More than 400,000 miniature remote-controlled aircraft fly in our skies.1 Recreational marijuana is currently grown and sold in eight states. Smart contracts can now automate a number of business transactions. And the Chicago Cubs are World Series winners.
It was a whirlwind year, and you can be excused for losing track of all the major emerging insurance issues out there. But the ISO Emerging Issues team has you covered. We’re charged with identifying, researching, and tracking trends that could potentially affect the property/casualty industry in 2016 and beyond. You can check out our findings on the ISO Emerging Issues Portal (ISOnet login required).
This is the first of two parts of our 2016 emerging issues retrospective, where we’ll highlight a few hot-button emerging issues from the past 12 months.
In Part I, we discuss the following questions as they relate to drones, marijuana, and blockchain technology: What’s happened with these issues since January? How have governments and stakeholders reacted? What has ISO been doing to address them?
Beginning in late 2015, the Federal Aviation Administration (FAA) started promulgating final regulations governing recreational use of small drones. In August 2016, the FAA implemented final regulations governing commercial use of small drones.
In December 2015, the FAA announced2 that it would require anyone over 13 years of age operating a recreational drone weighing between .55 pounds and 55 pounds (including payloads) to register the drone online with the agency. The final regulations3 also addressed safety requirements, including an altitude limit of 400 feet, limiting operations to visual line of sight, and certain restrictions as to where drones can be operated.
On the commercial side, the 2012 FAA Modernization and Reform Act4 charged the FAA to formulate regulations for small commercial drone use. The final rule5 took effect in August 2016 with a number of conditions and limitations for drone use, including the following:
- The drone plus payload must weigh less than 55 pounds.
- The drone cannot be operated at an altitude that exceeds 400 feet or at a speed of more than 100 miles per hour.
- The drone must be operated within the visual line of sight of the operator.
- The drone cannot be operated at night, within five miles of certain airport reference points, or “over any persons not directly participating in the operation.”
Crucially, under the new regulations, the FAA will allow6 companies to apply for a certificate of waiver regarding some of the requirements under the new rule, including those related to daylight operations, operating above people, and pilots operating drones within the visual line of sight.
State regulation of drones
State policy on drones has often been overshadowed by the FAA’s actions. But states haven’t been idle, with 32 states7 enacting laws addressing drones in some capacity as of 2016. This year alone, 31 pieces of legislation were passed across 18 states. Many states began with policies defining drones, prescribing uses for law enforcement, and establishing restrictions on general public use. Other pieces of legislation have addressed such issues as harassment and video voyeurism concerns, drone interference with first responders, and drone operations over critical infrastructures.
This year, the California General Assembly also attempted to pass a law prescribing mandatory liability insurance requirements for owners and operators of drones. California Assembly Bill 27248 tasked the Department of Insurance with defining “adequate protection” against bodily injury and death, as well as for property damage arising out of the operation of drones. Ultimately, the bill was vetoed9 by Governor Edmund Brown Jr., who felt that the measure created “significant regulatory confusion.” He is in favor of a more “comprehensive approach” that takes into account the FAA regulations.
Following the implementation of ISO general liability drone coverage and exclusion options in 2015, ISO continued to evaluate drone exposures and in 2016 developed endorsements for several other commercial lines:
- Capital Assets
- Commercial Excess Liability
- Commercial Inland Marine
- Commercial Liability Umbrella
- Commercial Property
We also introduced new endorsements for our Homeowners program, excluding liability for bodily injury or property damage with respect to unmanned model or hobby aircraft, including recreational drones.
To learn more about ISO drone coverages, visit the ISO Drone Resource Center.
This year, more states legalized either medical or recreational use of marijuana. Before the November 8 elections, Ohio10 and Pennsylvania11 enacted laws allowing for medical marijuana use. On November 8, voters in a number of states decided on various ballot initiatives that addressed legalizing marijuana either for medical or recreational use.
