Space may well be the final frontier, but space re/insurance is already a thriving specialty line. Here, Lee Tookey talks about the very specific challenges involved in writing the line.
The space insurance market has endured an extended period of reducing rates, driven by both good experience and ample capacity. Recent events have pushed the 2011 underwriting year into a loss, but there is still additional capacity looking to enter the market. Rates have not only fallen, but the difference has narrowed between the rates charged for the best and the worst risks. Careful risk selection and portfolio management are thus even more important for safe navigation through the soft market.
While ample capacity continues to be available for most of the risks placed, brokers can deflect the calls they are receiving from some underwriters to increase rates. Insurers and reinsurers seekingdiversified income are still adding to the capacity available in the market and this has been a key feature in dispersing pressure for higher prices. Until the call from the underwriters for rates to turn is larger and louder, there is unlikely to be a change in pricing trends.
The 2011 loss ratio for the market as a whole looks certain to exceed 100 percent, with little or no prior year reserve releases to soften the blow. This may lead to some underwriters reducing the capacity they will deploy, but withdrawals from the market rather than reductions in line size will probably be needed before the pricing environment improves. Previous market hardening usually followed a run of losses which resulted in the withdrawal of some insurers as well as some of their reinsurers. Many of those who withdrew laid off the unexpired part of their book, resulting in a rush of new business which was typically placed at higher rates and these portfolios became the benchmark for the pricing of new placements.
In the absence of these ‘forced’ placements, brokers are able to deflect the prospect of rising rates by delaying the execution of new business. With launch business being placed up to three years before the expected launch date, brokers are usually able to delay placing the business if they anticipate an improved pricing environment for their client.
Longer policies, varied cover
Conventional coverage encompasses the launch, testing and operation of the satellite with a policy duration up to 12 months after launch and then for 12-month policies in orbit. This operating or ‘in orbit’ stage is generally limited to 12 months at a time, but some markets will offer, at a premium, a longer policy duration period for the initial launch policy plus three or five years. With a one-year policy the underwriters can review the health of the satellite and determine the basis of coverage and revisit their pricing assumptions. The coverage and rate of a particular satellite can also be influenced by the performance of other, similar satellites in the world fleet.
Whereas clients are always looking for the best price, many also want longer-term cover so that they have some certainty—hence the higher rate they are willing to pay for the three or five-year launch policy. Clients have to try and strike a balance between the annual policy and the higher priced policy of longer duration. Individual satellites can be insured for in excess of $350 million and, with two satellites sometimes launched on the same rocket, the launch aggregates can exceed $700 million. The market is currently able to provide this level of capacity (and possibly more, if required) with some occasional players attracted by restricted coverage paying higher rates.
There are additional types of cover provided, including third party liability for both the launch service provider and also the satellite operator, enginetesting insurance and certain specialist property insurance for launch facilities. These are generally smaller placements in the space market, but some of the bigger limit liability placements are written within aviation accounts. This area of the market provides growth potential as private companies become more involved in space, since they do not have the same budgets or state protection as the major players.
The best space insurers provide a valuable service to satellite operators in addition to transferring risk. Some provide a truly comprehensive service with involvement in the early stages, including design. Others are purely opportunist sellers of capacity. Satellite operators disclose detailed plans and performance data for their new satellites but the current rating environment, with the emphasis on price, undermines the contribution technical insurance capacity provides.
"NASA has deliberately funded development programmes with the private sector to encourage innovation, not just replication, of existing technology."
Good loss experience (before 2011) is almost certainly due in part to improved design and manufacture, but satellites do still suffer failures, or anomalies. Some of these problems have already been identified as they affected previous satellites. Furthermore, policy conditions imposed during the last hard market and specific exclusions have taken account of this knowledge and meant that not all adverse events have translated into insured losses. Previously, it was possible for a satellite to be declared a total loss with only a 20 percent loss of capability. These constructive total loss points are now generally more appropriately set at 75 percent or greater.
Collisions and re-entries
Some events have raised the issue of old, failed satellites drifting in space and other space debris, including the upper stages of those launch vehicles which carried the satellites to orbit. The Iridium 33 satellite collided with a failed Russian satellite, Cosmos 2251, in February 2009, and the re-entry of NASA satellite UARS on 24 September 2011 is a reminder that while objects falling to earth are infrequent events, they could potentially be very costly in terms of human life or loss of property. Satellite operators regularly manoeuvre satellites to avoid larger tracked items of debris, but the smaller items of debris travelling at high velocity can seriously damage a satellite and have probably already damaged some commercial satellites. As yet there is no viable plan to clean up the orbital plane but it is surely only a matter of time before this technology is developed and deployed.
Commercial space flight, in particular space tourism, presents possibly the most exciting opportunity and the biggest challenge to the market. Some of the technology involved will be state-of-the-art, with limited flight heritage. Indeed, NASA has deliberately funded development programmes with the private sector to encourage innovation, not just replication, of existing technology. This will require analysis by technical underwriters working with the flight operators within a legal environment that often restricts the transfer of technology and full disclosure. Government agencies may have to relax these controls to allow the new projects to develop a sustainable working relationship with the insurance community.
Much of the technology will, however, be developed from existing space technology which, while familiar to underwriters, has never been used for civilian passenger travel. All interested parties, including operators, passengers and lawmakers, must recognise space travel is a hazardous venture. It is a challenge for the lawyers to build a regime which not only provides appropriate compensation for passengers after an accident, but also recognises the risks inherent in this developing industry. The fundamental question—whether the operator should be liable in the same way as an airline—is raised.
Space passenger liability insurance does not find a natural home in the airline insurance portfolio but much of the structure required, and the capacity, is already there. A sustainable insurance product is achievable given the technical understanding in the space market and constructive legislation. The technology could be operational within two years and that will start a new chapter in space insurance.
Lee Tookey is head of aviation reinsurance, space and specialty lines at Aspen Re. He can be contacted at: firstname.lastname@example.org
Space, re/insurance, Aspen Re