Insuring the low-altitude airspace economy in China

Advances in digital and intelligent technologies, and the transition to a green economy, are incentivising companies to make use of the airspace below the altitude required for commercial aviation. This covers altitudes of up to 3000 metres above ground.

Low altitude aircraft include drones, which are typically unmanned aircraft, and the rapidly evolving segment of electric vertical take-off and landing (eVTOL) vehicles, which can carry passengers, as well as commonly used general aviation planes and helicopters that operate within the limited airspace (see Figure 1).

Figure 1: Low altitude airspace and aviation activities

Since 2019, the US, the European Union, Japan, South Korea and others have developed plans to reform airspace systems, transport systems and R&D to enable greater Urban Air Mobility (UAM), defined essentially as manned and unmanned air traffic transportation in urban areas. China developed its National Comprehensive Three-dimensional Transportation Network Plan in 2021.

The low-altitude airspace economy is a broader concept that covers the output of UAM transportation in the low altitude airspace. It includes economic activity from the manufacture of the UAM aircraft to their operation and services, related physical and digital infrastructure facilities and their use in conventional industries (see Figure 2).

The low-altitude airspace economy is viewed as a strategic emerging industry in China. Nearly 30 provincial and municipal governments have issued specific development plans and targets. According to CAAC, China's low-altitude airspace economy exceeded CNY 500 billion in 2023 and is anticipated to soar to CNY 3.5 trillion by 2035.

Our research centres on drones and eVTOLs, the key low altitude aircraft emerging from new technologies. These are manufactured using the latest innovation in materials, power batteries, joint communication and sensing (JCAS) technologies, cloud computing and artificial intelligence.

Figure 2: Overview of the low altitude airspace economy

The global drone market is growing rapidly, with a market size expected to reach USD 55.8 billion by 2030 (a 7.8% compound annual growth rate) from an estimated USD 30.6 billion in 2022. Within this, the commercial drone segment is expected to grow at 8.3% annually on average, outperforming the recreational drone segment.

China's civil drone market reached USD 16.5 billion in 2022 and accounts for more than half (54%) of the global civil drone market.¹ As of June 2024, 1.88 million civil drones were registered in China, and the number grew by 34% annually (compound annual growth rate) between 2019 and 2023.

eVTOL vehicles are designed to transport passengers or cargoes through vertical take-off and landing. They use electricity as all or part of their energy system, and have the advantages of being pollution-free, low-noise and cost-effective compared to traditional helicopters. 

The eVTOL industry globally is generally in the configuration or testing stage, but in China eVTOLs are ready for commercial use. In December 2023, the first eVTOL received an airworthiness certification from the Civil Aviation Administration of China (CAAC), indicating that safety and quality standards for commercial operations were met.²

Several local Chinese governments have announced plans to construct take-off and landing facilities for low-altitude aircraft and some pilot eVTOL programs are expected to be launched in several cities in China in the near term.   

Low-altitude aircraft also bring a broader range of innovations to major downstream industries such as agriculture, aerial monitoring, firefighting, disaster relief, logistics, urban transportation and sightseeing.

Specific use cases can include:

• Agriculture: crop and wildlife monitoring, spraying seeds, pesticides and fertilizer, land mapping, disaster assessment, agricultural research and development.
• Logistics: package delivery and tracking, inventory management, package inspection, package sorting, monitoring, route planning and logic data analysis.
• Power line inspection: regular inspection and monitoring, construction supervision, and rapid response.
• Emergency rescue: disaster assessment, personnel positioning and rescue, monitoring, provisions delivery, communication relay and night lighting.
• Surveying: geological survey, urban planning, archaeological research, coastline detection, and heritage protection.

The diverse range of low-altitude aircraft types and their manufacture, service and uses with integrated fast-evolving digital technology create emerging risks (see Figure 3). The underlying risks are typically considered aircraft manufacturing capabilities, supply chain security, service stability, and the collateral impacts on third parties.

In our publication, we focus on risks inherent to the aircraft and map them to use scenarios.

