< Previous8 | INSIGHTS | Fall 2022 Authors’ Note The views expressed in this article are those of the authors, but not necessarily of General Reinsurance Corporation or Erie Insurance. They’re being used to deliver medicine and vital organs, to inspect power lines, and to keep an eye on criminal activity. Made possible by leaps in technology and fueled by the pandemic-driven desire for contactless delivery in a tight labor environment, drones will increasingly occupy the skies in upcoming years. As drone applications grow, so too will their impact on the insurance industry —as evidenced by the number of recently introduced drone coverage endorsements and restrictions. To that end, the Insurance Services Office, Inc. (ISO) has crafted a variety of commercial general liability endorsements that address unmanned aircraft separately from other exposures. 1 Regarding first-party coverages, ISO has also crafted commercial property and inland marine endorsements for covering drones on an open perils, blanket, or scheduled basis. 2 Growing Number of Applications and Availability As 2022 dawned, the Federal Aviation Administration (FAA) reported that 860,742 drones were registered in the United States, with 329,433 registered commercially and 527,755 registered for recreational use. Abstract Seemingly overnight, drones have moved from cultural curiosity to mainstream convention. This article examines their rapid growth, considers how they are shaping the future of commerce, and provides insight around the coverage implications and practical challenges that they pose for insurance professionals. •Small-package delivery for a variety of products, including medicine, groceries, consumer products, and vital organs intended for surgical transplant Drone-based delivery promises to become the most widely recognized application. Management consulting firm McKinsey estimates that more than 2,000 drone deliveries occur each day worldwide. 5 Further evidence of anticipated growth is this sampling of pilot programs begun within the last two years: •A UPS and CVS partnership delivers medications to a sprawling Florida retirement community with 135,000 residents. •Walgreens makes flying deliveries in partnership with Google’s drone- manufacturing affiliate Wing to citizens of Frisco, Texas. •Kroger operates a drone delivery program for food packages weighing no more than five pounds in a number of Ohio cities, with expansion to other states underway. •Walmart established a drone delivery division for online customers in Northwest Arkansas. The drone delivery programs currently in play are disarmingly easy to use. Here’s an example: Assume you’re home with a bad cold. Seeking medication and fast relief, you open the provider’s app (or go to its website) and place your order. The pharmacy merchant receives the order, gathers items from the shelf, and then requests that a drone complete the delivery. Next, the The FAA classifies drones as Unmanned Aerial Systems, or UAS, defining them as the aircraft, controller, and link between the two. The FAA labels the drone itself as an Unmanned Aerial Vehicle (UAV), with a small one weighing less than 55 pounds. Drones exceeding that weight require a special exemption. In addition, all drones weighing more than 0.55 lbs. must be registered with the FAA, and anyone flying a drone for commercial purposes—not solely for recreation or as a hobby—must obtain a remote-pilot certificate from the FAA. One study suggests that worldwide spending on drones will surpass $121 billion in the next 10 years, with most being spent on high-value commercial systems that perform tasks such as site inspection and small-package delivery. 3 Spurred by the need to address systemic labor shortages, improve last mile delivery, 4 and efficiently inspect building sites, commercial industry is expected to drive most future growth, outstripping a much smaller but still-growing consumer market. These sectors are expected to make up the majority of the commercial space: •Industrial inspection, encompassing construction, mining, railroads, and utilities •Agriculture, both domestically and overseas, to survey field conditions, plant seeds, and apply fertilizer As drone applications grow, so too will their impact on the insurance industry” 10 | INSIGHTS | Fall 2022 drone is dispatched, with its operator having selected the most efficient route for delivery and drop-off. Hovering at roughly 23 feet off the ground, the drone lowers a winch that picks up the package (which, with current technological restrictions, is limited to five pounds max) and is then raised and secured to the drone. Cruising at 100 to 130 feet and at speeds as fast