Drones — transformational for retail and logistics but a headache for insurers?

The recent announcement that Amazon is to expand its drone delivery service into the UK and Italy, by the end of 2024, provides further evidence to those who believe that drone delivery is on the cusp of converting science fiction into a reality for retailers and logistics operators.

In this article, we consider how far technology has advanced, the current regulation in the UK and potential pitfalls for insurers in this “brave new world”.

The use of drones in retail and logistics

Whilst drones have been both an enjoyable hobby for many and have in recent years been successfully deployed by several police forces in crime fighting and search and rescue missions, their use in logistics has been principally centred in the United States.

Amazon Prime Air spent almost a decade developing and defining its drone delivery service in Lockeford, California. Amazon’s experience there will undoubtedly shape the nature of its future service in the UK.

Walmart, the US supermarket giant, claims to have executed 10,000 “safe deliveries” whilst Alphabet Wing (part of Google) has made 350,000 commercial deliveries across three continents, partnering with retail, logistics and healthcare companies. This record it says, evidences both scalability and efficiency.

Current regulation

The Civil Aviation Authority (CAA) is responsible for the regulation and governance of UK airspace. It first published the “Drone and Model Aircraft Code” in October 2019, which sets out the requirements imposed on all drone operators.

It requires operators (commercial and private) to be registered and in possession of both flyer and operator identification. Importantly, drones are not permitted to fly higher than 400 meters above the ground and operators must at all times maintain a human line of sight with the drone. The permitted drone to human ratio is one. ‘No-fly zones’ are mandated around both airfields and prisons.

The pros and cons of drones and adverse incidents

Proponents of drone deliveries point to the following advantages:

• Speed and efficiency, particularly in the “last urban mile” delivery.
• Operational cost is low.
• Environmental credentials — alleviating traffic congestion by reducing the number of vans/cars from the roads.
• Efficiency — the ability to operate a 24/7 service.

Disadvantages include:

• The fact that drones currently operate in a strict regulatory environment — and have a restricted airspace.
• Limited payload capacity.
• Restricted operational ability in adverse weather conditions — particularly storms and snow.
• Security concerns — drones remain vulnerable to theft or interference.

The most notable adverse incident involving drones occurred in December 2018 when nearby recreational drone use paralysed Gatwick Airport, grounding planes for over a day, although there have also been numerous incidences involving the use of drones to transfer drugs and mobile phones into prisons. Subsequently the Code has mandated “no fly zones” around airfields and prisons.

Drone liability

Recreational and commercial drone users must take out public liability insurance cover and ensure that their personal or organisational ability is mandated by the CAA if their drone and payload weighs 20kg or more.

Personal liability cover may be available under a household policy, though insurers are frequently inserting exclusion clauses for drone liability as their use becomes more ubiquitous.

Internet research shows a wide number of “aggregators”, specialist and general insurers willing to underwrite the cover and there is a wide fluctuation in premium cost. At this relatively embryonic stage, insurers have little in the way of “claims experience” to judge future premiums, although adverse incidents have so far been rare and limited in terms of damage which has eventuated.

As for the future, increased drone usage increases the risk of adverse events occurring. If this is in conjunction with relaxed regulation permitting drones to operate at higher altitudes outside the line of human sight and with a drone to human ratio increased by a factor of 10 or 20 (to render deliveries more commercially cost-effective and efficient), so does the liability risk.

Historically, insurers have been keen to embrace the challenge of insuring against new risks and hazards. The current signs are that rather than seeing this as a headache, many see this as an opportunity to offer new products and services with the reward of increased premium income and an increased customer base.

Commentary

Most commentators see the principal value of drone delivery as being its cost effectiveness for “last urban mile” deliveries, particularly in dense conurbations such as London where traffic density is high.

We are of course, currently, some way distant from a sky buzzing with an armada of drones, delivering a variety of consumer goods, but Amazon’s recent announcement suggests that science fiction is likely, in the foreseeable future, to become an everyday reality for many.