Insurance

Technical Afterword

The Commercial Space Insurance Industry

Introduction: The Market

Emerging commercial space technologies, along with complex and substantial financial investments, presented a new type of high-risk exposure. Thus, the space insurance underwriting community was developed, and the niche for specialized insurance was filled. The space insurance market is highly competitive, dynamic, and volatile with a relatively small group of U.S. and European insurance companies in the forefront.84

According to one industry representative, Dowa Fire, Marine & Space Insurance:

Again, according to Dowa Fire, Marine & Space Insurance:

This upward trend has been driven by expansion in the communications satellite industry and by growing demand for cheaper, more reliable, and more capable launch systems.

The launch services and space insurance markets generated $8 billion in revenue in 1997 and approximately $10 billion in revenue for 1998.86 Over the last 30 years, space insurance companies have collected approximately $4.2 billion in premiums and paid nearly $3.4 billion in claims. As outer space is being increasingly used for communications, broadcasting, and remote sensing, the demand for space-based activities is expected to grow, helping risks stabilize. Insurance premiums will thus decrease, and market capacity will in turn increase.87

Space insurance is syndicated, meaning that each individual underwriter assumes a percentage of the risk.88 Approximately 10 to 15 large companies, and 20 to 30 smaller companies, may participate in a given insurance package. Typically, multiple insurance underwriters cover each risk for a fractional share, thereby spreading the risk throughout the global markets.89

An insurance package covers risk to the rocket, the satellite, and related equipment.90 Factors such as market conditions, the type of rocket, orbital deployment conditions, and satellite characteristics determine insurance terms and conditions. While all underwriters use similar terms and conditions, commercial space insurance policies are individually crafted, principally based on the specifications of the satellite and the rocket.91 The coverage period, premium rates, and other terms and conditions are negotiated among the client, the satellite owner or manufacturers, and the underwriters.92

Competition determines which insurers will participate in a specific placement, and the marketplace sets pricing for each policy. Price and availability of space insurance depends primarily on the lead underwriterís ability to understand and assess the intricacies of each risk.93

The estimated space insurance market capacity is between $850 million and $1 billion for each satellite program, with an estimated range of $250 to $300 million per launch.94 Approximately seven to ten underwriters play a significant role in the market, and Europeans ordinarily account for $500-600 million out of the $1 billion available for a single satellite project.95 Typically, an insurance underwriter will commit only 80-85 percent of its available financial resources to one program.96

Space insurance market conditions are cyclical in nature. Currently, the market is "soft," producing more capacity to meet risk needs, and is a buyerís market with many qualified insurers.97 Launch service providers are more willing to introduce new launch vehicles in this type of market. In contrast, in a "hard" market, or sellerís market, underwriters have the greatest influence. Successful market participants must respond to and implement changes within the dynamic satellite launch equipment, launch services, and space insurance markets.

The four primary U.S. insurance brokers are J & H Marsh & McLennan, with about 60 percent of the market, Willis Corroon Inspace, International Space Brokers, and AON, Inc.98 Currently, there are 10 to 12 lead underwriters, including one Australian, two French, one U.S., and two British.99 The U.S. underwriters account for 20 to 30 percent of current space insurance syndication.100

Each individual U.S. underwriter has a detailed technical understanding of space risks ó based on its own spacecraft engineers ó and a sophisticated space industry database.101 Some European underwriters employ consultants with expertise in the technical assessment of space risks, including experienced former NASA satellite engineers.102

Any underwriter may spread the risk to any other insurance company or reinsurer by selling participation in a particular insurance program.103 Reinsurers receive no technical information but rely on representations by lead underwriters as to risk.104 Reinsurers occupy numerous layers in the insurance industry, sharing the risk of a particular contract.105 The reinsurers depend on their relationship with the underwriters and "follow the fortunes" of the underwriters, referred to as "following-on." 106

There are four essential types of space insurance:

