The increasing use of drones for commercial purposes has become one of the biggest emerging threats to the future of airplane safety, according to Allianz Global Corporate & Specialty (AGCS).
The use of unmanned aerial vehicles (UAVs) for a host of different applications may leave operators exposed to a whole new set of risks, including third-party damage or injury and liability, according to AGCS’s Global Aviation Safety Study.
One of the biggest risks, it said, was from radio frequency interference, resulting in loss of control, and, in the worst cases, fatalities.
Other problems include invasion of privacy, aerial surveillance and data collection.
“With the ability to collect massive amounts of unsolicited data, UAVs present an enormous threat to individual privacy and a significant challenge for insurance carriers,” said Vikki Stone, senior vice president at Poms & Associates Insurance Brokers. “In drafting policies, it is crucial for carriers to know how such information will be used.”
The production of UAVs has increased by double-digits year-on-year since 2007, according to AGCS, with applications ranging from news gathering and surveillance to sporting events and crop dusting.
Such has been the take-up that the Federal Aviation Administration (FAA) estimates that by 2020, there will be about 30,000 small commercial unmanned aircraft in our skies.
However, coverage is limited, with only about 21 insurers involved and those that do offer policies have been hampered by a lack of historical and analytical data, the study said.
“Annual utilization, number of accidents and repair costs are not readily available and unmanned aircraft are not presently flying at the rate that they will be in the near future in the national airspace,” the report said.
Another problem is that, despite FAA plans to integrate UAVs into the U.S. airspace in 2015, there is a “lack of international, regional and local regulations for the safe operation of UAVs,” said Henning Haagen, AGCS’s global head of aviation EMEA and Asia Pacific.
Stone said that the No. 1 concern among carriers was the lack of certification of UAV pilots.
“I think the bigger problems are going to be the people that don’t follow the guidelines required, so ultimately we’ll end up with a number of rogue flyers out there — that’s the scary part,” she said.
Peter Schmitz, CEO of global aviation specialty at Aon, outlined other major risks of drones.
“The biggest threat is clearly the taking down of a major aircraft in a mid-air collision,” he said.
“The second issue is the application of these vehicles in urban areas where the risk of damage to properties and individuals is much greater than it would be in rural parts.”
Schmitz said that regulatory authorities across the world face an uphill task in coming to grips with these issues because UAVs are still a relatively new and unknown quantity in terms of repair costs and loss ratios.
Revving Up Motor City
Soaring unemployment, a dwindling population and the collapse of its automotive industry — not to mention a largely dysfunctional property market — all contributed to Detroit’s infamous demise.
The city hit rock bottom on July 18, 2013, when it filed for Chapter 9 bankruptcy with a staggering $18.5 billion debt — the largest municipal bankruptcy in U.S. history.
But in November 2014, having secured a major restructuring deal, Detroit emerged from bankruptcy, offering a new dawn of hope for the city’s residents.
The key to that brighter future is the city’s real estate market, which is undergoing a boom. Investors are snapping up vacant commercial and residential properties for redevelopment.
But variations between real estate market values and replacement costs are making some projects fiendishly difficult to insure.
VIDEO: The Telegraph visits the abandoned skyscrapers of Detroit, where the population has fallen from 2 million to 800,000, and some residents and entrepreneurs who are searching for solutions.
Investment is red hot in the 7.2-square-mile area that stretches from Downtown, Corktown and Midtown to the riverfront and Lafayette Park, with new restaurants and retail outlets opening every week.
Investors from far and wide, including Warren Buffett, are being lured by cheap property prices, and the revitalization of the city’s hub is driving demand for the newly converted apartments and business premises.
Such is the pace of growth that more than two dozen development projects have been completed or are in progress, according to the Downtown Detroit Partnership, a public-private partnership aimed at revitalizing the city.
These include the new $450 million Detroit Red Wings arena, and the renovation of the former Packard plant, which has stood derelict since the late 1990s.
“It’s been a contagion that’s spread, with investors keen to snap up a piece of real estate and tenants opening stores and restaurants all over the city.” — Daniel Stern, partner, Lormax Stern Development
Driving this redevelopment boom are entrepreneurs such as Detroiter Dan Gilbert, CEO of Quicken Loans, who has pumped more than $1.5 billion into 65 projects across the city over the last five years.
Allan Mallach, senior fellow at the Center for Community Progress, a Washington, D.C.-based advocate for land reuse and neighborhood revitalization, said that the bankruptcy and restructuring has given the city a fresh start.
