What Is Insurance Actually?

Transport Risk Management, Inc. are brokers engaged in the practice of UAS, aviation insurance and risk management services. As a leading aviation and aerospace brokerage, we provide our clients with a complete service for all their insurance, reinsurance and risk management needs.

As part of our business philosophy, Transport Risk strongly believes that educating our clients about risk and the management thereof provides them with the most reliable solution for reducing, not only the risk, but also the costs associated with those risks.

UAS/Aviation Insurance

Aviation insurance policies offer some of the broadest coverage of any insurance line. In addition to the standard aircraft hull, UAS and aircraft third party legal liability, cargo legal liability, bodily injury and property damage liability, they may even extend to cover primary or excess limits for motor vehicles, employers and adver­tising legal liability and personal injury among many other extended exposures.

What is Insurance, actually?

Whether private, corporate or commercial, policyholders are most likely to identify insurance first as an expense. Consumers that regularly pay premium and have suffered no significant losses may have trouble understanding or accepting its inherent value. Insurance is however among the most vital and valuable of assets enabling a UAS to fly. Of course, any UAS operator will require financial means, aircraft, experienced staff and equipment, but without insurance, most customers will never allow the UAS to ever take off….at least not one that they hired.

A case in point: in spring 2016, a UAS operator had to ground five large UAS after traveling from the U.S. to Europe; owing to an administrative omission, the necessary insurance certificates were not issued and provided to the customer who hired the operator to conduct operations on their behalf. The lack of a simple piece of paper had suddenly become a major obstacle to normal operations and grounded the entire company at great expense. Fortunately, after calling Transport Risk Management, the coverage was quoted, the policy was issued and the operator was able to provide the documents direction through the Transport Risk Management customer portal.

The textbook definition of insurance is: “An individual can transfer the risk of a possibly large loss to the insurer by payment of a premium and so convert the uncertainty of a possible large loss into the certainty of a smaller but fixed annual ­cost”. More than just that piece of paper, insurance is a promise by the insurers to reimburse the insured’s for financial loss redeemable at some time in the future. Inasmuch, it guarantees a monetary compensation for losses which the insured may incur and it replaces uncertainty by certainty in exchange for the payment of a premium. In the case of UAS, insurance provides a financial guarantee for huge limits translating into hundreds of millions of US dollars at risk.

While insurance is becoming an absolute prerequisite to a UAS operation, its actual total cost — on average at less than 1% of the operator’s overall budget — is relatively small. Of course, the UAS industry – like many other industries – is under financial pressure. Yet the cost of commercial hull and liability insurance per single flight is modest compared to the huge exposure of the risk and the tremendous benefit the consumer derives.

The value of insurance and the capital required

The promise to meet financial obligations — the insurance policy — becomes a finan­cial guarantee and represents a form of capital for the UAS industry. In the individ­ual case, it replaces a substantial amount of capital the operator would other­wise be required to have on its own balance sheet.

To provide a water tight financial guarantee and to fulfill the terms of the policy, insurers require that the respective capital be secured in their balance sheets. The Insur­ance industry has a clear and distinct capital requirement; a sound financial basis to cover the huge exposure, and potential monetary obligations which they assume from the insured.

The manner in which an insurance company manages its operation has substantial bearing and influence on the capital required. Operating as a life insurer or non-life insurer — or specializing in UAS or industrial property business — will affect the amount or capital needed to write business. As a rule, the more diversified the insurance company, the less relative capital is required. Diversification can include the line or business and the geographical spread.

The capital requirement for UAS insurance

What exposures to the UAS industry must be financially covered? UAS insur­ance on a stand-alone basis carries with it some challenges for both underwriters and capital investors. Firs, and contrary to auto insurance, the law of large numbers has limited application in the UAS class of business. Second, the UAS class of business is highly exposed and offers potentially high volatility with a high limit and financial downside. Despite that downside, UAS insurers give a promise to fulfill the financial obligations arising from losses the insured may sustain. In turn, insurers must have adequate capital to meet realistically expected losses, cover worst-case scenarios end ultimately — with a strong security rating — remain solvent.

Today’s insured global UAS fleet is estimated to consist of some 21,500 UAS, representing a hull insured value of some $30,000,000. On average, aviation insurers provide liability policy limits of around $2,000,000 for every single UAS flight including takeoff and landing — of which there are roughly 7,000,000 annually. Insurers cover the combined aircraft hull and liability policy amounts on an each and every occurrence basis and as such, the amount of exposure UAS insurers assume is theoretically unlimited. The sums potentially at risk amount to tens of millions of dollars.

Many of the individual policies fall considerably below the above average figure; numerous others exceed it by fifty or even one hundred percent, the fact is, it is the major manufacturers that maintain the largest fleets of aircraft and purchase the highest available limits — up to, or in some cases even exceeding, $50,000,000. Given the exposures and potential loss scenarios we have considered, a loss exhausting the policy limit cannot be taken lightly since it would exceed total annual premiums of the entire class by a very large margine.
While the total aggregated exposure of several hundred million dollar is purely theoretical, such figures are nonetheless stunning when the small size of the class and relatively small premiums charged are considered. Each aircraft represents an individual risk, and naturally not every one is exposed to the full extent at the same time. The global UAS fleet is spread over five continents, many countries and many different locations. Still, there are scenarios that point to losses for insurers which exceed the gross annual premium by a significant margin. Such claims could emanate from a series of losses, a frequency of larger losses combined with some extraordinary severe individual losses even exhausting policy limits. Such a scenario might mean insured claims approaching multi—million dollar figures. Given the greater frequency of take-off and landings, as well as congested airspace today, this is hardly a far-fetched scenario. What’s more, the UAS industry might also be hit with losses from catastrophe events involving passenger airliners, further exacerbating such a scenario.

When understood in these terms and given the nature of your own individual exposure, how much capital would your own company or UAS flight department require on its own balance sheets to manage these risks?