“You young guys and your e-tickets; just wait until you show up and the airline doesn’t have a record of it.” – Mumbled by a former boss as he rifled through his briefcase looking for his lost paper ticket at the check-in counter.
Recently another business associate made a similar statement about Drone Insurance while pointing at the black-box I held in my hand. There is one major difference however. The infinite granular operational data collected by my black-box is stored, via the cloud, on a server ready to be retrieved, viewed, crunched, munched, analyzed and verified any time I, or a court judge, care to look at it….and I don’t have to rifle through my obsolete file cabinets and piles of unused checkbooks to produce it. In fact, I can even watch it all unfold live and in Technicolor.
Usage Based Insurance (UBI) is an alternative way to distribute and price insurance. With UBI, how, or how much you fly determines your premium. The lower your exposure, the less you pay.
Before we talk about UBI, let’s discuss traditional aviation insurance pricing.
Traditional aviation insurance pricing uses several rating factors such as:
Limits of coverage carried
Type of coverage carried
Aircraft Loss Experience
Qualifications of the pilots
Operational experience of the insured
Operator loss history
Time exposed to risk of loss (hours of flight time)
While those factors may correlate with risk and help predict future losses, they don’t accurately represent the actual exposure arising from real operations or account for fair spread of premiums across the class. Because an operator represents in an insurance application that they will fly 50 hours per year, does not mean that they won’t actually operate 500 hours per year while paying the same premium that another operator pays for 5 hours of exposure. The only way to truly determine levels of exposure is to monitor the exposures in real time and in turn charge premiums based upon the insurance an operator actually uses.; thus the name Usage Based Insurance or UBI.
UBI is based upon the monitoring of and operator’s exposure by their insurer. That monitoring is conducted through several different methods.
On-Vehicle (sensors): The most distinctive feature of on-vehicle UBI is its agnostic portability between aircraft, pilots and customers. UAS on-vehicle UBI sensor packages are small, light and provided to operators free of charge by their insurer. The sensors are completely agnostic relative to aircraft type, easily transferred from one aircraft to another, do not require professional installation and they do not draw power from the aircraft.
The on-aircraft sensor model allows any insured to continue working with their own insurance agent if they choose to and their long-term agent can remain the primary contact and advisor. This aspect is very important to large and small companies alike. Maintaining continuity in coverage is critical in avoiding coverage gaps elsewhere in the operators business and allows the client to maintain long-term business relationships with trusted, vetted and approved professionals.
Other operator insurance needs such as ground vehicles, auto liability, professional E&O liability, building and property coverage, travel medical, repatriation and health insurance can be included and covered through the same insurance company, agent or broker that provides the on-aircraft sensor insurance program.
All on-vehicle operations can be viewed on a smartphone or computer in real-time by both the operator, the customer and their insurer. Real-time monitoring also allows insurers to provide feedback to operators and in turn reducing losses and improving safety. For example, if an aircraft exhibits excessive heat, vibration or is approaching a distance from the pilot that would indicate a potential fly-away, a notice could be sent to the pilot’s phone or ground station advising them of the situation. That real-time data can also be used to benefit the operator as a fleet management system, pilot time logging and training system, customer verification and billing system and as a maintenance management system.
Because the sensor is attached to the aircraft or placed inside a transport case, the aircraft is easily found after a fly-away or theft. Hard landings can be monitored and damage claims can be handled immediately because the sensor can notify claims adjusters that an accident has occurred the moment it occurs and can even automatically comply with NTSB accident reporting requirements.
Another distinctive feature of the on-vehicle model is that the sensor actually becomes the insured asset rather than the aircraft thus removing the need to maintain long-term coverage on each aircraft in a fleet eliminating the associated premium. Each aircraft can be insured for ground-only exposures such as theft, in-transit losses, weather and fire while saving significant premium. When needed, the aircraft can immediately be put into service without prior notification to insurers with full coverage and flexible limits as required by the operator, their customers, finance companies and leasing companies.
