Drones or unmanned aircraft systems (UAS) used to be primarily associated with military operations. Today, compact versions are increasingly operating in everyday life and the UAS industry is fast becoming a multi-billion dollar business, as the benefits to be gained from utilizing such innovative technology become apparent.

This Allianz Global Corporate & Specialty (AGCS) report examines the key issues and trends underpinning rapid growth in usage of UAS and provides insight into the potential risk exposures related to their deployment in the private, public and commercial realms.

UAS have the potential to both solve problems and save costs in future across a number of industries, throughout the developing world and in disaster relief scenarios. Growth projections for the sector are significant as UAS become cheaper to purchase, smaller in size and easier to operate. In fact, the UAS industry is regarded by many as the most dynamic growth sector of the global aerospace industry.

However, as civilian and commercial use of UAS rapidly increases and continues to evolve, the potential for misuse of this technology needs to be considered. Advances in technology are inevitably accompanied by a host of new and little understood risks. There have already been enough incidents and near-misses to date involving UAS to generate concern that the likelihood of collisions and other loss events will grow as UAS numbers multiply.

Use of drones or unmanned aircraft systems (UAS) in public airspace is increasing dramatically. In the US, the Federal Aviation Administration (FAA) projects that by the end of 2016 over 600,000 UAS will be deployed for commercial use – three times the amount of manned general aviation aircraft. In addition, 1.9 million UAS are expected to be in recreational use. The number of UAS is set to triple by 2020¹.  

Globally, UAS market volume is forecast to reach 4.7 million² units by 2020 (other estimates are even higher), with the market for commercial application of UAS technology estimated to soar from $2bn to $127bn³. Such projections are driven by UAS becoming cheaper, smaller and easier to use, as well as regulatory progress.

As recreational and commercial UAS usage increases, new risk exposures are emerging. More incidents likely will occur once regulations are finalized that encourage more widespread use. Such incidents could result in multi-million dollar claims against businesses, operators and manufacturers.

Hobbyists account for the majority of UAS owners yet remain largely unregulated in many countries, raising safety concerns, as many can be untrained and inexperienced. Insurers have already seen loss activity resulting from novice control of UAS. Regardless of technological sophistication or operator skill, however, accidents happen.

UAS raise two priority safety concerns: mid-air collisions and the loss of control. A collision can occur if the pilot cannot see and avoid manned aircraft in time. Most at risk are manned aircraft which fly below 500 feet, such as helicopters, agricultural planes and aircraft landing or departing from airports.

Loss of control can result from system failure or flying beyond signal range; a major risk that has already caused incidents involving injuries. A scenario involving a pilot losing control of a UAS during a building inspection could result in a loss easily in excess of $5m. Damage from “foreign objects”, such as bird strikes for example, is already an issue for the aviation sector, as it is the fifth largest generator of insurance claims⁴. A collision involving a UAS striking the engine of an airliner could cause $10m in physical damage alone.

As with manned aircraft there are concerns UAS may be used for malicious acts. An emerging peril is the potential threat from UAS being used to target critical infrastructure. There have been a number of incidents of drone overflights at power stations. There are also concerns that UAS could be utilized to attack sports stadiums or other events where large crowds gather.

Other risk scenarios include the prospect of hackers “spoofing” a UAS radio signal, potentially leading to a crash, the potential loss or theft of valuable recorded data when the device is transmitting information to the control station or after the flight by cyber-attack when the data has been stored. In addition to data protection, there are also many public concerns around such issues as privacy and trespass and nuisance.

Increasing use of UAS is also altering the risk profile of many industries. For example, a real estate agent has little bodily injury exposure but this changes if it engages UAS to take aerial photographs.

Regulations have been a significant barrier to more widespread use of UAS. Standards differ remarkably around the world, as evidenced by the hundreds of working groups trying to harmonize rules. Another challenge is posed by the fact that regulations cannot keep pace with technological advancement.

In most cases, the designation between commercial and recreational UAS use is the starting point. Other common standards exist such as visual line of sight (VLOS) requirements for pilots, size restrictions (usually <55 lbs/25 kg.), and restrictions against operating UAS near airports or outdoor venues.

New rules for commercial use in the US (effective August 2016) represent a milestone as they lower the barrier to entry for new commercial users and are expected to significantly increase the number of units in operation. These new regulations will likely influence other countries to adopt similar laws. The European Union (EU) is also working towards UAS rules.