Above is an excerpt from a recent insurance quotation illustrating the costs associated with bureaucratic inertia, lack of focus and the inability or unwillingness to innovate. Rather than innovate a path to profitability, the broker simply added an additional $250.00 fee to the quotation that already included a 15% commission paid to the broker by the insurance company. That equates to a hallucinogenic 35.9% fee+commission going to the broker and the additional cost passed along to the UAS insurance consumer. Ultimately the $1,194 annual premium quoted by the insurance company was raised by the broker to $1,444 and passed along to the consumer. Presumably, the added fee was necessary to cover the broker’s costs and ensure profitability.
That is just one reason why innovation in the UAS insurance industry is needed, and why it is needed now.
The UAS industry will not stand by or support an insurance industry that simply raises prices to compensate for inefficiency. The insurance industry must innovate and it must innovate now if it hopes to survive in a market where customers demand to interface digitally with their insurers.
You wouldn’t expect it out of the 800-pound gorilla in UAS insurance brokerage… but here it is from Terry Miller himself. Business as usual isn’t going to fly once UAS takes off.
First of all, there is no way on earth that aviation brokers will be able to scale quickly enough to sell millions of policies a year. That number comes from lots and lots of irrational exuberance – for instance AUVSI’s infamous $13.6B forecast. OK we know they got it wrong but pick a number you like and tell me how many drones there will be. Want another? The FAA just forecast 2.7M commercial drones by 2020.
Nor is there any way that the underwriters can scale fast enough to continue to assess each situation individually and continue to write custom quotes.
I spent enough time studying insurance (a straight disintermediation play was my intended point of entry into the drone business) to learn that insurance is based on the division of risk, aka the law of averages. The bigger the pool of similar situations (e.g. precision agriculture), the smaller the risk of each individual policy. Two million is a big pool… 2.7 is bigger.
The dirty little secret is that UAS insurance business is going to look at lot more like automobile insurance than aviation insurance. Right now the aviation guys own the space, but all the big dogs are sitting on the sideline waiting for the FAA to get done. At which point every broker selling homeowner and commercial coverage will also be offering UAS coverage to their installed base. Thus letting the customer continue to deal with their existing preferred vendor.
It is not hard to build logic driven applications that do much if not all of the work of assessing risk for the majority of applications. To be clear everything has to start somewhere, and companies like Global Aerospace who were among the first to market needed – and continue to need – enough data to understand the risk to build those intelligent systems. That will be a first mover advantage.
There is also considerable room for innovation such as Terry’s concept for the Dromatics™ usage based telematics insurance system. This is basically a “good drivers” policy in the form of an onboard flight recorder which enables the insurer to monitor the performance of the insured. Did they exceed altitude? How many hours did they really fly? Where did they really fly? How often did they go below minimum battery? Data-driven profiles will inform underwriting with considerably more precision than filling in how many miles you drove last year. And this is all data that is likely to be collected simply to operate in the UTM.
Finally, the current model ignores the UAS customer. This is a huge consumer insight and I believe it is exactly what Terry means when he writes customers demand to interface digitally with their insurers. No matter the age, anyone involved in the UAS business is technically savvy. They live their lives online and they want to do their transactions online. More and more of them are Millennials – consumers who are price sensitive, influenced by social media and prefer smartphones.
Does that mean that traditional underwriting and brokerage will disappear? No. Absolutely not. There will always be the need for judgment and best practices. There will always be the need to work with clients with very complex kinds of risk to ensure that they are suitably covered. And there will always be companies who will pay a premium for this type of service and expertise.
But most businesses, on most days, especially the dronepreneurs who will make up the bulk of operators under Part 107, just want to be covered for the basic risks associated with their mission. The insurance companies that succeed – and I am talking about both underwriters and brokers – will be the ones who can provide a new generation of technically savvy customers with what they need, when they need it with minimum friction at the best possible price.