In a worst-case scenario, US-built satellites could end up not only unexportable, but also uninsurable.

For the past 20 years, the Italian-based Generali insurance group has been holding a biennial conference on space insurance; this year's, in late March, was in Florence. The company

chose to highlight the deplorable state of space risk underwriting business in 1998. In the words of Benito Pagnanelli, now CEO of Generali Global's London office which handles the company's satellite business, "total claims paid were nearly double the premiums received that year." This and other figures cited relate to Generali's estimate of total business worldwide, not just the policies it wrote itself.

Further, the trend detected two years ago has been reinforced. The bulk of claims relate not to satellites destroyed through a launch failure, but to those which have developed some defect after being safely established in orbit. Figures released separately by brokers Cecar & Jutheau (the French arm of the Marsh, Inc group) show that almost 69% of last year's losses were caused by defective satellites, and only 31% by launch vehicle failures.

Relatively few of these in-orbit failures involved the total loss of a satellite; in most cases its performance was reduced, or its likelihood of achieving its full design life was diminished.

Expressed in terms of hard cash, global premium volume in 1998 amounted to some $850 million. Claims already paid for losses during the year amount to over $1.4 billion, with some $500 million in claims still outstanding at end-March. If all these prove to be payable, then the industry's outgoings for the year will exceed income by 124%, at least.

Pagnanelli summed up the situation succinctly: "Generali has been one of the major pioneers in this sector, and at present holds a leading position which it wants to maintain, though not at all costs. We are indeed an organization that aims at a just profit, and not a charitable institution."

Capacity, or the amount of money space insurance underwriters have at their disposal to meet claims at any given time, is not running short -- yet. At present it stands at about $1.1 billion. Looked at over a span of years, the space insurance business generally is still in profit, and has been since 1990, though the margin is once again shrinking.

In another way, however, increasing capacity poses its own problems. Pagnanelli drew attention to "the great surge in competition in the market, due to new self-styled operators, who I would not hesitate to define as kamikaze." This can only lead to a "ruthless lowering of premium rates", designed to attract business at almost any cost. Rates now average 8.5% of insured value for launch plus six months in orbit, says Pagnanelli. This is the lowest-ever level, and all of the fall has happened in the past three years.

If this trend continues, he believes, it would inevitably lead to "the withdrawal from the market of the most professional and financially sound insurers."

Specific complaints mentioned by Pagnanelli include claims based on possible malfunction at a later date or non-compliance with a satellite's original specifications, even though its performance is unaffected. But with the way policies are being written, satellite operators feel they are justified in submitting a claim for partial or even total loss. All too often, insurers are quietly paying up instead of arguing.

Renegotiating contracts

Another complaint is that clients or brokers acting for them are trying to renegotiate insurance contracts whenever they see the faintest chance of succeeding. This derives from what Pagnanelli denounces as much less cautious and detailed policy wording, giving rise to "different interpretations and disputes." Pagnanelli drew attention to "cases in which the insured has raised clear objections to providing information on the causes leading to ... failure." Sometimes this is justified "to protect patents or industrial characteristics"; but, increasingly in the case of US satellites, the insurer is prevented from making disclosures by the new draconian provisions of the State Department's "International Traffic in Arms Regulations", which entered into force on 15 March this year (see below)

Pagnanelli himself chose not to make any direct accusation of declining standards in satellite manufacture, the subject of many recent allegations (see box).

Among the operators, SES/Astra takes an entirely different approach from the manufacturers. With seven satellites currently co-located at 19.2 [degrees] E (soon to be eight), SES could also be said to be operating a constellation. CEO Romain Bausch said SES was determined to maintain service to its 27 million end-customers (it offers full redundancy for all channels), and made a practice of insisting on additional testing beyond the satellite manufacturers' requirements (Astra 2A had six weeks extra testing, notably of its xenon propulsion system). As a result, claimed Bausch, SES has not yet had a single failure, at launch or in orbit. His unspoken implication could have been that this was due to SES urging manufacturers to "go that extra mile" in testing satellites.