as 70 mph, the drone then proceeds to the delivery spot, where the winch lowers and drops the packaged medications. After delivery, the drone returns to a charging pad, where it awaits its next delivery. The entire process requires no human interaction—which is particularly helpful in an era marked by a pandemic and labor shortages. Underwriting Considerations Underwriting demand for drones and drone-related exposures will increase in the months ahead. As it does, underwriters must first distinguish between companies using their own drones and those that hire drone specialists to carry out certain jobs (such as the aforementioned Wing). After that, the comparative property, liability, and inland marine exposures can be addressed by asking questions such as: •What are the maximum miles—per trip or per designated time period? •Is usage charged on a per-mile or per- hour basis? To what extent does flight duration come into play, given limited drone battery life? •Will the drone be crossing state lines or different zip codes? What are the jurisdictional implications? •Will drones be making deliveries across heavily traveled roadways, potentially causing driver disruption? •How populated are the areas drones will be flying over? Urban or suburban? The higher the population density, the greater One study suggests that worldwide spending on drones will surpass $121 billion in the next 10 years” “the chance of bodily injury and property damage. •Are drones being used for surveillance, which, in turn, might generate personal injury claims? •What about tall buildings in urban settings? Or are aboveground power lines present that could impede a drone flight? •What exposures might be presented by rural areas? For example, a drone could crash in a farm field and destroy crops. Alternatively, a drone could crash into a dense forest and cause a wildfire. •What is the value of the product(s) being delivered? Is the cargo replaceable or critical in nature, such as vaccines or blood samples? What if the drone loses its cargo? •Are there privacy concerns, such as confidential photos? What’s the ultimate loss for which the drone owner could be sued? •Would coverage and rating be similar to current transportation risks? Would loss frequency be reduced, given that drones would be delivering products otherwise transported on the ground? •Should insurers’ rates be based on the various uses of drones? For example, are photos being taken—and if so, of what? Are health products being delivered? Groceries? Or are drones being used to survey commercial and residential property? •Should insurers require compliance with FAA regulations, including employees operating drones? How can they ensure that drone users comply with all current regulations? Is the drone being operated in a “line of sight” manner? Are a number of drones being operated concurrently? •What about flight elevation? The higher the elevation, the greater the chance for exposure to extreme and/or seasonal weather such as lake-effect snow or an intense thunderstorm, raising the risk of crashes. The lower the elevation, the greater the risk of collisions with people, property, or natural features. Safety and Security Concerns While drones offer innumerable practical benefits, they also present a handful of significant public safety concerns. Relatively inexpensive and widely accessible, drones hold great appeal to criminals, including terrorists. Such was the case in 2020, when a small quadcopter-type drone with thick copper wires attached underneath was released to attack a Pennsylvania electricity substation. Denuded of any identifiable markings and stripped of its onboard camera and memory card to avoid detection, the drone, for reasons still unknown, crashed on an adjacent roof. While the operator remains at large, the intent of the attack was crystal clear: disrupt the substation by creating a short circuit. (It should be noted that while victims of drone attacks may suffer bodily injury and/or property damage, the criminal acts exclusion in most policies bars such coverage.) National security experts warn that drones are increasingly being used by a growing number of bad actors. Drones have provided irregular forces, terrorist groups, and national armies with a low-cost tool to attack high-value military and civilian targets. Recent examples include groups such as the Islamic State using mass- produced drones to attack military sites, oil installations, civilian airports, and ports. Coverage Scenarios As the world moves toward drones being an ever-present part of life, the transition could involve some turbulence. Consider the following hypothetical coverage scenarios. Third-Party