“What it has done is to relieve some of the financial obligations that had to be met, which, in turn, has improved the net picture,” he said.
Daniel Stern, partner at Lormax Stern Development, a real estate developer, said another positive is that commercial prices climbed dramatically during the bankruptcy, particularly in the Downtown and Midtown areas.
“It’s been a contagion that’s spread, with investors keen to snap up a piece of real estate and tenants opening stores and restaurants all over the city,” he said. “In the last year alone we have had about 15 new restaurants open, which is more than we had in the last 10 years.”
Tale of Two Cities
But while Downtown is undergoing a renaissance, the contrast with the more deprived areas of the city couldn’t be starker.
Detroit’s housing market bubble burst in 2006, and the financial crisis two years later sped up the precipitous decline. It resulted in an acceleration of the number of abandoned homes in the city, with around 78,000 buildings and as many as 100,000 homes currently standing vacant, according to the latest estimates.
According to the Wayne County Treasurer’s office records, more than 17,000 foreclosed properties were sold at auction last year, mainly in Detroit, with some properties going for as little as $500.
One of the main challenges for Detroit now is to extend the success enjoyed Downtown to the more struggling areas within the city’s 138-square-mile limits.
“Since the bubble burst in 2006,” Mallach said, “people’s mentality has been that the city is on the way downhill and that their property prices can only go one way so they might as well get out.
“To that extent, the bankruptcy process and the emergence from bankruptcy has started to change that mind-set and has given people a new hope.
“The fact is that the city is now getting more attention from prospective investors, but the question is whether they are the right kind of investors with long-term horizons or simply those who want to make a quick buck within three or four years.”
Buying a property in these areas is easy, but getting a mortgage is a whole different matter, particularly in the more deprived neighborhoods, according to Eric Larson, CEO of the Detroit Downtown Partnership.
“The biggest challenge is that it’s nearly impossible to get a mortgage and to leverage these types of properties because you just don’t have the market comparables to support any kind of structured debt,” he said.
Another problem is that some of Detroit’s older buildings are harder to insure because they are more susceptible to mechanical and electrical faults and pipes bursting, particularly in the winter, when temperatures can drop below 32 degrees, said Rick Miller, national property practice leader for Aon Risk Solutions.
“From an insurance perspective, if a property is in disrepair or neglected, you have to look at whether its mechanical and electrical systems are functioning properly and whether there has been any water damage,” he said.
“Then there is the ‘neighborhood effect’ where you might buy a property in an area where there is a problem with vandalism and crime that could potentially impact you when trying to get insurance.”
Michael Adkins, vice president and manager of Chubb Group of Insurance Cos. in Troy, Mich., said: “Structural deficiencies in a property may increase the severity of a loss and could lengthen the time it takes to get the property back to its intended business purpose.”
Valuing the property can also be problematic, given the huge discrepancy between market value and replacement value costs in some areas, said Adkins.
“I see a lot of buyers’ reports where the purchase price is in no way reflective of the replacement costs.”— Martha Bane, managing director, property practice, Arthur J. Gallagher & Co.
“Commercial real estate owners often look to insure property based on what they paid for the building or the market value,” he said. “But the property’s value could be more or less than the actual cost to replace the structure based on construction costs at the time of the loss.”
Martha Bane, managing director of Arthur J. Gallagher & Co.’s property practice, added: “I see a lot of buyers’ reports where the purchase price is in no way reflective of the replacement costs.”
Brian Ruane, who leads Willis’ real estate practice, said that occupancy was another issue.
“One of the main factors that underwriters look at when assessing a property is occupancy,” he said.
“Low vacancy rates can increase the risk of vandalism and, in the case of rental properties, the owner’s ability to keep up with their tax and mortgage repayments if they have no tenants.”
But, above all, the No. 1 challenge remains kick-starting the city’s mainly under-performing housing market.
One insider told Risk & Insurance® that the city’s bankruptcy merely compounded the fact that Detroit remains one of the weakest property markets in the country.
“Detroit has the lowest commercial office rents, the highest vacancy rates and the lowest prices for single family housing anywhere in the U.S.,” he said.
“The risks involved in getting into the market are considerable, but one of the main advantages with Detroit is that you can come in and make an instant impact. Within a year you can be running your own business or managing three or four rental properties.”
Stefan Hilts, a director in Fitch’s U.S. RMBS group, said the city’s house prices are still 36 percent lower, in real terms, than their peak in April 2006, just before the bubble burst, mainly as a result of a falling population, rising unemployment and a weak economy.
