The revolution of risk and insurance in aerospace

12 September 2018

From automated passenger drones to space tourism, risk and insurance in the aerospace sector is set to undergo a major revolution in the coming decades.

Technology is already transforming air travel, with automation and robotics playing a key role in improving safety, flight efficiency and passenger experience both at the airport and in the air.

In the cockpit, powerful computers and autopilot capabilities have drastically reduced the risk of pilot error; in flight school, pilots can be trained in virtual cockpits; and on the runway, robots and drones are increasingly being used to conduct fast, efficient aircraft inspections.

Yet this is just the start, according to Peter Elson, CEO of Aerospace, at JLT Specialty: “Advancements in composite materials, the ability to simulate environments to design, test and develop technology, and the availability of capital are funding a range of exciting new projects that could transform the very nature of air travel itself.”

Decades after Concorde was decommissioned, for example, airlines are investigating how lighter hull technology and improved fuel efficiency could mean supersonic planes make a comeback.

Meanwhile, tests are underway in Dubai on autonomous passenger drones while companies such as Space X and Virgin are making headway in their ambitious quests to make commercial space flights a reality.

Virgin Galactic plans to offer, among other things, suborbital tourist flights, while Space X’s goal is to transport mankind to a colony on Mars. However, major airlines are already busy conducting research and development to ensure they do not get left behind.

“I suspect that if the developers get the technology right, with adequate safety measures and liability coverage, there could be room for all of these modes of air travel to co-exist,” Elson says.

According to William Smith, Global Executive, Aerospace, at JLT Specialty, the insurance market is “absolutely dedicated” to developing insurance coverages for emerging technologies. “These are the clients of the future,” he says.

However, all these projects must overcome significant challenges before they become a reality. Finding the right ticket pricing point, for example, could be a stumbling block for supersonic planes, while autonomous drones and space flight will only succeed if the public has full confidence in their safety.

Drone hazards

Drones are already a growing concern for insurers. While, in most countries, commercial drones (used in the media or as aerial surveillance tools in a range of sectors) must be registered, insured and operated by trained pilots, personal drones are typically unregistered and uninsured.

“Sooner or later one will cause a serious air accident, but insurers do not yet know what the scale of loss will be,” says Matthew Day, Director of specialist aviation broker Hayward Aviation, part of the JLT Group.

Even drones insured under specialist aviation public liability cover are unlikely to have sufficient limits to cover a lethal collision with a passenger airplane. “All it would take was for one drone to cause a major air crash and there will be an immediate and dramatic hardening of drone insurance rates and coverage,” Day says.

Controlling air space to avoid collisions is the primary concern when it comes to unmanned passenger drone flight, says Day.

General liability risk will also vary significantly depending on the environment in which these drones would be flying: for example, a busy city versus remote areas.

Drone battery life is another challenge, though in Dubai – where tests of passenger drone technology are at their most advanced stage – remote solar-powered charging stations have been developed that allow drones covering long distances or operating in hostile territories to recharge automatically.

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People in space

Space endeavours are, of course, fraught with risk, as demonstrated by a recent failed VSS Enterprise test flight, which broke apart in mid-air, killing one of its pilots.

While most space projects to date have required coverage of the assets themselves (the rockets) as well as some third-party liabilities associated with the launches and re-entries, the primary challenge for insurers in the future will be to insure the passengers. This is a new emerging risk which previously wouldn't have been considered. “All of a sudden, there will be people on these voyages – not astronauts, but private individuals with only rudimentary training. This introduces a host of risks,” says Elson.

“The loss history of commercial space missions has been one failure in approximately every seven or eight. You can’t sustain a passenger business model with that number, so operators have to drive towards a whole different level of reliability that is much closer to the airline environment,” he adds.

Unmanned rocket launches are currently insured under satellite policies but, in the future, coverage for passenger voyages will be more akin to today’s aviation policies. “The liability to the passengers on board may well exceed the value of the hardware itself,” Elson notes.

Public safety remains the primary concern for these projects, and arguably the key challenge for both the operators and their insurers.

Airline safety performance is at an all-time high – there were no deaths at all from commercial air flights in 2017 – but with aviation coverage as broad and cheap as it has ever been, aviation underwriters are struggling to make profit and the challenges of insuring new and daring forms of air travel are welcome.

“Insurers have a vested interest in keeping up to speed with new risks and technologies and to provide specialist underwriting capability to support these risks, as they will generate the premiums and profits of the future,” says Elson. “Innovation creates future demand.”

For more information, please contact ClientFirst@jltcanada.com.

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