The on-vehicle model also allows for full coverage including hull physical damage and flexible liability limits. Insuring through this model can reduce premiums to a fraction of traditional insurance models that require annual full-flight coverage on all scheduled aircraft. In fact, the coverage could even be carried by a pilot without an associated aircraft and follow the pilot to any employer, any aircraft and any customer worldwide. Customers can also benefit by reducing their costs for non-owned UAS coverage. In that case, the customer can easily apply their own sensor that charges for their actual exposure arising from the use of non-owned UAS. As an additional option, the customer can also request that a flight mission log be transmitted directly to their insurer upon completion of the mission.
Because the sensor is insured, a long-term policy can be issued thus allowing for changes in limits as required by the operator or their customers when needed. It also allows the operator to issue certificates of insurance and verifications of coverage to their customers, regulators, lien holders and other interested parties on a long-term basis without the need to reissue for each flight or under a new policy number every time they fly.
The on-vehicle sensor also allows for the rotation of assets. Operators are able to evenly distribute vehicle use across the entire fleet and include spare aircraft in the rotation rather than using the same aircraft only because that is the aircraft that is insured. Even rotation and fleet utilization is good for business and it improves safety by allowing an operator to easily change aircraft rather than pushing a single aircraft to its operational limits, and beyond, or forcing them to use an aircraft that is not as well suited for an operation only because they cannot transfer insurance to the better suited aircraft when it’s needed. The on-vehicle sensor also ensures that the operator is only charged when the aircraft is actually in flight eliminating any time limit or rush to complete the mission before insurance runs out.
Portability of the insured sensor also allows the operator to easily cross geographical borders and take their insurance with them regardless of where the aircraft is based, country of registration or domicile of the owner.
The on-vehicle model allows for simultaneous aircraft in flight and cost declines by number of hours flown. There is no time limit and unlimited flights may be made within a policy period.
The on-vehicle model truly allows for full flexibility and fleet-wide coverage when, where and how the operator or pilot needs it. Premium is only charged when the aircraft is actually flying and is actually at risk. The premium is applied after the insurance is used and is only charged for actual exposure. Exposure based, not time based.
In-Vehicle (sensors): The manufacturer installs their own sensor into each aircraft they manufacture and monitoring is done through their proprietary system. The sensor is not agnostic and is not portable between aircraft and pilots. The data provided to operators is limited to that which the manufacturer allows. The in-vehicle sensor can sometimes be purchased separately but must be professionally installed in most cases and cannot be transferred to multiple aircraft or pilots. The operator must also pay for the hardware and monitoring separate from the insurance and will not be able to control the level of monitoring or distribution of the data that is collected.
The insurance provided under the in-vehicle model is not portable geographically or between aircraft or pilots. The aircraft must be scheduled to the policy and each aircraft must be insured separately thus removing the ability to easily transfer coverage from one aircraft to another based upon use.
The on-vehicle model allows for simultaneous aircraft in flight and cost declines by number of hours flown. There is no time limit and unlimited flights may be made within a policy period.
Smartphone App: Under the smartphone app model, the operator installs an app on their phone and the smartphone is not attached to the vehicle. No operational data is collected from the aircraft because the sensor is not on, or in the vehicle. Exposure, insurability and cost are controlled by the insurance company and only determined at the time of operation based upon several factors such as airspace, geographic location and weather.
Existing insurance company, agent or broker relationships cannot be maintained under the smartphone app model which can result in a loss of companywide continuity in coverage’s placed for other exposures the operator may have. Likewise, the smartphone model requires the drone operator to use a new agent that does not know them or their business and who has not vetted or approved as a vendor.
Smartphone apps are limited to a single line of insurance. They cannot integrate the multitude of other coverage’s required by all operators including ground vehicle, auto liability, professional E&O, business building, contents and property, travel medical, repatriation and health insurance.