“Prices are still massively undervalued given that there’s still a population and there’re still people working in the city,” he said.
However, a number of institutional and individual investors from Wall Street to China willing to take the plunge have been lured by the low prices, which have started to climb again in the more desirable areas.
Dr. Svenja Gudell, senior economist at property firm Zillow, warned however that there could be tough times ahead if the less well off areas continued to struggle.
“Roughly 30 percent of Detroit’s housing units already lie vacant, and without job growth and a healthy economy to attract new workers, what demand there is will inevitably dry up.
“Those homes currently vacant will remain so, blighting the cityscape and creating the double whammy of downward price pressure in the city’s neighborhoods.”
But while hope remains, the prospects for Detroit’s property market, at least in the short-term, are looking up.
Larson said: “I think that Detroit is going to be in significantly better shape post-bankruptcy, but we need to make sure that we don’t become just a tale of two cities.”
Risks of Celebrity Sponsors
Companies are using actors, prominent sports figures and other celebrities to endorse their products more than ever before.
However, while they may generate lots of publicity around a product or service, not all of it is good publicity.
You only have to open up a copy of the newspaper to read about scandals engulfing stars such as Bill Cosby, Brian Williams or Tom Brady with the New England Patriots’ ‘deflate-gate’ saga.
Sponsors have reacted by withdrawing their support, most notably in the NFL, where domestic violence allegations hanging over the sport prompted Procter and Gamble to pull the plug on a deal to supply players with pink mouthguards during Breast Cancer Awareness Month and cancel all on-field marketing.
The risks for any sponsor associated with this type of negative publicity are infinite, said experts, often resulting in the cancellation of lucrative advertising and marketing contracts, ultimately costing the company millions of dollars in lost revenue.
Worse still, the sponsor may be forced to pull its product from the market altogether, with the end result that millions of dollars are wiped off its share value.
The main risk of hiring a celebrity to endorse a product is the unexpected or disgraceful behavior of that individual, or unforeseen events such as death. — Lori Shaw, executive director, entertainment practice, Aon Risk Solutions
Lori Shaw, executive director of Aon Risk Solutions’ entertainment practice, said the main risk of hiring a celebrity to endorse a product is the unexpected or disgraceful behavior of that individual, or unforeseen events such as death.
“The first step is to analyze the potential risks, discuss ‘what if’ scenarios; outline the financial consequences; and to be aware of the risks that can be avoided, those that can be transferred contractually to the celebrity or talent, those that can be transferred to insurance and the risks that must be retained,” she said.
Shaw said that companies need to take a holistic approach to their branding and marketing activities in order to assess the potential impact of any adverse publicity on their balance sheet.
Nir Kossovsky, CEO of Steel City Re, a corporate reputation measurement and risk management specialist, said another major problem of negative publicity is the damage to a company’s reputation.
“The primary risk is that an adverse behavior at an event or by a celebrity will be viewed by stakeholders as a reflection of that company’s culture, values or operational ineptitude,” he said.
“In this situation where the stakeholder holds the company culpable for any such action, often they will respond by altering their future expectations and exercising their financial clout, usually to the company’s detriment.”
Kossovsky said that, rather than calculate the potential risk, sponsors need to first determine the value gained from the sponsorship deal, and the costs of acquiring that value.
Then they must assess the costs of communicating to stakeholders the steps it took to mitigate against any adverse events and publicity that may occur, he said.
“There are two instances when a company should walk away from a deal,” he said.
“The first is if the costs of a parallel communication strategy coupled with the direct costs of sponsorship outweigh the value of the expected gain.
“The second is if, on objective reflection, there is a compelling case that the average stakeholder will hold management culpable for an adverse event no matter what the management says to the contrary.”
To mitigate against these risks, corporations are increasingly turning to specialized insurance plans and writing clauses into their contracts allowing them to cancel a deal if the celebrity is considered to have acted in an inappropriate manner that may damage the company’s brand.
Recently, AIG launched a new policy protecting sponsors that hire celebrities to endorse their product.
Celebrity Product RecallResponse is triggered by any “actual or alleged criminal act or distasteful conduct” from the celebrity that has a significantly adverse impact on a company’s product.
It covers certain costs incurred by companies to remove or recall those products bearing the celebrity’s name and image, as well as the costs of removing advertising.
“In this age of social media and instant news,” said Jeremy Johnson, president and CEO of Lexington Insurance Co., which provides the policy, “reports of indiscretions by celebrities or high profile athletes can spread worldwide instantly, with swift, adverse implications for products or brands associated with the individual.”