Injury and Property Damage Seeking to improve customer service and feeling increasingly pressured by big-box retailers, the owner of a rural drug store launches a new drone delivery program. With a limited budget, the retailer opts against engaging a well-known drone delivery service or investing in a number of drones to own and operate. Instead, he makes an arrangement with a local tech-savvy drone operator. The program begins with little fanfare or notice (in case things don’t work out), and on a sunny winter morning, the initial drone delivery advances on behalf of the retailer. That same morning, Midge embarks on her weekly trip to the local grocery store. Driving along a residential street at the posted speed, Midge notices a drone fly into her field of vision. Startled by it, she swerves her vehicle to the right and inadvertently steps on the accelerator rather than the brake pedal. Her car veers onto a sidewalk, killing two adults and severely injuring a child. Personal Injury Joe and Betty are steamed that long-time friends Bill and Kate didn’t invite them to their daughter’s wedding. Distraught over all they’ll miss, Joe convinces Betty that by using a drone, they’ll be able to “crash” the small ceremony being held in Bill and Kate’s secluded backyard. Flying above the wedding, the drone provides Joe and Betty with a satisfying view of unfolding events. However, just as the bride and groom are exchanging vows, the drone unexpectedly malfunctions and strikes a guest, who sustains a large gash on her forehead and is rendered unconscious. Chaos ensues as fellow guests rush to help. Cyber Risk Based in California, Epicurean Winery and Vineyard (Epicurean) has grown steadily over the last 10 years. Critical to its profitability has been a drone-based inspection program that enables staff to efficiently identify and treat damaged vines. Some of the surrounding property owners are displeased with Epicurean’s success and the traffic and congestion that the winery’s frequent tours have brought to the area. The most vocal of the group is Elias, recently retired from a Silicon Valley firm that provides component parts to the drones that Epicurean uses. Enraged after a weekend during which roads were clogged with winery visitors, Elias hacked into the drone system with the intent to damage some of Epicurean’s upcoming harvest. He succeeded but also caused unanticipated harm when the drone flew over a nearby park, where children were playing. Startled by the drone’s sudden appearance, a child fell from the top step of a slide and sustained a fractured skull. While drones offer innumerable practical benefits, they also present a handful of significant public safety concerns” 12 | INSIGHTS | Fall 20221.Joseph S. Harrington, “Flight Risk,” The Risk Report, vol. 44, no. 6, February 2022. 2.Harrington, “Flight Risk.” 3.“Spending on drones ‘set to explode’ in U.S.,” General Aviation News, January 13, 2022. 4.“Last mile delivery” refers to the last step of the delivery process, when a package is moved from a transportation hub to its final destination. 5.Sarina Carter, Tore Johnston, Stephan Lidel, Robin Riedel, and Leonard Tusch, “Drone Delivery: More lift than you think,” McKinsey & Company, March 15, 2022. Professional Liability/Errors and Omissions Regional insurer Heckworth Mutual has found drones an invaluable tool to quickly assess and adjust storm-related losses through its contract with a local operator. After a recent hailstorm damaged a large swath of homes in a residential area, the drones revealed that several of the insured homes showed no sign of roof-related damage. Based on detailed, drone-provided images, the company denied coverage in those instances. At a weekend party in the subdivision, neighbors discuss the storm and how their respective insurers responded. Several mention that they’re insured by Heckworth and that their claims were denied. A local attorney overhears the conversation and suggests they band together and bring a bad-faith suit alleging that Heckworth breached its duty to personally inspect each roof before denying coverage. Seeking to expand the potential recovery, the attorney also suggests suing the drone operator for producing photos of insufficient quality to pinpoint the nature and extent of the damage. Coverage and Exclusions For many years, insurers typically excluded aircraft, with the exception of model or hobby aircraft. The advent of drones has given model and hobby aircraft a whole new meaning. Go ahead and throw in exposure for the hobby drone owner using his or her UAV for an “occasional” business venture, too. All of this has prompted insurers to rethink aircraft coverage. Homeowners