Insurance Rates Change Industry Dynamics
By Kirby Ikin
Insurance is not a subject many would consider a driver in the space industry. In fact, few within the space industry give insurance the consideration that it deserves, let alone attempt to understand the subtle — and sometimes not-so-subtle — influence it exerts in the marketplace.
In recent years, there have been considerable changes wrought by, and to, the space insurance industry. We do not have to look back too many years to a time where underwriters viewed the primary area of risk as being launch operations. This was borne out by historical figures that showed the bulk of losses coming from launch failures rather than from satellite losses. Another historic characteristic was that when in-orbit losses did occur, they almost always occurred in the first 12 months of operations.
In the mid-1990s, several launch vehicles were performing reliably — most notably the Ariane-4 and Atlas-2 — and the satellite-insurance community was making attractive profits. Following natural laws of supply and demand, this unquestioned profitability attracted new insurance capacity to this particular class of the underwriting business. Consequently, the resulting oversupply of capacity put downward pressure on insurance rates. One of the notable developments from this pressure was the extension of launch coverage from the more traditional launch plus 12 months of in-orbit operations to launch and the next five years of operations.
It came as a rude shock to underwriters when they found the balance of losses not only coming from satellite failures, but from failures occurring several years into a satellite’s life. By the time the problems had manifested themselves, the underwriting community already had committed to insuring many satellites that prospectively were at risk. Those events triggered an ongoing problem for the marketplace.
After a number of years of underwriting losses, the space-insurance market has changed significantly. Available insurance capacity has dropped from a one time high of $1.2 billion to around $500 million. Some observers even suggest that effective capacity may be as low as $300 million – roughly the value of a single communications satellite.
Beyond the obvious general rise in premium rates, this drop in capacity has had two significant side effects.
First, it has encouraged more satellite operators to consider deploying smaller geostationary, commercial satellites. No doubt some of this change in sentiment relates to simply wishing to reduce exposure to the risk of satellite failures from large and sophisticated new satellites. However, it also is clear that larger satellites, which require closer to full-market capacity, are going to suffer from higher premium rates.
Second, dual launches will test the market’s ability to provide the required amounts of coverage, let alone attractive premium rates. It is not unreasonable to speculate that dual launches put greater pressure on Arianespace in the commercial marketplace. While Ariane-5 is not well-sized for two commercial satellites in its current form, when such opportunities arise, satellite operators will need to evaluate the availability of insurance as a key consideration when considering which launch vehicle to choose.
One other manifestation of the space-insurance losses suffered in recent years has been an unwillingness by underwriters to offer insurance more than 12 months before a launch. This hesitancy, perhaps, is an understandable reaction by some underwriters. However, it has the potential to undermine the whole satellite-procurement process, at least for satellite operators that rely on external financing to fund satellite acquisitions.
It is quite reasonable for a financier considering advancing funds for a satellite procurement to require insurance to be in place before agreeing to such a deal. After all, an operator’s ability to service debt is contingent on them having either a working satellite or access to insurance payouts in the event of failure. Given the recent volatility of the space-insurance market along with the tendency for underwriters to exclude certain types of failure from coverage, it would be a brave financier that would blithely assume insurance coverage will be available, let alone at reasonable rates.
The problem here is that satellite procurement may start three years in advance of launch, and certainly financing will need to be in place 24 months before launch. Hence, if insurance is needed at this point and underwriters are not prepared to provide coverage more than 12 months out, the entire procurement process is undermined.
From these few key observations, it is clear the state of the insurance marketplace has a material effect on everything from satellite financing right through to the decisions on the size of the satellite bus selected and the choice of launch vehicle. Perhaps in the future, the space industry will keep a closer eye on developments in the satellite- insurance marketplace. Perhaps one outcome will be greater interaction between manufacturers, satellite operators and underwriters to achieve a more stable insurance environment in which everyone wins.
Kirby Ikin is managing director of Asia Pacific Aerospace Consultants Pty Ltd. He can be reached at 011, 61 2 9988 0252, or by e-mail at firstname.lastname@example.org .