Recreational use and commercial regulations
California12 , Maine13 , Massachusetts14 , and Nevada15 all passed ballot initiatives (state statues or constitutional amendments that bypass the legislature and are put to popular vote) that generally legalized the recreational use, possession, and cultivation for personal use of certain amounts of marijuana for adults age 21 or older, as well as provisions for the regulation and licensing of commercial marijuana enterprises. All the initiatives provided, in some form, that employers will not be required to accommodate marijuana use in the workplace or amend their existing workplace policies restricting employee marijuana use. Some of the proposed commercial controls also include, in some form:
- “track and trace” procedures to ensure supply chain visibility from cultivation of marijuana to its sale
- requirements for product testing for contaminants before sale
- regulations governing operation of a motor vehicle while under the influence of marijuana
The four states listed above now join Alaska, Colorado, the District of Columbia, Oregon, and Washington, which previously legalized recreational marijuana in some form.
A ballot in an additional state, Arizona16 , failed to garner sufficient votes to legalize recreational marijuana.
Voters in three other states approved ballots that legalized medical marijuana in some form: Arkansas17, Florida18, and North Dakota19 . Additionally, voters in Montana20 approved a measure that loosened existing restrictions on medical marijuana.
Nevertheless, the federal government continues to list marijuana as a Schedule I drug under the federal Controlled Substances Act of 197021 (CSA), which defines Schedule I as drugs “with no currently accepted medical use and a high potential for abuse” and are considered “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” In addition to marijuana, Schedule I includes drugs such as heroin, peyote, and LSD.
This year, the Drug Enforcement Agency (DEA) declined petitions from two governors to reclassify marijuana22, thereby maintaining its listing as a Schedule I drug. However, the DEA will ease its restrictions on marijuana research, possibly expanding resources to study potential medical benefits of the drug beyond the only currently approved research center at the University of Mississippi.
In years prior, the Department of Justice and the Treasury Department each released a marijuana-related guidance under the Obama administration. The 2013 Department of Justice guidance23 generally clarified the department's enforcement priorities with respect to states with marijuana programs. The 2014 Treasury Department guidance24 generally outlined the legal responsibilities for financial institutions when conducting or considering conducting business with marijuana-related entities. However, these guidances and federal policy related to marijuana could potentially change under the incoming Trump administration.
State vs. federal regulation
The four states that legalized marijuana for recreational use in November somewhat addressed the potential conflict between their laws and federal drug laws.
For example, the Maine initiative stated that it “may not be construed to shield any individual, partnership, corporation, firm, association or other legal entity from federal prosecution.” The California initiative states that its provisions “shall be liberally constructed to effectuate the purposes and intent” of the initiative, provided that none of its provisions “shall be interpreted or construed in a manner to create a positive conflict with federal law” such that federal and state law “cannot consistently stand together.”
Additionally, the Massachusetts and Nevada initiatives included provisions for contract enforceability, generally stating that no commercial marijuana-related contract may be deemed unenforceable on the basis of federal law.
Blockchain, a distributed ledger technology that time-stamps transactions and could help prevent fraudulent claims, was tested in several real-word use cases this year, including the following:
- A global insurer piloted25 natural catastrophe swaps.
- A partnership successfully experimented26 with a blockchain-based smart contract system to track goods and authorize payments along a supply chain.
- A U.K. start-up platform for home sharing provides27 per property per day insurance.
- A proof-of-concept platform was developed28 to provide insurance policies for purchases, rentals, and services between individuals.
Like a traditional accounting ledger, blockchains are essentially databases29 with records of historical transactions. Each “block” is an “entry” on the ledger and is connected to past blocks with a cryptographic signature, thereby creating a transaction history for a piece of data. String these “blocks” together and you get the blockchain.
What makes blockchains so potentially revolutionary is that they are digitally distributed networks of data. That is, blockchains operate through a system of networked computer systems that use cryptographic software to verify proposed data transactions in a consensus-based manner.
