Insurance for drones: why insuring drone deliveries is the next big thing

With  drone deliveries going mainstream, the insurance companies can no longer put their drone-related policies aside.

You’ve been there too. Getting home after work, waiting 2 hours for food delivery to reach you due to the afternoon traffic. The Jetsons would probably just push a button in their Food-a-Rac-a-Cycle and get their dinner in minutes.

Surprisingly, we’re not so far behind them. With Amazon about to launch drone deliveries, Walmart testing them now in the US, Dominos working on them around the world since 2013, and even Costa Coffee making successful drone deliveries to Dubai beaches, we’re closer to being the Jetsons of today than we think.

Between 2023 and 2030, the drone delivery market is expected to grow 14,5% annually. Changes will be especially visible in the Asia-Pacific region, which is to have 39% market share by 2023, as described in a recent report by BIS Research.

Each of these deliveries will have to be insured. And this means new revenue streams for the drones insurance industry.

FAA’s tough law

The world has always been observing the American market for the upcoming trends. Until now, tight regulations from the Federal Aviation Administration (FAA), have made it difficult to revolutionize the drone use in the US.

FAA is the main regulatory body for aviation whose jurisdiction includes permissions for the operation of drones, also referred to as unmanned aerial vehicles (UAVs). The institution has a list of requirements to be fulfilled in order to receive a permission. The main restrictions refer to flying beyond an operator’s line of sight, flying above humans or above certain locations.

For many years, the FAA was very strict about the commercial use of drones. But 2019 was a breakthrough. That year, UPS got to be the first FAA-certified nationwide drone airline.

2020 is another important year for the industry: the Amazon’s Prime Air project has just received the FAA approval to fly beyond an operator’s line of sight.

Now, that means revolution.

Faster, cheaper, eco-friendlier

In the commercial goods delivery market, the pros for using drones can be expressed in 3 words: faster, cheaper, eco-friendlier.

The experts predict that drones will be used for small good deliveries and for cargo in the future.  Once the deliveries reach sufficient scale and profitability, they have the potential to become a contender for traditional transportation.

These days, Walmart estimates that 70% of their orders in the US are delivered to locations of up to 8 km away. Amazon, in turn, in 2013 calculated that 86% of their packages weigh less than 2.3 kg. Short distance and low mass are a perfect fit for drone deliveries.

But will there be demand for them? According to McKinsey, 60% of consumers worldwide are in favor or neutral toward the deliveries. The researchers estimate that the market size for such deliveries in particular countries, Germany for instance, can amount to 500 million items in 2025.

A wide gap

Alongside drone deliveries, the market for insurance for drones is outstanding. For years, there have been 2 main products related to insurance for drones: liability and hull drones insurance. These come in different packages, varying between insurance companies, and can either fall into the ‘long term’ or ‘on demand’ category.

There seems to be quite a gap on the drones insurance market in this sector. The current insurance for drones focuses on the risk of personal injury and property damage, related to the drone itself or the damage caused by it. With professional goods deliveries, the insurance for drones needs to be wider. For now, this type of  drones insurance is mainly covered by smaller companies, specializing only in insurance for drones. There is still only a couple of offers from well-established large insurance companies. Some initiatives here are taken by Munich Re in the US and Allianz in Europe, the latter cooperating with a start-up called Flock.

Insurers have some difficulty in drones insurance, especially insuring drone deliveries seems tough, mostly for the risk assessment. Each field and industry needs to be analyzed case by case. There still isn’t enough information for automatic underwriting. This makes the drones insurance processing long and costly. With an increasing number of such insurance customers, a necessity to have well thought-out claim procedures becomes another pressing element.

The potential in insurance for drones

If the drone delivery market evolves, it might take over small consumer goods and even go beyond that. UPS, owning and leasing nearly 600 airplanes, is not limiting themselves to only single-parcel drone deliveries. Their plans are ambitious and include cargo transportation carried out by drones. Companies like Dronamics are already creating bigger and more advanced drones. The Black Swan model by Dronamics can transport up to 350 kg for 2,500 km.

The risk is high, and to avoid it, as it’s the case with traditional transportation and incoterms, businesses around the world need the right drone-related policies – similar to those working in traditional logistics. Here’s where drones insurance comes into picture.

All risks considered

Drones, used for any purpose, raise two main safety concerns: loss of control over the vehicle and air collision. Insurers already figured out how to deal with these and how to run underwriting for such scenarios. Offers with insurance for drones are evolving.

With insurance for drones deliveries, more risk factors need to be considered by the insurers. One of these is the operation beyond the line of sight. An important factor here is whether or not a drone uses any technology for recognizing air traffic, which forces certain actions to avoid collisions. Another aspect to deal with is landing in unadjusted places, or the dropping of a package in case of retail deliveries. This includes the risk of damaging the package, the need of the receiver getting authenticated, the accidents caused by touching a drone, or takeoff-related ones.

Insurers around the world are getting ready. Allianz, for instance in the sphere of underwriting drones insurance, recommends to consider particular risks: maximum take-off mass, using high or low altitude, experience of the pilot, operating within or beyond line of sight.

One thing is for sure: drone deliveries are taking off. The question is, are they going to fly, and if so, who’ll be the first insurer to reap the most benefits?

Julia Burda, Junior business consultant, Comarch