Insuring satellites and launchers is becoming increasingly difficult as underwriters charge ever-higher prices and insist upon broad exclusions for certain risks.

Satellite operators and insurance brokers are looking for ways to maintain coverage without agreeing to policy terms that would not offer enough coverage to justify the price. Heavy losses incurred in recent year by the insurance industry for space-related risks have contributed to the price hikes and reduced availability of coverage as insurers have left the space sector.

A major factor in the hefty rate hikes during recent years stems from an increase in some in-orbit satellite problems and launch failures, insurance industry officials said.

One of the most prominent glitches involved a technical flaw in six in-orbit Boeing [BA] 702 model satellites, resulting in claims for insurers that could reach $1.7 billion. Claims faced by insurers as a result of hurricanes often do not reach that level.

Wary of absorbing further losses, underwriters are scrutinizing risks more carefully and raising rates. Rates for the insured value of a satellite are between 15 percent and 35 percent of the spacecraft’s value, insurance industry officials said.

High rates and broader exclusions helped insurers earn an estimated profit of between $150 million and $200 million in 2002, said Jean-Michael Eid, a managing director in the Washington office at AON Space, an insurance brokerage that represents a number of major global operators. However, the profit fell well short of recouping losses of $525 million incurred by space insurers as a result of policy payouts between 1998 and 2001, he added.

Insurers took a big hit in 1998 when their claim payments totaled $1.725 billion, compared with just $910 million in premiums, Eid said. In 1999, insurers recouped a bit of that by paying only $635 million in claims, versus receiving $1 billion in premiums, he added.

The space insurance sector suffered another underwriting loss in 2000 when claims reached $1.06 billion, outstripping $910 million in premiums. A slight recovery occurred in 2001 when $425 million in claims was exceeded by $500 million in premiums.

Still ahead for the insurance industry is the resolution of whopping claims from the in-orbit Boeing 702 satellite problem. Insurers will ask Boeing to share in the burden of paying off those claims.

“Everybody has to take responsibility for his or her actions in resolving unsettled insurance claims,” Eid said. In addition, satellites and launch vehicles must reestablish a general track record of reliability. Insurers are rating the coverage they offer to individual satellites and launchers more closely to their perceived risk and track records, Eid added.

“The quicker we can demonstrate the reliability of satellites and launchers, the quicker we can restore the insurance and financial community’s confidence in the technology,” Eid said. “If you don’t have good technology, you will not have insurance.”

To reduce future claims:

• Satellite operators are monitoring the construction of satellites by placing their own engineers in manufacturers’ plants;
• Manufacturers are emphasizing the use of proven technology rather than the latest technical advances;
• Launchers are taking corrective action to ensure the causes of recent failures do not recur; and
• Discussions are underway about increasing the risk and reward for manufacturers to give them a heightened financial incentive to build satellites that will fulfill their designed useful lives.

“We urgently need technology to succeed,” said Richard Rankin, a senior vice president at International Space Brokers in Rosslyn, Va.

Joseph Wright, the president and CEO of PanAmSat Corp. [SPOT], said his company is able to more rigorously monitor the construction of satellites now that a sister company no longer builds them.

Prior to Boeing’s purchase of Hughes Space and Communications, PanAmSat ordered nearly all its satellites from the satellite manufacturer, which had been a unit of PanAmSat’s parent Hughes Electronics [GMH].

As a result of the common parent company, PanAmSat was required by law to maintain an arm’s length distance in its dealings with Hughes Space and Communications.

Questions Remain

Questions remain about whether any of the problems that ultimately occurred on the Boeing satellites in orbit could have been foreseen in advance by even the most discriminating in-factory monitors, industry sources said.

The six Boeing 702 satellites with in-orbit solar array problems will have shortened lives, resulting in large insurance claims. Two of those claims affect Washington-based XM Satellite Radio [XMSR]. Both of its satellites, “Rock” and “Roll,” are Boeing 702s with the solar array anomaly. Operators of the other faulty 702s are PanAmSat, which has two affected spacecraft, Telesat Canada and Thuraya.

Boeing advised XM in September 2001 of a progressive degradation problem with the solar array output on the in-orbit Boeing 702s, according to an 8-k document filed by XM with the Securities and Exchange Commission.

The output power of the solar arrays and the broadcast signal strength of both satellites are above minimum acceptable levels and are expected to remain that way at least through 2005, XM officials said. XM’s insurance policies provide coverage for a total or partial loss of either satellite due to the occurrence of an anomaly within five years of their launch. Both spacecraft were launched during the first half of 2001.

XM is covered for losses of up to $200 million for each satellite and has advised its insurance carriers that the solar array situation likely will result in a claim. “We are proceeding with the claim process, according to plan,” said Chance Patterson, XM’s vice president of corporate affairs.

Steve Blum, president of the satellite-broadcasting consultancy Tellus Venture Associates, said that XM’s problems give the company time to plan for contingencies.

“As long as they have 18-24 months of life at a minimum, they can order the construction of a new satellite,” Blum said. “Let’s face it, it is not like the manufacturers are turning business away right now.”

The near-term impact would be on XM’s financial statements to account for the impaired satellites once the consequences of the anomaly are fully realized, he said. “The company does not have a gun to its head right now,” ?Blum said. “It can go into the marketplace and cut the best deal possible.”

When a satellite-broadcasting platform is launched, the cost of a satellite is a big hurdle to clear, he added. “Once satellites are up and revenue is coming in, all of the sudden that satellite cost doesn’t look like such a huge expense relative to the overall scale of the business. That is why DirecTV and EchoStar [DISH] can keep funding the launch of new satellites to expand their services.”

Boeing has implemented a number of changes to guard against quality problems in the future. The Boeing Satellite Systems leadership team was restructured to emphasize systems engineering throughout the manufacturing process, a tested design was used for the 702’s solar arrays and “best practices” were adopted to improve manufacturing processes, said Richard Esposito, a Boeing media relations specialist.

“We have continued to have an ongoing, open dialog both with customers and with the insurance community,” Esposito said. “We also have proven quality on orbit with the superior performance of the Boeing 702 that we launched last year.” That spacecraft was PanAmSat’s Galaxy 3C.

–Paul Dykewicz

(Jean-Michel Eid, AON Space, 202/862-5302; Richard Rankin, International Space Brokers, 202/841-1334; Joseph Wright, PanAmSat, 203/210-8606; Chance Patterson, XM Satellite Radio, 202/380-4318; Richard Esposito, Boeing Satellite Systems, 310/335-6314)