If a party wants to add a block to the chain—that is, if the party wants to execute a data transaction—the distributed network will run certain algorithms to ensure that the transaction is valid for previous transactions. If the transaction is determined valid, the block is added to the chain and is linked to previous transactions with a unique cryptographic signature. The new block then becomes another entry in the distributed ledger with a time stamp visible to all participants of the blockchain network. Crucially, this time stamp is immutable because no single participant of the blockchain can execute a change on the chain. In other words, the very lack of a central authority to enforce transactional validity creates the trust needed to transact along the chain.
This essentially means that the blockchain allows for a trustworthy, public (to the blockchain’s participants), and nearly instantaneous method for executing data transactions. That’s partly why digital currencies such as Bitcoin are based on blockchain technology. It’s also why blockchain is capturing the attention of financial institutions and insurance companies.
Blockchain and insurance
Claims handling and fraud prevention are two key areas where blockchain could have an impact on insurers. The blockchain network of policyholders, insurer(s), and external data sources (police reports, medical information, and the like) could act as a so-called “smart” contract, wherein the policy agreement between insured and insurer is entered onto the blockchain. When the policyholder files a claim, the data would be recorded on the blockchain, giving both insured and insurer an immutable, verifiable record of an initial claim. The distributed network could then verify the validity of the claim. This could help prevent fraudulent claims, administrative errors, and expensive claims auditing. The blockchain prevents double claims, automatically records the transactions without administrative intervention, and potentially provides details about claims otherwise available only through an extensive auditing process.
This year, ISO held a webinar featuring Blockchain LLC’s head of strategy and partnerships, Paul Szurek, who discussed blockchain technology and its potential impacts.
In the second part of the 2016 “Year in Emerging Issues,” we’ll discuss developments in home sharing, ridesharing, autonomous vehicles, and connected vehicles. You can learn more about the issues discussed in both Parts I and II on our ISO Emerging Issues Portal (ISOnet login required).
Lucian McMahon is a Product Development Analyst for ISO’s Emerging Issues team and Austin Bailey is a National Affairs Analyst with ISO’s Government Relations division.
1 FAA. (2016) FAA Releases Drone Registration Location Data. Retrieved from https://www.faa.gov/news/updates/?newsId=85548
2 FAA. (2016) FAA Announces Small UAS Registration Rule [Press release]. Retrieved from https://www.faa.gov/news/press_releases/news_story.cfm?newsId=19856
3 FAA. (2016) Fly For Fun. Retrieved from https://www.faa.gov/uas/getting_started/fly_for_fun/
4 FAA Modernization and Reform Act. (2012) Retrieved from https://www.gpo.gov/fdsys/pkg/CRPT-112hrpt381/pdf/CRPT-112hrpt381.pdf
5 FAA. SUMMARY OF SMALL UNMANNED AIRCRAFT RULE (PART 107) (2016). Retrieved from https://www.faa.gov/uas/media/Part_107_Summary.pdf
6 FAA. Beyond the Basics (2016). Retrieved from https://www.faa.gov/uas/beyond_the_basics/#waiver
7 NCSL. (2016) Retrieved from http://www.ncsl.org/research/transportation/current-unmanned-aircraft-state-law-landscape.aspx
8 California Legislative Information. (2016) Assembly Bill 2724. Retrieved from http://www.leginfo.ca.gov/pub/15-16/bill/asm/ab_2701-2750/ab_2724_bill_20160831_enrolled.html
9 California Office of the Governor. (2016). Retrieved from https://www.gov.ca.gov/docs/AB_1662_Veto_Message.pdf
10 Ohio Legislature. (2016). Retrieved from https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA131-HB-523
11 Pennsylvania General Assembly. (2016) Retrieved from http://www.legis.state.pa.us/cfdocs/billInfo/bill_history.cfm?syear=2015&sind=0&body=S&type=B&bn=3
12 California Office of the Attorney General. (2016) Retrieved from https://www.oag.ca.gov/system/files/initiatives/pdfs/15-0103%20(Marijuana)_1.pdf?
