Technological advance has provided both consumers and businesses with a variety of shiny new gadgets and services. However, as the rise of cyberattacks has underlined, it has also provided society’s undesirable elements new means of creating nuisance or committing crime.
The growing popularity of unmanned aerial vehicles (UAVs) — aka drones — is a case in point. Their powerful video cameras open up a whole new world of photographic opportunities. Insurers and loss adjusters are finding them a valuable aid in claims investigation. Unfortunately, drones are also increasingly intruding on people’s privacy, crashing into buildings and intruding on aircraft flight paths.
The problem of rogue drones is on the rise on both sides of the Atlantic. In the UK, the British Airline Pilots Association (BALPA) this month called for research by the government and safety regulator the Civil Aviation Authority (CAA) into the impact of a drone hitting a plane or helicopter, following a spate of near-misses at Heathrow and other UK airports.
BALPA believes that the impact of a drone colliding with an aircraft could smash the windscreen or, worse, that their lithium batteries could trigger an engine fire.
Even more alarming was the January report “Hostile Drones: The Hostile Use of Drones by Non-State Actors Against British Targets” published by security think-tank Oxford Research Group, which warned that “drones are a game changer in the wrong hands.”
The report assessed the design and capabilities of more than 200 unmanned aerial, ground and marine systems and also how drones had been used by activists, terrorists and organised crime groups.
“Drones are a game changer in the wrong hands.”
“Drones are being used by individuals beyond authorized and accepted use,” the report’s authors concluded. “There is particular concern [they] will be used as affordable and effective airborne improvised explosive devices (IEDs), as well as concern regarding the decentralisation and democratisation of intelligence, surveillance and reconnaissance (ISR) capabilities.”
The list of potential targets for flying bomb attacks included foreign embassies, nuclear power stations, a G7 summit or the prime minister’s car. “The UK government, police, military and security services will need to introduce countermeasures to reduce or mitigate the risk of commercially available drones being used for attack,” the report concluded.
Those recommended included the licensing of drones and defenses such as laser systems to protect targets, radio frequency jammers and authorization for the police and army to shoot down any suspect drone.
From Eagles to Bazookas
Meanwhile, initiatives to defend against rogue drones are a mixture of the surreal and James Bond movie. Police in the Netherlands have joined forces with Guard From Above, which describes itself as “the first company in the world to use birds of prey to intercept hostile drones”.
GFA held an international press day earlier this month to demonstrate how trained eagles can be used to snatch a rogue drone in mid-air. This company assures doubters that this “lo-tech solution to a hi-tech problem” is perfectly feasible as the birds’ “incredible visual acuity” enables them to hit the drone without being injured by the rotors.
A more hi-tech solution has been developed by the European aerospace conglomerate Airbus, which last September unveiled its counter-UAV system. Based on a combination of radars, infrared cameras and direction finders, the system can identify possible rogue drones from a distance of up to 10 kilometres (6 miles), determine their threat potential and bring them down if needed.
“Furthermore, the direction finder tracks the position of the pilot who subsequently can be arrested,” Toulouse, France-based Airbus stated. “Since the jamming technology contains versatile receiving and transmitting capabilities, more sophisticated measures like remote control classification and global positioning system [GPS] spoofing can be utilized as well. This allows effective and specific jamming and also a controlled takeover of the UAV.”
More 007-type technology has come from this month’s UK launch of the SkyWall 100 anti-drone net bazooka. Developed by the Northumberland-based start-up OpenWorks Engineering, the concept behind the system is to capture a rogue drone in a net and deliver it intact with a parachute, via a combination of compressed gas-powered smart launcher and an intelligent programmable projectile.
SkyWall 100 is the first release in a planned series of systems; described as a “man-portable handheld launcher that is highly mobile and a cost effective way of dealing with the drone threat.” In the pipeline are SkyWall 200, a semi-permanent device that can be carried by two people and the SkyWall 300, a permanent installation with a fixed mechanical turret.
Each of these initiatives could be contenders for the S100,000 prize offered last November by MITRE Corp for novel ways to detect and identify suspicious small drones and “interdict those that present a safety or security threat”. Participants had until early February to submit a white paper outlining their approach and the most promising entries will be demonstrated early in the fall.
A Bird’s Eye View
Unmanned aerial vehicles (UAVs) — aka drones — are an integral but polarizing part of 21st century life.
The benefits are well-known: whether used as a tool or a toy, miniature remote-controlled aircraft equipped with high-resolution cameras can provide stunning aerial shots as well as photograph hard-to-access areas, which explains their increasing popularity with both consumers and businesses.
Drones are also inexpensive. Starter kits cost only $75 to $150 and cheaper four-propeller drones typically sell for $600 to $700. Sophisticated models with cameras can run to about $3,500. But the pricing continues to drop while the optics packages steadily improve, said Grant E. Goldsmith, vice president of Avalon Risk Management and president of its overwatch division.