• Pre-launch insurance, specifically property and cargo insurance,107 covers satellites and rockets prior to launch. Pre-launch insurance usually covers risks associated with transportation of the satellite from the manufacturing facility to the launch site, assembly on the launch pad, inspection, and pre-lift-off activities. The period of coverage ends with the intentional ignition or lift-off of the rocket.108
• Launch insurance is the most common type of space insurance. It may extend from six months to one year after launch. Coverage commences where pre-launch insurance ends. Launch insurance terminates when the satellite separates from the rocket and completes an initial operational phase of functionality testing. The launch period may last approximately 20 to 30 minutes.109
• In-orbit insurance commences after the satellite has completed its initial operational phase of functionality testing, and normal operations in space begin. The life expectancy of a satellite is approximately 10 years and ends when the satelliteís fuel cell depletes. In-orbit insurance usually consists of one-year renewable policies. "[I]n order for the insurance companies to renew the In-Orbit insurance, they require ëhealth reportsí from the insured regarding the condition of the satellites. Based on these reports they accept renewed coverage." 110
• Third-party liability space insurance covers legal liability arising from damage to a third party during the launch or the in-orbit operations of a satellite program. A variety of coverage options are available: personal injury, property damage, damage to U.S. Government launch facilities, loss of revenue, service interruption, and material changes to ground stations.111

Self-insuring for the launch phase is not a common practice. PRC-owned and manufactured commercial satellite launches in the PRC, however, usually are self-insured by the PRC.112

Broker Selection and the Underwriting Process

Broker Selection

The following summarizes the space insurance acquisition process and the parties involved. First, a satellite owner contracts with a satellite manufacturer to build a satellite.113 Next, the insured client, a satellite owner or satellite manufacturer, obtains a list of brokers from the manufacturer.114

Then, the broker is appointed following a competitive process.

The broker may negotiate insurance, manage transactions, and, if necessary, settle claims that may arise on behalf of the client.115 The broker acts as a conduit for all documentation and information.116 Its primary task is to obtain technical questions from underwriters and answers from the satellite owner and manufacturer.117 The broker may assist the satellite owner and manufacturer in developing a presentation and pricing plan for the underwriters.118 Brokers do not suffer monetary risk in the event of launch accidents; they are paid on a commission basis.119 Traditionally, commission size depends on the final premium negotiated for the insurance program. The higher the insurance premium, the higher the brokerís commission.120

Insurance Acquisition

The underwriting process begins with a technical assessment of the satellite and rocket.121 The client prepares technical reports and presentations regarding the satellite and rocket for the brokers.122 Usually, the satellite manufacturer prepares the initial project package containing detailed technical information and launch service procedures.123

This package is presented to the underwriters by the broker.124 The technical information consists of the specifics of the launch and satellite operations, coverage for partial or full loss, associated costs, and launch service availability.125 Also, it includes the program risks, history of the rocket, modifications, and reasons for using new technology, if any.126

The presentation is designed to build the confidence of the underwriters in the insured client.127 Technical questions regarding the following are often raised by the underwriters:

• Communication systems
• Payload
• Electrical power system
• Attitude control system
• Mechanical systems, including appendage and solar arrays128

Normally, two rounds of questions and answers by the satellite manufacturer and launch service provider to underwriters are sufficient to complete the bidding phase.129 Additionally, underwriters rely on databases and their own technical staff or other experts for information.130

Typically, non-disclosure agreements binding underwriters accompany technical materials for the presentations.131 Underwriting information is part of the insurance contract, and the insured is obligated to use its best efforts to provide insurers with information relating to risk of loss.132 The insured has an obligation to notify the underwriters if any characteristic of the satellite or the launch service changes.133

A second briefing to the underwriters may be necessary if such a "material change" occurs affecting the terms and conditions of the policy. In the case of Intelsat 708, for example, Loral had to make such a presentation after changing the material that was used for the satelliteís solar arrays to galium arsenide.134