13 Maine Department of the Secretary of State. (2016) Citizens Initiatives & People's Veto. Retrieved from http://www.maine.gov/sos/cec/elec/citizens/index.html
14 Massachusetts. (2015) An Initiative Petition For A Law Relative To The Regulation And Taxation Of Marijuana. Retrieved from http://www.mass.gov/ago/docs/government/2015-petitions/15-27.pdf
15 Nevada Secretary of State. (2016) Retrieved from http://silverstateelection.com/ballot-questions/
16 Ballotpedia. (2016) Retrieved from https://ballotpedia.org/Arizona_Marijuana_Legalization,_Proposition_205_(2016)
17 Ballotpedia. (2016) Retrieved from https://ballotpedia.org/Arkansas_Medical_Cannabis_Act,_Issue_7_(2016)
18 Ballotpedia. (2016) Retrieved from https://ballotpedia.org/Florida_Medical_Marijuana_Legalization,_Amendment_2_(2016)
19 Ballotpedia. (2016) Retrieved from https://ballotpedia.org/North_Dakota_Medical_Marijuana_Legalization,_Initiated_Statutory_Measure_5_(2016)
20 Ballotpedia. (2016) Retrieved from https://ballotpedia.org/Montana_Medical_Marijuana_Initiative,_I-182_(2016)
21 US Drug Enforcement Agency. (2016) Drug Schedules. Retrieved from https://www.dea.gov/druginfo/ds.shtml
22 Carrie Johnson, “DEA Rejects Attempt To Loosen Federal Restrictions On Marijuana,” NPR, August 10, 2016, Retrieved from http://www.npr.org/2016/08/10/489509471/dea-rejects-attempt-to-loosen-federal-restrictions-on-marijuana.
23 US Department of Justice. (2013) Guidance Regarding Marijuana Enforcement. Retrieved from https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf
24 Federal Reserve Bank of Minneapolis. (2015) BSA Expectations for Marijuana-Related Businesses. Retrieved from https://www.minneapolisfed.org/publications/banking-in-the-ninth/bsa-expectations-for-marijuana-related-businesses
25 Allianz. (2016) Blockchain technology successfully piloted by Allianz Risk Transfer and Nephila for catastrophe swap. [Press release]. Retrieved from http://www.agcs.allianz.com/about-us/news/blockchain-technology-successfully-piloted-by-allianz-risk-transfer-and-nephila-for-catastrophe-swap-/
26 Emily Cadman, “Aussie Bank's 7000-Mile Blockchain Experiment Could Change Trade,” Bloomberg, October 23, 2016, Retrieved from https://www.bloomberg.com/news/articles/2016-10-23/cotton-bales-7-000-mile-trip-heralds-blockchain-future-in-trade.
27 Haley Kirton, “Blockchain, the technology behind digital currency bitcoin, makes a splash in insurance to offer a solution to homeowners renting out part of their property,” City A.M, March 10, 2016, Retrieved from http://www.cityam.com/236468/blockchain-the-technology-behind-digital-currency-bitcoin-makes-a-splash-in-insurance-to-offer-a-solution-to-homeowners-renting-out-part-of-their-property.
28 Luke Parker, “LenderBot by Deloitte and Stratumn to bring insurance to the sharing economy using bitcoin’s blockchain,” Brave New Coin, July 16, 2016, Retrieved from http://bravenewcoin.com/news/lenderbot-by-deloitte-and-stratumn-to-bring-insurance-to-the-sharing-economy-using-bitcoins-blockchain/.
29 UK Government Chief Scientific Adviser. (2016) Distributed Ledger Technology: beyond block chain. Retrieved from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledger-technology.pdf