“Many new drones have 4K cameras, which are really nearly Hollywood quality,” he said. “It is really the drop in price point in good optics that is making them more practical to many kinds of users.
“All drones are subject to loss and damage in a hard landing situation but at $3,500 they approach the level of ‘disposable aviation’ assets for many users.”
However, growing demand is accompanied by increasing disquiet over the “nuisance potential” of drones to violate privacy and cause accidents, particularly when used in proximity to aircraft. Idaho-based Snake River Shooting Products recently launched the “drone munition” — a shot shell containing steel ball bearings that fits a 12-gauge shotgun, for customers seeking to repel the “Drone Apocalypse.”
These concerns haven’t prevented companies from seeking Federal Aviation Administration (FAA) authorization to use drones for commercial purposes. As Risk & Insurance® reported in April, four insurers — American International Group Inc., Erie Insurance Group, State Farm Mutual Automotive Insurance Co., and United Services Automobile Association — were among 125 companies submitting successful applications.
Applicants also included corn processing giant Archer-Daniels-Midland Co, which got the go-ahead to use drones for locating and assessing crop damage to accelerate claims processing. The company plans to start employing the technology during 2016.
Pennsylvania-based Erie Insurance said that FAA approval would enable the company to offer policyholders an improved service, yet retain the personal touch.
“We see drones as high tech meets human touch,” said Gary Sullivan, the company’s vice president of property and subrogation claims.
“Drones will help our claims adjusters get an early look at potential damage without putting themselves in harm’s way due to unsafe conditions, such as on a steep roof or at the site of a fire or natural disaster,” he said. “The sooner we can get in and assess damage, the sooner we can settle claims and help make our customers whole again so they can move on with their lives.”
At State Farm, spokesman Jim Camoriano said that employing drones is in line with the insurer’s work with vehicle manufacturers to advance airbag and seatbelt technology.
“Our use of unmanned aircraft is another example of State Farm’s commitment to the use of technology to better serve our customers. So far, feedback from those outside the industry continues to be optimistic on the potential benefits of using this type of aircraft.”
Since gaining the FAA’s approval to test and use drones as part of its commercial operations, State Farm has been engaged in flight testing UAVs at private test sites near its corporate offices in Bloomington, Ill. As yet, the insurer hasn’t determined a date for test completion.
Camoriano acknowledged that press coverage raises several questions regarding the use of the technology, but said that concerns arise mostly from recreational use of UAVs.
“We consider customer privacy one of our top priorities, and our use of this technology will adhere to all applicable laws and regulations to ensure consumer privacy,” he said.
Waiting on the FAA
Reports on UAVs’ potential usually mention their usage in the wake of disasters, to provide high-resolution images while accessing areas either too dangerous or inaccessible for manual inspection. A recent example cited is the explosions at a Chinese chemicals warehouse in Tianjin on Aug. 12. Footage shot from a drone shortly afterward vividly captured the extent of the damage.
To date, the reality for U.S. firms has been less dramatic, said Matt Ouellette, owner of Indiana claims service Ouellette & Associates and 2015-16 president of the National Association of Independent Insurance Adjusters (NAIIA). His firm uses drones mainly for commercial building inspections up to 300 feet above ground level and in the immediate aftermath of intersection vehicle collisions to assess the impact.
“Before we go to the expense of renting a boom lift, which costs around $1,500, we can use a drone for no more than $200 to $300 plus the adjuster’s fee for a preliminary inspection to ascertain the cause of damage and whether it is covered by insurance,” said Ouellette. “In some cases, it results merely from poor maintenance of the building.
“A fixed-wing drone flying over an area hit by hurricane or tornado can map out the area as a whole and provide insurers with valuable information on their likely exposure and how many of their insureds have suffered loss or damage. They can home in close and get good pictures.
“You can get FAA approval via a Section 333 exemption, which many businesses are applying for and getting these days. But the majority of drone operators likely operate without FAA approval.” — Grant E. Goldsmith, vice president of Avalon Risk Management
“We use four-prop hovercraft drones rather than the fixed wing variety for our commercial buildings and intersection accident inspections. They’re less expensive than fixed-wing, the latter being the type to which the FAA pays most attention.”
While insurers recognize the benefits of using drones for post-catastrophe inspection, they haven’t actually started using them, he added.
One obstacle is that the FAA’s readiness to exempt companies from the ban on commercial drone use isn’t yet accompanied by regulations setting out guidelines as to what work is and isn’t acceptable.
The FAA, said Avalon’s Goldsmith, “hasn’t yet published its rules for small drone usage with the national airspace, and these rules will likely not be published until 2017, so the interim period will continue to see a growing number of commercial users dodging both the FAA and local regulations at the state and city level while flying for business purposes.