The underwriters submit bids for the insurance package, including a decision to insure the satellite program, the amount of the premium, and the terms and conditions of the policy. Various risk assessment factors, including the history and reliability of the hardware to be used, are discussed. Also, previous failure and success rates, disposition of previous failures, experience of operations and operators, testing and product assurance provisions, and monitoring conditions by the satellite manufacturers or the insured are factors taken into account.135

Lastly, the policy is negotiated and written prior to launch.136 The insured client, acting through the brokers, answers any outstanding questions from the underwriters.137 Post-launch reporting advises the underwriters of the missionís progress.138

The entire insurance acquisition process takes about one year to complete.139 Typically, insurance contracts are finalized from six months to three years prior to launch.140

Space Insurance Premiums

A space insurance deposit between 10 and 20 percent of the premium is required when the policy period commences. The balance of the premium is usually due to the underwriters no later than 30 days prior to the launch.141

Typically, insurance premiums range from eight to 15 percent of the total costs associated with a launch.142 Premium rates have declined over the last few years.143 Even though there have been a large number of substantial claims in the last few years, premiums decreased by 50 percent in 1997.144 Claims incurred will surpass premiums collected in 1998, a disappointing year for underwriters.145

Launch insurance premiums depend on such factors as:

• Reliability of the rocket
• Reliability of the satellite
• Level of complexity of the satellite
• Scope of coverage
• Amount of insurance146
• Rocket history
• Overall design of the satellite
• Product assurance plan
• Satelliteís operational lifetime
• Insurance capacity
• Commercial versus government launched
• Regulatory standards for rockets147

According to a September 1998 article: "[C]ustomers can pay less than 10 percent [of the total costs] with an emphasis on launch-plus-3-year or even launch-plus-5-year coverage plan . . . In-orbit policies are generally negotiated separately from launch plus 3 or 5 year policies. Rates tend to be 1.2 to 1.5 percent per year at present." 148

Space Insurance Claims of Loss

Despite the availability of insurance, the satellite owner has every incentive to place the satellite in orbit and make it operational because obtaining an insurance settlement in the event of loss does not help the owner continue to operate its telecommunications business in the future. To increase the clientís motivation to complete the project successfully, underwriters will also ask the client to retain a percentage of the risk.149

Insurers are advised of any occurrence likely to result in a claim. The insured is obligated to disclose any relevant issues, including the results of any failure investigations.150 The insurers must have this informationóand a substantiated theory of the failureófrom the parties that were involved in the launch.151

The claims settlement process continues until agreement is reached on the loss sustained.152

In the event of a launch or satellite failure, the insurance representative of the insured client is responsible for drafting the Proof of Loss and Notice of Loss:153

• The Proof of Loss is a statement issued to the insurers and is signed and notarized by the insured client. It includes the time the loss occurred, details as to what happened, and technical information such as telemetry data, frequencies, and power levels at the time of the failure.154
• The Notice of Loss is a one-page statement that places the insurers on notice of a possible claim.155

Both statements are provided to the insurers by the insured client through the broker.156

The Applicability of Export Controls To the Space Insurance Industry

Security Clearances and the Transfer of Controlled Technical Information

The broker reviews drafts of the Proof of Loss and Notice of Loss and makes sure that all relevant information is contained therein. The broker does not alter them, but offers suggestions as to changes.157 The broker is the last party to sign the statements prior to release of a claim payment.158

Security clearance requirements for space insurance industry personnel handling sensitive data are not clear.159

Timothy Rush, Vice President of J & H Marsh & McLennanís Space and Telecom Group and a former Intelsat employee, testified that underwriter employees do not usually have security clearances.160

In the case of Intelsat, data requiring protection is kept in a secure facility.161 Intelsat authorizes insurance-related technical information to be forwarded to the Defense Department for review.162 The Defense Departmentís responsibility is to monitor technical data reviews and transfers that take place in the course of the insurance process for space projects.163