The smartphone app model does not allow for real-time monitoring because the sensor is not on, or in the vehicle. The smartphone app charges premium only for time and not actual exposure to risk and is fully earned whether the insurance is used or not.
The smartphone app model does not allow for full coverage including hull physical damage, weather, fire or in-transit losses in turn removing the possibility for use on leased or financed aircraft. Because the policies are short term and placed at the time of operation also expiring at the end of a specific operation, certificates of insurance cannot be provided on a long-term basis and eliminates any option for a notice of cancellation in favor of a certificate holder. When the coverage expires, it must be renewed or replaced in order to continue insured operations and requires that certificates and verification to third parties be reissued. Renewal or replacement of coverage after the hourly expiration is not guaranteed and neither are cost or coverage limits.
The smartphone model does not permit or cover simultaneous aircraft in flight and cost increased by number of hours flown. There is a one hour time limit and all flights must be made within a policy period for coverage to apply.
Other issues arise when geographic locations are deemed uninsurable, there is a loss of signal, GPS drift shows an incorrect location, the coverage expires prior to the end of the flight operation or the phone battery dies. Claims handling and litigation are another area of concern since, in reality, it’s not the aircraft that is insured but rather the operation. Fly-aways, time of coverage, weather and airspace are just a few of the variables that are outside of the operator’s control and exclusions that could be applied without notice….post loss.
One smartphone app developer cites that a benefit of the smartphone app is that it mitigates catastrophic risks to the Insurer without the need for cumbersome integration or connection to the drone. In reality, the cumbersome connection to the drone is precisely what provides benefit to the most professional operator, assures protection to the operator and provides predictability of cost and coverage to the operator.
Using smartphones to determine UAS operational exposure, insurability has some issues that must considered including the inability to predict the availability of coverage, cost of coverage or breadth of coverage. Additionally, the safety benefits derived from pilot training programs, airworthiness programs, maintenance programs and operational procedures are not factored into the premium rating thus removing any financial incentive for UAS operators to develop and follow best safety practices. If every operator is viewed the same by the insurance company, what’s the point in trying to save the insurance company money by mitigating risk?
The smartphone app applies premium based upon time and not actual exposure. The smartphone app is only able to charge for premium in advance of the flight and expires at a specific time whether the flight actually took place or not and whether the insurance was actually used or not used. Once expired, the smartphone app coverage must be renewed or replaced prior to flying again. If any risk factors change prior to renewal or replacement, coverage may no longer be available, the required limit of coverage may no longer be available or cost may be substantially higher. There is no long term premium agreement or protection provided to the operator as a long-term policy provides.
In our tests of one smartphone app, the premium charge changed from the front yard to the back yard of the house we were filming. Apparently the back yard was a higher exposure due to a school location. The premium cost went from $10.00 per hour to $15.00 per hour just by waking 45 feet.
Another concern of time-based insurance is its negative impact upon safety. Forcing an operator into a limited timeframe to complete the flight is never a good idea. Likewise, placing no value upon maintenance tracking and management, pilot training and operator experience is, well, unusual since loss ratios can be directly related to all of those factors.
Determining exposure through the use of telematics for UBI is based on three primary models.
Pay As You Fly (PAYF): Mostly time-based. The more hours you fly, the more you pay. Premiums are pre-paid on a semi-annual or annual basis.
Pay How You Fly (PHYF): Like PAYF. Includes other factors like speed, weather conditions, maneuvering, altitude, stability and more.
Pay As You Go (PAYGO): Either PAYF or PHYF. Operators pay only for the trips they take, before, or after they take them.
Most programs provide premium discounts for flying less and for professionally operated aircraft. Some insurers will offer a small discount upfront so that operators will try UBI. Others may offer a discount only after a certain evaluation period. Some may offer both.
