance regulators work to address all relevant regulatory challenges and concerns related to drone operation.
Overview: The International Civil Aviation Organization (ICAO) defines drones as remotely piloted aircraft systems (RPAS), the recommended term internationally as ICAO moves toward developing standards for its member states while terms like UAVs (Unmanned Air Vehicle), UAS (Unmanned Air Systems) are also commonly used to refer to drones.
The various personal and commercial applications of drones include underwriting, claims adjustment, disaster management, crop management, filmmaking and journalism. Some package delivery businesses are currently testing delivery drones. With the commercial use of drones expected to expand rapidly in about five years, it is paramount to have established rules regulating their use. The Teal Group, an aerospace and defense consulting company, estimates annual spending on aerial drones, including civilian and military applications, to reach $11.6 billion in 2023 from about $5 billion in annual spending now with barely any significant spending on commercial use.
New rules for commercial drone usage were put into effect on August 29, 2016. Commercial drones must weigh less than 55 pounds, fly up to a maximum of 400 feet in altitude, at a speed of no more than 100 miles per hour, and can only be operated during daytime and up to 30 minutes before sunrise and after sunset, according the Federal Aviation Administration (FAA) rules (in 2018 the FAA waived the initial night-flying restriction). Drone operators must also qualify for flying certificates and be at least 16 years old. When a draft of the new rules was proposed in 2015, the National Association of Mutual Insurance Companies (NAMIC) welcomed the proposed rules as a “well-reasoned and productive first step toward commercial UAS use and would reduce the potential for undue hazard to other aircraft, people, or property.” With these new rules at hand, according to an article in the Wall Street Journal, FAA leaders are now having talks about “cutting through bureaucracy, issuing exemptions and embracing new procedures to quickly authorize a wide range of drone applications, including emergency medical deliveries and everyday package shipments to consumers.” The only thing holding the FAA back is the fear of making a mistake because they believe “allowing new risk could endanger their careers even when that risk is so minimal.”
In March 2021, the FAA finalized, “Operation of Small Unmanned Aircraft Systems Over People” (OOP), a ruling which, under certain conditions, permits civilians to operate drones at night and over people in the National Airspace System (NAS) without a waiver. This new guideline opens up opportunities for commercial drone operation. With drone companies now meeting the OOP conditions, drone usage for insurance cases will soon become more commonplace.
The use of drones could be very beneficial for the insurance industry, particularly following a natural disaster. Drones could be employed to reach remote and inaccessible areas by claims adjusters. At the same time, the availability of insurance coverage is absolutely necessary for the continued development and growth of the commercial drone market, as the need for coverage is expected to be as high as the risk for potential losses. While a number of insurance companies have already begun providing coverage for general liability to drone users by endorsing onto an existing property and casualty policy, insurers would need to resolve drone-related liability and coverage issues not contemplated when policy language was originally drafted.
The work of underwriters will ultimately define the extent and limitations of coverage based on risk assessment in order to adequately price drone insurance. Generally, the following general types of coverage will be needed for the use of drones and ancillary business activities: liability, property, personal injury, invasion of privacy, and cyber risk. At this early phase of the market, only bespoke policies are written by a few specialist carriers whose numbers should increase as more insurers enter the market once the FAA rules are finalized.
Aircraft underwriters’ coverage approach would be generally governed by aviation and other regulatory agencies and the commercial usage of the drones. Since commercial drone use is a new space for insurers, all aspects of drone operation and related and potential risks need to be fully explored.
Status: The Catastrophe Response (C) Working Group collaborated with NAMIC to open a dialogue with state insurance regulators working with their local emergency first responder community. Discussion centered around permitting claim adjusters who are authorized drone users to be on the scene post-disaster.
The Catastrophe Response Working Group disbanded in 2017 and merged its charges with those of the Catastrophe Insurance (C) Working Group.
The Property and Casualty Insurance (C) Committee is charged with monitoring and responding to problems associated with products, delivery and cost in the property and casualty insurance market, which includes insurance questions regarding the personal and commercial usage of drones. The NAIC is actively monitoring this emerging issue.
Committees Active on This Topic
Why Using Drones Is Taking Off With Insurers (Gen Re, March 2019)
InFocus: Insurance industry drone use is flying higher and farther (Deloitte, 2018)
Drones and insurance (Insurance Information Institute)
NAIC Urges Drone Compliance in Wake of Hurricane Harvey
August 31, 2017, NAIC News Release
Drones Take Flight as Insurers Step In
August 2015, CIPR Newsletter
Drones and Insurance (CIPR event, 2018)
Media queries should be directed to the NAIC Communications Division at 816-783-8909 or firstname.lastname@example.org.
NAIC Center for Insurance Policy and Research (CIPR)