The amount of technical data that is required to be disclosed in the space insurance process depends on the maturity of both the satellite and the rocket.164 Mark Quinn, former Vice President for J & H Marsh & McLennanís Space and Telecom Group, states that the information provided at space insurance presentations is "not very technical in nature." 165 Newer satellites and rockets, however, present greater risks since they are not technically and operationally known quantities, and the insurers thus want additional information about them.166

Intelsat officials state that the PRC launch service provider receives only satellite interface information. Interface information consists of satellite dimensions and critical point locations of satellite components such as antennas. A userís handbook contains most of the information on rockets.167

Nevertheless, as Donald Cromer, President of Hughes Space and Communications, who had attended insurance industry briefings, testified, technical information subject to export controls "could" be communicated in such briefings.168

Export Licenses

According to insurance industry personnel, the obligation to obtain an export license rests with the owner of the technology. Thus, prior to Intelsatís taking title to the Loral-built Intelsat 708 satellite, Loral had the responsibility to obtain export licenses for all related exports of controlled technology.169

The burden is on the insured client, agrees J & H Marsh & McLennanís Michael Hewins, former Chairman of that firmís Space and Telecom Group, to obtain all appropriate export licenses, and no special licenses are required by the space insurance industry.170 In light of the destinations of the data, insured clients must determine whether the data is sensitive and export licenses are required.171

Hewins, a broker with substantial space insurance experience, says he believes that no export licenses are required for the space insurance presentations that contain technical information. Further, Hewins believes that no export licenses are required for the questions and answers that are passed between the underwriters, brokers and insured clients.

Hewins says that he assumes that all information shared in the insurance process is given to all entities, foreign or domestic, unless covered by non-disclosure agreements.172

Another experienced broker, Timothy Rush of J & H Marsh & McLennan, says that the broker requires the originators of any technical data to certify that proper licenses have been obtained for technology transfers, or to certify that the data in question does not require such licenses for transfer.

According to Rush, brokers do not enforce licensing requirements. But, he says, brokers do help protect against technology transfers prohibited by U.S. law, by informing their insured clients of where they send any data the client submits to them under the insurance contract.173

Yet another J & H Marsh & McLennan broker, Mark Quinn, says that the insured client is supposed to indicate whether an export license is in place for the satellite program. However, Quinn reports that he has not seen a technology transfer license, although he assumes one exists for each project.174

According to Terry Edwards, Manager of Intelsatís Launch Vehicle Program Office, and Donald Bridwell, Manager of Intelsatís Major Programs in the Procurement Division: "Intelsat Headquarters Agreement does not exempt Intelsat from U.S. laws in respect to export licenses. U.S. spacecraft manufacturers are subject to U.S. export control laws." The export license, they say, covers the entire scope of the satellite project.175

Intelsatís Edwards also states that Defense Department monitors have a very difficult assignment.176 Quinn adds that the Defense Department monitor who worked on his project several years ago did a very good job and knew the details of the project well.177 However, Quinn states that he has not been present at any meeting where a Defense Department monitor has interceded to stop the transfer of technical information. He states that the briefer usually has a rehearsal briefing with a Defense Department monitor present, prior to the meeting.178

Space Insurance and Export Controls for PRC Launches

The space insurance process does not differ for projects that include PRC rockets and satellites.179

Insurance for PRC clients must comply with local regulations and is provided by re-insuring an indigenous insurer.180 The PRC, however, does not have a developed insurance market. Therefore, a broker such as J & H Marsh & McLennan acts as an intermediary company since the PRC is not financially stable.181

J & H Marsh & McLennanís Hewins states that the PRC insurance companies, China Pacific Insurance Company (CPIC) and the Peopleís Insurance Company of China (PICC), are difficult to deal with from a business standpoint. Further, CPIC and PICC are not lead underwriters in the international market, do not possess satellite insurance expertise, and tend to work on multiple projects.182

The J & H Marsh & McLennan Beijing office handles property and casualty insurance for the PRC, and for U.S. companies conducting business there. The J & H Marsh & McLennan London office also issues third-party liability insurance for China Great Wall Industry Corporation.183

Endnotes

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