It should be noted that some 75% of all satellites recently launched have US prime contractors (though many subsystems come from European suppliers, including some of those implicated in recent failures, such as solar arrays and travelling wave tubes). By a curious coincidence, the same proportion of space risks (75%) are underwritten by European insurers, compared with only 15% in the USA. The "Rest of World" is responsible for the balance. Consequently, a high proportion of US-built satellites are "exported", either physically for launch outside the US, or sold to a non-US operator. Further, for the 85% of satellite insurance policies underwritten outside the US, detailed information on the spacecraft should ideally be "exported", so that underwriters can fully understand the risks.

All this could now be put in jeopardy, thanks to (US) Amendments to the International Traffic in Arms Regulations, and (US) Public Law 105-261, otherwise the "Strom Thurmond National Defense Authorisation Act for Fiscal Year 1999." Both of these require that communications satellites be controlled on the US Munitions List, with effect from March 15 this year. The implications of these enactments was just beginning to kick in at Florence at end-March, where Dennis J. Burnett, of the Washington law firm Pierson & Burnett, gave a most alarming presentation.

The essential change in the ITAR amendment is to transfer regulation of satellite exports back to the State Department, taking responsibility away from the Commerce Department which has exercised it for the past several years. In the view of a number of members of the US Congress, Commerce has been falling down on the job, effectively waving through many exports without adequate scrutiny. All this is now changing.

The most conspicuous casualty to date has been the Hughes $450 million contract for the APMT GEO regional mobile satellite, for a Singapore-based consortium which is 51% Chinese-owned. The manufacturer now accepts that this contract is lost, leaving it with almost $100 million of presumably irrecoverable expenses. But there are other instances of contracts still locked up in scrutiny, or just not bid for through fear of interminable negotiations. A more detailed survey will have to await the next issue of Interavia.

Export licence delays

Pressure of work is one major factor delaying issuance of export licenses, believes Burnett. State Department employees, "terrified of losing their jobs", are apparently examining the security implications of every nut and bolt. They are supposed to clear export applications in 90 days (whether "working" or "calendar days" is unclear), but do not look like succeeding. Allocation of resources to take on extra qualified staff has been a problem. But more significant has been an apparent requirement for US satellite manufacturers to keep their engineers "right out of the loop" in any discussions with foreign third parties. These would include the very underwriters who are supposed to be assessing the insurability of all new technology. In a worst case, US-built satellites could end up not only unexportable, but also uninsurable. Although Public Law 105-261 "does not require the application of special export controls for the launch of US-origin satellites ... from or by nationals of countries that are members of NATO or major non-NATO allies" (a number were specified, not including China or Russia), there is language in the amendment that requires export controls "as appropriate in furtherance of the security and foreign policy of the USA". If in doubt, check and double-check seems to be State's interpretation. Further, DoD personnel -- whose expenses must be fully reimbursed by the exporter -- must monitor all information exchanges with foreigners. It remains to be seen whether the US satellite industry will survive this latest attempt to hamstring it, or whether some degree of sanity will eventually emerge.

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RELATED ARTICLE: MOTOROLA DEFENDS "CHEAPER, FASTER" APPROACH

Few manufacturers actually addressed the Generali meeting, though all the majors sent delegates. Of those prepared to speak, Mark Borota, senior VP of Motorola Communications Enterprise, made the most vigorous defence of the "cheaper, faster" approach in its execution of the Iridium prime contract. Motorola admits to 12 in-orbit failures so far (other sources say 14), out of 86 satellites launched to date, but says that that there have been no such anomalies for the past five months, thanks largely to new software uploading. Borota says the Iridium constellation "is designed to tolerate failures", and that the company is concerned "only with the health of the constellation as a whole" (it currently offers 99.95% availability). It is understood that Motorola is absorbing some of the cost of replacement satellites, but it has all the same lodged claims during the past two years totalling a reported $236 million.