One year ago, the unfortunate conjunction of two major crises in the aerospace world nearly knocked out the space insurance market. Twelve months later, the first signs of a slow recovery are seen with a resumption of underwriting activity. Nevertheless, all the players remain extremely cautious

2001 was a nightmare odyssey for the space insurance sector. The last quarter turned out to be apocalyptic with the turmoil in the insurance sector in general and its aerospace branch in particular following the September 11 events. At the same time, Boeing Satellite Systems' new workhorse, the BSS-702 series, experienced an epidemic of in-orbit failures leading to insurance claims worth more than $2 billion. Some reinsurance companies could no longer cover the claims and went out of business, undermining the very foundation of the system.

At the end of the year, the negotiations regarding the reinsurance capacity assigned to the space sector, traditionally renewed on January 1st, drew a new landscape for space insurance. Several prestigious players, such as Australia's GIO or Belgium's Aviabel, decided to exit the business, the latter after 15 years. Most of the remaining insurance groups, such as Italy's Generali, the traditional largest player in the field, decided to reduce their own exposure and shrank their capacity. As a result the theoretical insurance capacity available on the worldwide market plummeted from well above $1 billion to less than $800 million. The actual available capacity that can be engaged on a single space launch is now estimated at about $450 million.

Contracts in 2002

The year 2002 began with nearly no new insurance contracts signed. By mid-year, the market woke up slowly with insurance contracts to cover the launches of Echostar 8, flown on August 22 atop a Russian Proton vehicle, and of Canada's Nimiq 2, tentatively planned for launch in December on Lockheed Martin's second Atlas 5. Surprisingly, Eutelsat was able to complete the insurance coverage of three of its satellites on the maiden Atlas 5 and Delta 4 vehicles as well as on the first uprated Ariane 5 featuring its new ESC-A cryogenic upper stage. Discount launch prices, the low cost of the W5 satellite and highly advantageous launch contract conditions (such as a total refund in case of launch failure on both Atlas and Delta) may explain this. Moreover, a renegotiation of the insurance contract for the launch of the second Thuraya geomobile is said to have been discretely completed. Boeing had to modify the BSS-GEM satellite platform following the BBS-702 failures thus changing the satellite technical specifications. The original insurance coverage, valued at $800 million, was the largest ever placed on a single launch.

Several large contracts are also on the horizon. SES-Americom is negotiating an insurance package to cover the launch of six satellites, to be launched on Ariane, Atlas and Proton boosters. The well-known professionalism of SES--one of the only satellite operators ready to postpone a launch by more than one year to conduct additional pre-launch testing on a spacecraft--is considered a positive point by the insurance community. Insurance contracts are also being discussed for Loral's NSS-8 and two Astrium-built Intelsat 10s. The coverage of this latter pair is challenging as they combine the first flight of a new high-power satellite bus (the Eurostar 3000) with the use of new upgraded versions of the Proton and Zenit launchers.

"In the end, this will have been a bad year," estimated Benoit Condroyer, space insurance broker for Aon Space. "We will stay well below the levels of last year and of the year before."

Wait and see

With launches proceeding at a slow pace but with continuing success and with no major claim this year, the sector is calming down. The premium rates, which had reached unprecedented levels--but of pure theoretical value with no real contract signed--have begun to stabilize and are slowly decreasing. However, due to the small number of contracts effectively signed, a firm trend is hard to identify.

A paradoxical consequence of this is that these first signs of premium rate decrease are actually hindering the recovery as many operators are preferring to wait for better conditions to arise before entering negotiations. As a result, numerous insurance contracts for launches in 2003 could be signed at the very last moment. Obviously, this risky policy could be mined by any major launch mishap.

Even without major loss in the coming months, the recovery could well be no earlier than two to three years in the future. "There have been very few new satellite procurement contracts signed this year," says Thierry Mangot, Chairman and CEO of European Space Brokers, the European Branch of International Space Brokers. "This will result in very few insurance contracts to be negotiated in the coming two years."

This market contraction coincides with a new strategy by satellite operators in the procurement of launch services made possible by the overcapacity in the commercial space transportation sector as new launchers were introduced while the launch market collapsed. "Traditionally, the operators used to select their launch service 24 to 18 months before launch. Today, they usually sign only 12 or even 9 months before launch."

With less time to prepare and study the technical specifications of the launches, negotiating risk management in the best conditions has become very challenging. Despite all these difficulties, the space insurance community has been able to prevent the worst from happening: no commercial launch was conducted uninsured. But this came close: some satellites, like DirecTV-4S and Echostar 7, had no "in-orbit life" coverage at launch. Full self-insurance, once the role for some of the largest international operators, has not been considered a viable option for years. However, there is growing concern among space underwriters that the largest operators might retain some of the risks themselves resulting in a contraction of their market. "Bigger operators benefit from higher flexibility for sparing satellites," says Joseph Wright, CEO of PanAmSat, "and self-insurance is a concept we are definitely looking at."