policies provide property coverage for loss to model or hobby aircraft, but the most common causes of loss may not be covered, and the value of many claims may not exceed most policy deductibles. Some insurers have taken the route of simply excluding all aircraft from property and liability coverage, including personal injury. Most homeowners policies exclude liability for any business activities, removing commercial use of drones, which is a concern for hobby drone owners who may be asked to dip their toes into the commercial space. ISO excludes liability for aircraft—defined as “any contrivance used or designed for flight except model or hobby aircraft not used or designed to carry people or cargo.” Variations in aircraft exclusions may include providing property and liability coverage for model aircraft but not hobby aircraft. One common practice with exclusions is the statement that coverage is excluded when the aircraft is designed to carry people or cargo. That means, even if the drone owner chooses not to carry people or cargo, there is no coverage. Personal injury (which is the biggest liability exposure), invasion of privacy, and criminal acts are all coverage needs that are likely excluded or have limited coverage availability. This is significant because the policyholder/drone operator could easily (and inadvertently) invade a private space or run afoul of FAA rules and expect to be covered for a resulting loss. Such a situation can happen more frequently than one might think. Therefore, the lack of coverage could become an issue due to the ever-increasing popularity of drones and new discoveries for their use throughout the world. Conclusion Growing numbers of drones will continue to fly the skies over time—and to change our lives just like prior disruptive technologies, such as the personal computer. As with other disrupters, drones promise to usher in a litany of transformational benefits and a handful of legitimate safety concerns. Amid this environment, the insurance industry will find ways to tailor coverage that best meets the associated opportunities and challenges. INSIGHTS | Fall 2022 | 13 Explore Your Options Today! Web.TheInstitutes.org/Agents-and-Brokers Your time is precious and fleeting – that’s why our new, on-demand Micro-Certs and Market Specialization courses include assignments you can complete in as little as 25 minutes a day. Expand your expertise as you explore key facets of risk management and the insurance industry as well as risks that challenge your clients, including the impact of labor shortages, intellectual property risks, cyber risks, and more. Sharpen Your Skills in 25 Minutes a Day Micro-Cert topics include: ▶ Cyber Risk ▶ Leadership and Coaching ▶ Commercial Coverage Gaps ▶ Commercial Risk ▶ CAT Prep ▶ Supplemental Personal Lines Market Specialization topic course industries include: ▶ Healthcare ▶ Hospitality ▶ Real Estate ▶ Manufacturing ▶ Construction ▶ Transportation ▶ Public Entities SCAN ME SCAN ME 14 | INSIGHTS | Fall 2022I N S U R A N C E C A R EE R S | I N S U R A N C E C A R E E R S | 7 Ways to Encourage Students to Fall Into Insurance by Mary Calmer How did you fall into insurance? How might others be encouraged to take the plunge? With a talent gap looming, establishing effective ways for attracting young people into the industry is critical. This article explores seven initial actions to take. If you’ve never said either of these statements yourself, then you’ve likely heard a colleague say them. It’s no secret that many of us found our way into insurance by happenstance. The industry has gotten by so far with this strategy (or lack thereof), but we now have some serious ground to cover. According to the United States Bureau of Labor Statistics, the 2021 median age for employees in the insurance industry was 45. Comparatively, the median age for the entire U.S. workforce as a whole was 42.2. This tells us that the talent gap is looming—and that we need to take it upon ourselves to counteract it. Specifically, we must proactively encourage students to consider insurance as a career choice instead of hoping they’ll stumble upon it somewhere down the road. “I fell into the insurance industry! ” “ I never set out to work in insurance.” I N S U R A N C E C A R E E R S| I N S U R A N C E C A R E E R S | I N S U R A N C E CAR E E R S | I N S U R A N C I N S U R A N C E C A R E E R S | I N SU RAN CE C A R E E R S |16 | INSIGHTS | Fall 2020 I NSUR A N C E C A R E E R S | I N S U R A I N S U R A N C E C A R E E R S | I N S U RA N C E C R E E R S | I N S U R A NC E C A R I N S U R A N C E C A R E E R S| I N S U R A N C E C A R E E R S | I N S U R A N C E C A