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Pay as you fly: drones show the way

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In January 2018, the first usage-based insurance cover for drones in Europe was launched, with capacity provided by Allianz. Since its debut, Flock Cover has analysed and priced risk for more than 500,000 drone flights in what could be a sign of how the future face of insurance may take shape.

The brainchild of London-based insurtech Flock, the pay-as-you-fly product is available via an app that crunches advanced data-driven analytics in real time using a proprietary risk evaluator.

According to a new white paper from Flock, this approach of quantifying, mitigating and insuring drone flight risks has translated into premium savings for clients. Drone pilots use the data to identify when and where it is safest to fly, and on average get to lower their final quote by 15%.

A use-as-you-pay concept using Big Data is not new. But in the world of insurance, where a reluctance to move with the times is still evident in many corners, underwriters are clinging on to the familiar practice of pricing risk based primarily – if not wholly – on historical data.

That stubbornness to move quickly in step with an ever-accelerating world could come at a high price for insurers who simply won’t accept new ways of doing things. Those who cling to certainty could potentially lose market share to insurtechs willing to explore innovative techniques that are helping them to swiftly penetrate new markets.

The drones market is a good example. It’s one of the new high-growth areas that insurers appear to be still struggling to find an answer to.

The historical pricing formula, according to the white paper by Flock, does not work for the drones market because of a lack of past claims data. Using this approach will not result in an accurate calculation of premium prices. And in the process drone operators end up paying far more than they probably should.

To make it even worse, drone pilots are a very mixed bag. Some are fixated on safety above all, others are anything but safety-conscious. Some pilots are very experienced and skilled, others are neither. But both are quite likely to pay the same level of premium.

Flock’s internal assessments show flight risk profiles can vary by over 10,000% through changes in pilot experience and flight location.

“The application of traditional insurance pricing methods in the drone industry has led to many drone operators and enterprises paying substantially more for their insurance than their risk actually requires,” Flock says in the white paper.

“This opaque ‘one-size-fits-all’ approach means that proactive risk mitigation is not incentivised or rewarded by insurers, despite the likelihood of fewer claims.”

The drones market, according to a Goldman Sachs study, will be worth $US100 billion ($145 billion) by next year, with the bulk of growth fuelled by commercial activity.

“This, in turn, will fuel the growth of the drone insurance market, due in part to the regulatory requirement for commercial operators to have compliant insurance policies in place,” Flock says.

“While the growth trajectory is steep, the industry is still relatively nascent. As such, the amount of historical data that insurers have to work with is relatively low.

“This lack of data presents a number of obstacles for insurers to intelligently or fairly price drone insurance for customers, calling into question whether traditional pricing methods are suitable for the drone industry.”

According to Flock’s white paper, insurers are still struggling to price the risk.

The successful takeoff of Flock Cover is significant on many fronts for the insurance industry. Crucially it shows just how Big Data could be applied in underwriting new business risks.

“The rise of flying robots has coincided with the rise of Big Data. When used intelligently, Big Data can be harnessed to quantify, intelligently price, and mitigate drone flight risks in real-time.

“As such, insurance is more transparent, with fairer pricing tailored to individual risk profiles. What’s more, rich data insights can enable drone operators to fly safer, and be rewarded for doing so.”

“This new alternative to traditional insurance is known as an ‘exposure-based’ approach.”

With the use of drones becoming more common – ironically, insurance is an industry that’s finding an increasing range of uses for them – it will be interesting to see how the “exposure-based” approach develops.