Time to rewrite the rules?

In early July, space insurers, re-insurers, underwriters and brokers gathered in London for their bi-yearly conference. This was an opportunity to exchange views and propose new ways of doing business in order to ensure the sector's future.

One of the major topics to be questioned was the threshold for "constructive total loss" (CTL) beyond which insurers have to repay the whole amount covered to the operator. Today, the CTL threshold is still at 50% of the satellite capacity. This means that if a satellite loses 50% of its transponders, or of its electrical power, over its lifetime, a full value claim is issued ... and usually paid. The claim usually covers the total cost of the satellite manufacturing as well as its launch and part of its operations. However, this payment does not prevent the operator from operating the damaged satellite at half of its capacity. With a satellite carrying 48 or 60 transponders and designed for 16 years of lifetime, this still represents a high-value asset. And to make things worse, many policies did not take into account the satellite depreciation after several years of operations.

"This 50% threshold is ridiculous" underlines Ernst Steilen space insurance director for Germany's largest insurer Munich Re, "it should be raised to 75%!"

The underwriters are also complaining about the lack of effective guarantees provided by the space industry in terms of reliability and the lack of technical risk appreciation by some operators. Moreover, this technical appreciation is made even more difficult by the strict U.S. regulations regarding technology transfers. Sometime, it is simply impossible for a non-U.S, underwriter to get the minimum information needed to prepare a risk management evaluation.

"We have to take what the manufacturers say for granted without any possibility to make our own judgements," complains Simon Clapham, head of the Marham Space Consortium, from the Lloyd's Syndicate.

One option could be to increase the role of lawyers in the negotiations to ensure a "careful wording" of the insurance contracts. Another would be to reinstate a "right of recourse" allowing underwriters to ask for indemnification if they can link a failure to poor design or manufacturing process.

This technical opacity is claimed to be advantageous for the manufacturers since it prevents objective comparisons. For the insurance market, it prevents a comprehensive differentiation of the products that could make it possible to tailor premium rates accordingly. This differentiation had been dropped in the 1990s when promising market prospects had attracted numerous newcomers in the space insurance sector. To build up their market share, they usually proposed very low premium rates on undifferentiated insurance packages. This risky strategy resulted in increased deficit for the whole sector when it had to face some major losses such as the failures of Chinese launchers or of Boeing's Delta 3 as well as the failure epidemics on Boeing and Loral satellites in orbit.

Today, some brokers are worried that, as differentiation has become very difficult to apply, some underwriters might prefer a selective approach and simply refuse to participate in some categories of placements. Such a strategy would reduce their market and increase their financial vulnerability in case of failure. "This is no longer risk management, this is gambling," considers Simon Clapham.

However, selectivity inside the contracts is already explored, with some recent insurance coverage contracts simply excluding some equipment or other known likely sources of failures.

There seems to be a consensus in the community that the future of space insurance is not solely in the hands of the insurers. The recent problems and crises are largely the result of the very high competitive pressure maintained by the operators on the industry. This has pushed manufacturers into taking more risks, leading to series of failures. Most of these costly mishaps could have been easily avoided with more upfront R&D efforts.

The current leveling off in the satellite market is considered by some as an opportunity to recover with a limited number of claims. At the same time, there is a major concern with the withdrawal of numerous well-known launch systems (Ariane 4, Atlas 2, Proton K) in favor of new boosters which still have to prove their claimed reliability levels. Due to the slow launch rates, the uncertainties regarding the actual proven reliability of these vehicles will last for a while and this will make the behaviour of the premiums rates hardly predictable.

Concerns over large satellites

The recent decrease in rates could be only a short-term trend. Concerns remain and raising funds is still very difficult. The introduction of very large satellite platforms, weighing more than 5 or even 6 metric tons at launch, will be a major challenge as the space insurance sector might not be able to survive more than one loss of this kind.

Dual launches are also a major concern again as the new versions of Ariane 5 will be able to loft pairs of large satellites in the 4-to-5 metric tons range. In the current situation, this would require to engage almost all the available insurance capacity worldwide per launch. To support the insurance sector, Arianespace has already announced that it is exploring financial solutions on its own to reinsure its launches outside the space insurance sector.

David Todd, space analyst at Airclaims has the final word: "Virtually everyone is to blame for the current situation." He cites the underwriters who accepted poor policies, the brokers who negotiated such policies, the satellite operators who put too much pressure on the market, the satellite manufacturers who did not deliver adequate reliability and the launch providers who introduce new and unproven launch systems. "But I am confident that they'll all learn from their mistakes and that the market will recover."