Our client insurance applications indicate that about 90% of UAS operators consider themselves to be above average in terms of skill, safety, knowledge and experience. The fact that 10% do not, is surprising in itself but actual losses verify that the 90% is also inaccurate. Those variables have taught insurance companies not to take applicant representations on face value and have conditioned underwriters to overcharge for premiums in response to those variables. In turn, that conditioning has lead to a subjective and perhaps unfair rating system for those who do represent their exposure accurately versus those that represent on the low end of the exposure scale.
Aviation insurance underwriters have traditionally used very limited factual data to determine the insurability and rating of a risk. Essentially, they base their decision on broker knowledge and presentation of the risk combined with a healthy dose of “gut feel” and comparisons to where the competition is quoting in the market. Now telematics is giving insurers their opportunity to see just how skilled, knowledgeable and safe an operator really is. By monitoring their real-time operations, underwriters can begin to distinguish between operators who are safe in practice and those who are safe only in their representations on paper. Because telematic technology can give a detailed picture of the true exposure an operator presents to an insurer, it is likely that “telematics insurance” will become the unmanned aviation industry norm.
Most telematic insurance systems rely on a device attached to the aircraft that transmits real-time data back to the insurance company. Other models rely on smartphone apps downloaded by customers. In the U.S., the focus of insurance is typically on how much time an aircraft spends in the air or “pay-as-you-fly”. In Europe, the focus is typically on operator skill (pay-how-you-fly) by tracking how often extreme maneuvers are made that might indicate avoidance measures, altitude and flight locations relative to other hazards such as airports and buildings. Some devices can even detect and report aircraft speed, landing impact forces, time-to-climb and crash occurrences. All of those variables may indicate exposure levels that can be compared to causes of loss and loss ratios arising from different flight profiles and operator characteristics.
The benefit to low exposure insureds can be premium discounts ranging from 10% to 40% below standard rates. The operators most likely to benefit from telematics are those that the standard insurance market is overpricing because they overestimated their actual time in flight, actual anticipated uses and geographical exposures in their original insurance application.
The penalty to low exposure operators results from risk sharing or risk distribution. Risk sharing means that the premiums and losses of each member of a group are allocated within the group resulting in low exposure operators to pay more because they are part of the same group as loss-prone high exposure operators. With telematics, however, low exposure operators can demonstrate that they really are safer, and receive a discount based upon their actual exposure to the insurance company. So can some “higher exposure” operators who operate safer and with fewer losses than comparable operators in the same class.
The rewards for insurance companies could be even greater. They get to choose their customers based on data, not gut-feel or a broker’s presentation. Through telematics, underwriters have a way of actually identifying better risks and that is a huge advantage. More important, it avoids insuring the expensive loss-prone operators of the future in an emerging industry. By charging high risk operators more, it nudges them to buy insurance elsewhere, a practice known as “adverse selection”.
A side benefit is that insurers can more easily identify scams. Telematics eliminates the possibility of a post-loss policy placement or unverifiable losses such as fly-aways or water crashes. Telematics also makes recovery of flyaway aircraft and stolen aircraft much more likely since the location of the aircraft can be accurately pinpointed.
Telematics can also help improve standards by making operators more aware of when they are operating dangerously. Telematics devices can be made to beep when an aircraft leaves a geo-fenced area or makes an evasive maneuver for example. They can alert emergency services after a crash, too.
Transport Risk Management’s unmanned insurance unit, Unmanned Risk Mangement, is pioneering the use of drone insurance telematics. Through the use of telematics, we will be able to offer true pay-per-use coverage to our customers. Not only that, but we can provide other products such as flight and mission management, flight planning, maintenance management and pilot flight logging. Customers will also have access to technology that will allow their customers to view, in real-time, operations being conducted on their behalf.
The biggest concern for most operators and regulators are the privacy implications of tracking operators. Despite such concerns, the market is growing quickly. Customers like personalized discounts. And insurers crave any source of data that helps them sift those operators who are above average from those who merely believe they are.