All models include an initial underwriting application process, risk assessment and policy outlining the terms of coverage including where, how and the costs associated with all insured operations. The most professional operators with training programs, safety programs, maintenance programs and loss prevention programs, will qualify for the broadest coverage at the lowest premium. The exception to that process is the smartphone app which does not factor operator professionalism or culture into the rating system and applies only to clock-time and not actual flight-time.
Several UBI models for UAS operators have been announced recently including several smartphone based apps. Going by the information we’ve been provided, the smartphone apps appear to be the most limited in terms of predictability and practicality.
The first group of smartphone uncovered losses include:
Airports, TFRs and other operations requiring permission
Beyond Visual Line Of Sight (BVLOS) Operations
Operations beyond ¼ mile radius of takeoff point
Operations after 1st hour after initial takeoff time. Renewal or replacement may or may not be available for additional premium
Privacy limited to no prior knowledge and no criminal act
Simultaneous operations of more than one aircraft
Races or contests
No other UAS Insurance policy or UBI model contains any of the exclusions outlined above.
When a quote is requested, the smartphone app will assess different risk levels to determine insurability and cost. Some of those risk levels include:
High risk level – Declination of coverage.
Some risk level – Rates exposures such as schools, stadiums and prisons in the areas of intended operations.
Low risk level – Unrestricted area of operations such as agriculture on a clear day away from urban areas and airports.
Permissive self certification – An operator may enter permissive authority or other circumstance that they claim allows them to operate in the area. Coverage would be denied if that authority was absent at the time of loss.
Only when the operator arrives at their location and applies for coverage, will they know which risk level their area of operation will fall within, if the location is insurable, what limits are available and how much it will cost. Those parameters outlined above, could and would change from hour-to-hour and day-to-day depending upon changes in weather, losses experienced at the location by other operators, regulatory changes and a multitude of other factors that lie completely outside the control of the operator. If coverage is placed, the premium will be charged to the operator’s credit card in advance of the flight and the clock starts ticking.
No long term contract, commitment by either party or ability to work through coverage questions would be available to the operator thus resulting in the terms changing minute-to-minute for every operation. When the operation is complete, coverage expires and must be renewed each time coverage expires the operator applies for coverage.
Policy cancellation and renewal or replacement are other considerations that must be made. Once coverage is placed through the smartphone app, the operator has paid and the clock is ticking. If the aircraft is unable to fly or the flight is cancelled the coverage and premium are fully earned and non-refundable. Most state insurance regulations contain rules governing policy cancellation. Those rules are designed to protect an insured from being cancelled without notice or non-renewed without notice. Those regulations provide a commitment and level of predictability so that an insured is able to continue operating with insurance through the term of the long-term policy. Because smartphone app insurance policies expire hourly, an operator has no idea whether coverage will be renewed are available in the next 60 minutes. It remains to be seen if state regulations will allow that type of cancellation and non-renewal policy.
Exposure is one thing, practicality is another thing entirely. If an operator requires insurance to operate their business, they must be reasonably certain that they will be covered for all types of operations they conduct anywhere in the world. In other words, insurance should not limit an operator’s ability to conduct business anywhere; at any time they need to. If there is no contract (insurance policy) and the terms are only disclosed at the job site each time they intend to operate, it would be impossible for the operator to predict with any certainty if they will have insurance, how much insurance they will qualify for or how much it will cost.
Any insurance program must also allow the insured operator to work through trusted long-term business relationships including their own insurance company, agent or broker. Those professionals understand the needs of their client, know how to avoid coverage gaps in the client’s existing program and are already approved vendors within their client’s system. Forcing a change in those relationships can result in loss of continuity and increase the potential of an uncovered loss to the client and should be avoided whenever possible.
Most drone operators also have business activities unrelated to their new aviation exposures.
UBI insurance should provide a better option to insured operators. It should not limit their ability to operate where, when and how they need to operate. It should provide better coverage, more flexibility and lower cost to the operator.
Attached is a side-by-side comparison of the different types of policies and coverage.