R E E R S | I N R AN C E C A R Speak to a class at your local college. Colleges with risk management programs or Gamma Iota Sigma chapters are a good place to start. If the college doesn’t have either of those, see if they offer any risk management, insurance, actuarial science, or business courses. An outside speaker covering different career opportunities within the insurance industry may spark some interest. If you’re able to reach one professor’s students each semester, imagine how many you could influence! TIP: Encourage students to connect with you on LinkedIn so you can stay in touch long after your presentation is over. 1 3 Present to a local group of high school students. The women’s employee resource group at my company recently hosted a resume workshop for a local girls’ leadership organization. We started with a brief presentation on the insurance industry and what types of positions are available, then had a panel of women share their career stories, and concluded with individual resume reviews. Maybe your company could host something similar for Future Business Leaders of America, Junior Achievement, or your local high school’s business class? Reach out to the school and see what types of groups would be interested. BONUS: This is a great way for a company to get its name out, give back to the community, and attract young talent—a win-win-win! Support internship programs. Consider hiring a summer intern or asking your supervisor if this is something your team can do. Most sizeable companies have programs in place where they expose interns to the different facets of insurance and give an overview of the company’s operations. TIP: Remote internships can expand your talent pool. 2 I N S U R A N C E C A R E E RS| IN S U R A N C E C A R E E R S | I N S U R A N C E C AR E E R S 16 | INSIGHTS | Fall 2022 Taking Action You may be asking yourself, “What can I do?” Well, here are some ideas to get you started:INSIGHTS | Fall 2020 | 17 I N S U R A N C E C A R E E R S| I N S U R A N C E C A R E E R S | I N S U R A N C E CAR E E R S | I N S U R A N C E C A R E E R S| R E E R S | I N SUA R E E R S Share your story. Why do you love working in insurance? What makes your job exciting? Think of ways you can share your story with young people in your network —whether on social media or in person, such as at your local high school, alma mater, or next family gathering or coffee or lunch outing. Volunteer in your community. Focus on giving back in whatever way interests you: Coach a team, lead a youth group, chaperone an event, be a tutor. One local insurance carrier invites employees to participate in a Big Brothers- Big Sisters program in which kids come on-site to their headquarters. 4 6 7 5 Mentor. Can you provide career mentoring to a college student or recent graduate? FOOD FOR THOUGHT: Is there a fraternity/sorority or other group you have affiliations with that you can offer your mentoring services to? Pursue job shadowing. See if your employer would approve of someone job shadowing you. This can even be done virtually. Take this opportunity to show students what you do on a daily basis and share some interesting things about your role, the company, and the insurance industry overall. BONUS: Job shadowing can allow recent graduates to stand out to employers. TIP: High school and college students are always up for free food! FOOD FOR THOUGHT: How can you build meaningful relationships and be a positive role model? Spreading Enthusiasm As you go about building relationships, find out what interests each group of students. Chances are those interests can translate into an insurance career in some way. Plant that seed and continue fostering relationships. Maybe they aren’t interested in an insurance career right now, but how many people end up changing their major or career path along the way? Most important is to let your enthusiasm speak for itself. How do you respond to the question, “What do you do for a living?” I admit I have given some pretty bleak responses to that in the past because I felt that people outside our industry weren’t interested in it. What a turnoff that must have been. How can you put an exciting spin on your answer and pique someone’s interest? What would you add to my list? For more on this topic, see this issue’s Committee Corner, in which Emerging Leaders Committee Chair Maia Jarvis shares a personal account while considering how to entice students to explore insurance. | I N S U R A N C E C A R E E R S| I N S U R A N C E C A R E E R S | I N S U R AN C E C A R E E R S I N S U R A N C E C A R E E R S| I N S U R A N C E C A R E Action asking yourself, can I do?” are some ideas you started:Next >