“You can get FAA approval via a Section 333 exemption, which many businesses are applying for and getting these days. But the majority of drone operators likely operate without FAA approval.”
Ouellette said that in the absence of such clarification, some carriers are holding back from using drones themselves or authorizing their use by claims adjustment specialists.
“The passage of any legislation is likely to prove complex as many different parties need to be considered. The aim is for regulation that’s useful and not overly stringent.”
“I assume that many insurers are waiting for the dust to settle on the privacy and regulatory concerns before fully embracing drone technology,” agreed Stephen L. Brown, owner and president of Baton Rouge, La.-based Brown Claims Management Group.
“As an independent adjusting firm, we have had several insurers inquire about using our drone to assist in the inspection of roof claims.
“But it seems that it comes mostly from a place of curiosity, from the standpoint of seeing just what type of imagery this technology can produce in contrast to that generated by more traditional means.”
Brown also struck a note of caution on whether insurers could extend the use of drones beyond investigating catastrophe and hard-to-access risks to include more routine work.
“They could be, but to be honest, the small drones that we use are not easily flown in anything less than optimum weather conditions or where obstructions are nearby — and so we still only use them in a small percentage of investigations and inspections.”
However, there are some applications beyond property losses — specifically general liability and transportations losses — where aerial video can be a tool in documenting the scene of the accident, Brown said.
No Threat to Adjusters
Longer-term, does the drone spell the end of the traditional claims adjuster?
No way, said Ouellette, particularly as UAVs still have to be piloted.
“Certainly they can provide great images; however, the adjuster still needs to follow up with measurement and assessment work. He or she still has to provide much of the essential detail that drones aren’t able to capture.”
Brown agreed. “Drones will continue to be but one tool available to the field adjuster and will never fully replace the personal inspection. There will be instances in which the drone inspection is just not practical under the circumstances, due to adverse weather, physical obstructions, and the like.
“There will never be a day,” he said, “when drones can 100 percent be a replacement for adjuster ‘boots on the roof’ when it comes to property inspections or the personal touch that human claims adjusters can bring to loss investigations, appraisals and settlements.”
2015 RendezVous: Smiles or Scowls?
Nikolaus Von Bomhard was not a happy man this time last year. The CEO of German reinsurance giant Munich Re — in line with its general policy — is rarely outspoken. However, ahead of the September 2014 Monte Carlo gathering of the reinsurance industry’s key personnel, he spoke of being “disappointed, exasperated and even rather appalled by what is happening in the market.”
It’s unlikely that the past 12 months have offered much to lift his spirits. Guy Carpenter reports that global property catastrophe rates were down by 11 percent on average at Jan. 1 2015, the same rate of reduction as the year before. “Reductions were sustained across all lines of business with few exceptions,” the group commented. “We continue to see rate reductions and easing terms and conditions at the various key renewal anniversaries during 2015.”
Attendees at the 59th annual RendezVous in the tiny European principality of Monaco next month will therefore be confronting familiar problems; indeed, the mood could best be described as “the same, only more so.”
Low inflation, minimal interest rates and meager investment returns have regularly featured on the RendezVous agenda since the 2008 global financial crisis broke. More recently, Europe has seen low inflation turn to deflation, while some corporates have followed the lead of its more confident governments and been emboldened to offer negative rates on bond offerings. This year also began with the European Central Bank (ECB) belatedly adopting the experiment applied by both the Federal Reserve and the Bank of England, to kick-start an economic revival by launching a quantitative easing (QE) program.
As for Munich Re, more recent pronouncements have employed milder language — although when the group issued its annual results in May, board member Torsten Jeworrek admitted that market conditions looked fairly certain to remain soft.
“The question for us is not how far the rates can decline,” said Jeworrek. “The question is how to manage the cycle and where to find new business opportunities. We are proceeding on the assumption that the market environment will not change significantly in the upcoming renewal rounds in 2015, unless extraordinary loss events occur, or there are any major changes in the market.”
New Channels for Excess Capital?
With what Aon Benfield describes as “too much capital and less opportunity to deploy it” prevailing, 2015 has seen an upturn in merger and acquisition activity with more defensive and strategic deals than in any year since 2007. Swiss Re’s chief economist, Kurt Karl, said recently that activity pointed to a squeezing out of the middle-tier specialist insurers and reinsurers. “Some firms do not have the scale or the breadth of services to differentiate their offering from more commoditized reinsurance capacity,” he noted.
The unsolicited takeover attempt launched by Italian investment firm Exor for PartnerRe is still grabbing headlines. This has threatened to overturn the reinsurer’s planned “merger of equals” with rival Axis Capital Holdings that was announced at the start of this year.