Table 1: Risk landscape of the low altitude airspace economy

Overall, the probability of aircraft risk occurrence is closely related to the maturity of the technologies used, the operating environment, flight conditions, extent of use, and regulatory requirements. The main factors affecting potential losses include the value of the aircraft, and the application scenario, especially when carrying passengers or operating in densely populated areas.

Drones and eVTOLs introduce new risks that are difficult to assess and not yet covered by typical insurance policies for general aviation aircraft. First, the risk levels of drones and eVTOLs are more impacted by use scenarios, terrain, and flight routes, due to their frequent usage but lower flight endurance, speed, and altitude.

Second, the varying wing configurations of drones and eVTOLs reflect diverse technological roadmaps by manufacturers, impacting the level of risk. As drone and eVTOL technology evolves rapidly, so do the associated risks, unlike the more mature general aviation aircraft.

Third, emerging legal issues lead to ambiguity in low-altitude related liabilities. These issues can include privacy and data security due to the adoption of new technology, business model and airspace,. For instance, the absence of algorithm standards in "Safety Requirements for Civil Unmanned Aircraft Systems" makes it difficult to prove the faults in algorithms and so can result in unclear product liability. As such, existing insurance for general aviation may be less applicable to drones and eVTOLs.

Chinese P&C insurers are seizing the business opportunities from the low-altitude economy. As of July 2024, there are 45 insurance products on offer that involve the low-altitude airspace economy and/or drones, according to registered records with the Insurance Association of China. These policies cover aircraft, ancillary facilities and equipment, typically tailored to specific application scenarios such as agricultural drones and power wire inspection drones.

The main liabilities covered include drone property damage, drone third-party liability, and personal accidental injury (see Table 2).

Table 2: Low-altitude airspace insurance coverage

Major Chinese insurers are exploring package solutions to cover multiple risks tailored to typical use scenarios. Insurers have developed products with inclusion of professional liability, product liability, cyber security, conventional property and liability risk. These address scenarios from upstream (R&D) to downstream use cases (eg, package delivery, passenger transportation, urban governance).

With technological advances and policy improvements, the economic value boost from eVTOL and drone applications is likely to grow over time. We expect risk exposures to increase as drone and eVTOL flight times become longer and their use more frequent. Businesses are also expected to seek insurance covers to ensure financial stability against increasing complex risks while also complying with legal and regulatory requirements for the use of drones in commercial operations.

Lithium battery advancements in energy density, safety, and environmental adaptability can also introduce new risks. These may further increase the need for insurance coverage for the manufacturers and users of low-altitude aircraft. In some provinces, agricultural drone insurance is already included in policy-based agricultural insurance with financial subsidies.

We expect the rapid development of low-altitude aircraft and their applications to drive insurance growth. Based on the penetration of non-motor insurance and liability insurance, along with new product trends in the Chinese insurance market, we estimate that the low-altitude insurance market is expected to reach CNY 8-10 billion by 2035.

As for any emerging risk, it is not easy for insurers to accurately identify, assess, and price risks related to drones and eVTOLs given the rapid advances in technology, application scenarios, consumer behaviour and regulations.

Insufficient information may raise the risk of adverse selection. For instance, for insurers lacking specific insurance products for drones and eVTOLs and instead covering drones under "commercial general liability insurance," it is crucial to clearly define the coverage scope, the insured's obligations, and any exclusions through extended clauses.

Without this clarity, disputes may arise over liability and damages in claims. Recent court disputes in China show that drone applications are still new and complex, resulting in discrepancies between court awards and insurance companies' assessments based on their prior experience.

Insurance should be an essential financial tool for the low-altitude airspace economy ecosystem. We are seeing growing opportunities in fostering knowledge of evolving low-altitude related technology and enhancing data accumulation with manufactures and operators.

Opportunities also lie in segmented markets where insurers can develop new products and new business models to accommodate diverse low-altitude applications, thereby building up their unique competitive strengths.