Fourth Quarter 2002 Quarterly Launch Report 8 Commercial Space and Launch Insurance: Current Market and Future Outlook INTRODUCTION Third-party liability and government property insurances protect launch service providers and Since our last review of the space and launch their customers in the event of public injury or insurance industry (see "Update of the Space government property damage, respectively, and Launch Insurance Industry," 4th quarter, caused by launch or mission failure. In the 1998 Quarterly Launch Report), many changes United States, Federal Aviation Administration have occurred in the market. This report regulations require that commercial launch endeavors to examine the current market situa- licensees carry insurance to cover third-party tion and to explore what causes insurance mar- and government property damage claims that ket changes. We also examine how and why might result from launch activity. Because this market moves over time and discuss the these insurances are obtained from a different future outlook for space insurance. pool than the previous types of coverage, these insurances are beyond the scope of this report. For more information on licensee financial responsibility requirements, liability, and U.S. OVERVIEW OF SPACE INSURANCE liability risk-sharing regime, please see U.S. Department of Transportation/Federal Aviation The insurance market for the commercial Administration, Liability Risk-Sharing Regime space transportation industry is a global one, for U.S. Commercial Space Transportation: with satellite owners, satellite manufacturers, Study and Analysis, April 2002. launch services providers, insurance brokers, underwriters, financial institutions, reinsurers, Re-launch guarantees are a form of launch and government agents worldwide cooperating insurance in which a launch company acts as in order to coordinate an insurance package for an insurance provider to its customers. When a any given commercial satellite launch. launch fails and a customer has agreed to accept a re-launch in lieu of a cash payment, Space Insurance Types the launch services provider re-launches a cus- tomer's replacement payload. The launch serv- Within the space insurance market, many dif- ices provider often will protect itself by pur- ferent types of coverage are available. Some of chasing insurance for a series of launches, thus the key ones are noted here. spreading risk over a number of events and receiving better rates than could be obtained Pre-launch insurance covers damage to a satel- for a single launch event. lite or launch vehicle during the construction, transportation, and processing phases prior to Space Insurance Finance launch. Space insurance is usually a small, specialty line Launch insurance covers losses of a satellite of business within a larger multinational insur- occurring during the launch phase of a project. ance conglomerate. Several of these umbrella It insures against complete launch failures as companies are headquartered in tax haven envi- well as the failure of a launch vehicle to place ronments (like Bermuda and the Cayman a satellite in the proper orbit. Islands) and offer various specialty insurance, reinsurance, and financial services to a variety of In-orbit policies insure satellites for in-orbit international clients.1 Most of these umbrella technical problems and damages once a satel- insurance companies are publicly traded. lite has been placed by a launch vehicle in its proper orbit. Insurance conglomerates typically have large premium bases to protect themselves in the extremely volatile insurance market. These Fourth Quarter 2002 Quarterly Launch Report 9 conglomerates invest premium income and can CURRENT MARKET CONDITIONS return high profits on their investments, espe- cially when located in favorable tax environ- In our last look at insurance (see "Update of the ments. Space and Launch Insurance Industry," 4th quarter, 1998 Quarterly Launch Report), the After negotiating a space insurance policy, insurance market was a buyers', or "soft," mar- many underwriters also seek additional finan- ket. The number of insured launches had been cial backing. Reinsurers and financial institu- steadily increasing. Capacity was growing, and tions can buy participation in any insurance the amount of coverage available for a single package from an underwriter. Generally, rein- launch had been rising for 12 years. Premiums surers and financiers take on the same risks as were low, and contracts covering satellite underwriters and are similarly affected by mis- launches plus five years on orbit were common. sion successes and losses. The participation of these additional financial backers allows Over the last several years, the space insurance underwriters to spread risk throughout many market has "hardened." The current situation is layers of the insurance industry. Reinsurers do very different from that described in the 1998 not analyze any technical information, but report. The following discussion explains the instead depend on underwriters' evaluations of characteristics of the current market. risk to determine their level of involvement. Capacity Underwriting Process Capacity for a single satellite launch is the The process of insuring a satellite is a complex entire amount of coverage that insurance com- one. Typically for a given launch project, panies are willing to underwrite for the proj- either the satellite owner or manufacturer ect. Total yearly space market capacity is the begins by choosing an insurance broker. This theoretical amount of coverage available for broker becomes the primary agent responsible all commercial space activities in a given year. for transmitting information between the insured party and the underwriters. At the time of our 1998 special report on space insurance, capacity available for a single The underwriting process for a project begins launch was increasing steadily. In the current when the broker presents technical reports and market, however, capacity is decreasing; the contractual and financial information to a stated capacity for the entire space insurance number of international underwriters. In order industry has fallen from $1.3 billion in 1999 to to decide what kind of coverage they can offer, $840 million in 2002, as shown in Figure 1.2 the various underwriters conduct in-depth The actual total capacity in 2002 is $500-$550 technical analyses of the satellite and the million for launch-plus-one-year-in-orbit risks launch vehicle. The respective reliabilities of and $300-$350 million for in-orbit risks.3 the launch vehicle variant, satellite model, and the satellite's intended orbit are evaluated. Premiums Details such as launch site location, contract specifics, and satellite finance and value are Premiums are payments for an insurance policy also taken into account. made by the insured to the insurer. Premium prices are usually determined as a rate, or per- When the various evaluations are complete, centage of the total value of the policy. An potential underwriters present the broker with insurer's revenues for a given project are deter- bids containing information regarding capacity, mined by premiums received for that project, premiums, and terms and conditions that they minus claims paid out. feel that they can offer the insurance client. Premiums for both launch and in-orbit cover- age have been rising steadily since our 1998 special report. Figure 2 shows that 2001 launch-plus-one-year policy rates averaged Fourth Quarter 2002 Quarterly Launch Report 10 1400 1200 1000 800 600 Capacity (Millions USD) 400 200 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Figure 1. Stated Insurance Capacity (Source: Willis Inspace) around 15 percent, whereas rates in 1998 aver- Technical and Underwriting Requirements aged only seven percent. In addition to higher premiums and lower Figures 1 and 2 demonstrate the inverse rela- capacity, insurance customers in 2002 must tionship between capacity and premiums. deal with tighter underwriting and technical When economic conditions are generally favor- scrutiny. Technical examinations of vehicles able, insurance companies experience good and technology are more rigorous, and require- financial results and are able to offer high ments are stricter. Exclusions for losses result- capacity and low rates. Alternatively, when ing from terrorism and generic defects in a insurance companies experience poor financial particular model of satellite are now common results, capacity drops and premiums rise. in policies. New and higher deductibles are set to ensure that clients do everything possible to reduce risk. 25 20 15 Rates (%) 10 5 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 launch+1 rates annual in-orbit rates Figure 2. Launch+1 and In-Orbit Premiums (Source: Willis Inspace) Fourth Quarter 2002 Quarterly Launch Report 11 6 5 4 3 2 1 Available Post-Launch Coverage Period (Years) 0 1995 1996 1997 1998 1999 2000 2001 2002 Figure 3: Post-Launch Coverage Period Coverage Periods Insurance Cycles In the last two years, the coverage periods Most insurance markets behave in a cyclical available to satellite insurance customers have nature over time. At the start of a typical insur- been decreasing. Starting in 1995, "launch- ance cycle, insurers lower premiums charged plus" contracts became available to insure a in order to compete for business. The insur- satellite against damage occurring during ance industry experiences a "soft," or buyers',