The resulting turbulence was recently commented on by XL Catlin’s CEO Mike McGavick, who cheerfully admitted: “We’re awfully happy to be able to take advantage of the confusion that mergers create for others.” Admittedly XL can display a degree of schadenfreude; the group’s $4 billion takeover of Lloyd’s of London underwriter Catlin went through relatively smoothly — announced in January, it had wrapped up by April.
“While both XL and Catlin were major reinsurers pre-combination, we are now the eighth largest P&C reinsurer in the world and have a larger suite of products and a broader geographic reach together,” said Greg Hendrick, CEO of XL Catlin’s reinsurance operations.
“This will be the main thrust of our meetings at Monte Carlo; we can entertain any P&C risk that a client faces anywhere in the world and we will be very focused on the overall relationship across products and geographies.”
It will take rather more major M&A deals to change Aon Benfield’s assessment. However, Bryon Ehrhart, CEO of Aon Benfield Americas and a regular speaker at the RendezVous, said that while the pronouncement remains valid, he sees grounds for optimism. “The growth in reinsurance capital continues to outpace the growth in demand for reinsurance,” he said.
“However, material new demand has emerged for U.S. mortgage credit risk and certain life reinsurance transactions. While the industry clearly has the capital to deploy in these areas, the industry’s skills are still developing and currently limit the ability of the industry to match the opportunity.”
Ehrhart also believes that the industry’s leading players have made “material progress” toward incorporating lower-cost underwriting capital into their value proposition. “Reinsurers have seen that they have and can sustain their significant competitive advantages when they optimize their underwriting capital structures.”
So what else will feature on the Monte Carlo agenda next month? Negative interest rates are likely to be a key topic, said Jean-Jacques Henchoz, CEO reinsurance for Europe, the Middle East and Africa (EMEA) at Swiss Re. “After large parts of European sovereign yield curves dipped into negative territory during spring this year, investors have certainly become aware that zero may not necessarily be the lower bound for bond yields.”
“I think the debate now is less about Solvency II content, but about how companies are going to live with it.” — Eric Paire, head of global strategic advisory, Guy Carpenter’s EMEA region
He believes that deflation fears may diminish: While the ECB’s bond buying program under QE had a major negative impact on bond yields over the first half of 2015, it is unclear whether it will remain the dominant driving force. “There are other forces which may push bond yields higher,” said Henchoz. “The U.S. Fed is likely to start hiking interest rates later this year. In addition, it is expected that inflation rates will increase in the second half as oil prices stabilize.
“Overall, the outlook for interest rates remains highly uncertain at this point in time. What is clear, however, is that insurers’ investment returns will not improve significantly anytime soon. This is because even if bond yields increase, existing higher-yielding bonds in insurers’ portfolios will need to be reinvested into lower-yielding bonds. So insurers’ investment returns will recover only slowly and with a time lag.”
Long-established players are also coming to terms with the fact that many of the market’s newer entrants have joined for the long-term. “We believe that alternative capital is here to stay and will be a part of the capital base supporting the reinsurance market,” said Hendrick.
“The only open question in our mind is what size and portion of the overall market will this capital source attain in the coming years. We are positioning XL Catlin to be able to utilize all forms of capital, our own and third party, to ensure that we match each risk profile with the appropriate capital.”
Ehrhart suggested two other topics likely to feature in many discussions. “Cyber [risk coverage] will recur as a topic that is driving demand growth,” he said. “The discussion of alternative capital will move from the debate over whether or not it is a good or bad thing to how best it can be incorporated into a reinsurer’s value proposition to its customers and shareholders.”
Solvency II issues
Just over the horizon is the European Union’s Solvency II legislative program, which introduces a new and harmonized EU-wide insurance regulatory regime in all 28 member states. As it takes effect from Jan. 1 2016, it might be expected to feature highly on this year’s RendezVous agenda. Conversely, having been in the pipeline for several years, is the debate over Solvency II — and the industry’s objections to the directive — now largely over?
“Not at all,” said Eric Paire, head of global strategic advisory for Guy Carpenter’s EMEA region. “I think the debate now is less about Solvency II content, but about how companies are going to live with it, and this includes topics such as internal model validation, volatility of capital requirements, and reconciling increased required capital with low prices and interest rates.
“Furthermore, with doubts about the readiness of some companies and indeed regulators, Solvency II is a long way from disappearing from the agenda.”
Henchoz agreed. “The focus is currently very much on implementation, on understanding how business operates under the new EU solvency regime as well as preparing for application,” he said.
“Many companies are still busy getting their systems ready by 2016, in particular on reporting, and the change towards an economic and risk-based regime has some wider implications which demand a different approach to strategy and products.”
RendezVous 2015 also poses the question of where delegates who usually check in at Monte Carlo’s five-star central Hotel de Paris will find a bed. The iconic venue began a major renovation program last October that won’t be completed until September 2018; until then many will have to settle for an address that is less prestigious — or located further out of town.