Commercial Space Transportation QUARTERLY LAUNCH REPORT Special Report: Update of the Space and Launch Insurance Industry 4th Quarter 1998 United States Department of Transportation • Federal Aviation Administration Associate Administrator for Commercial Space Transportation 800 Independence Ave. SW Room 331 Washington, D.C. 20591 Special Report SR-1 Update of the Space and Launch Insurance Industry INTRODUCTION at risk, insurance is essential to mitigate the high cost of a failure. Insurance is a basic requirement for the maintenance of a commercial space industry. Certain types of space insurance, such as Space activity mishaps can result in hundreds third party liability insurance, protect the of millions of dollars of expenses. Two general public from the hazards of space recent launch vehicles that failed (a Titan 4A activity. The U.S. Federal Aviation and the initial Delta 3) were valued at $1.3 Administration, through the Commercial billion and $225 million respectively Space Launch Act Amendments of 1988, (inclusive of payload). The replacement cost requires third party liability insurance as a of the recently failed Galaxy 4 satellite, for condition for the issuance of a commercial example, was in the range of $200 to $250 launch license. Under the 1972 United million. In addition, consequences of Nations Convention on International Liability mishaps will typically extend beyond the cost for Damage Caused by Space Objects, of a satellite and launch vehicle. Business governments are liable for injury or damage operations can be delayed, possibly resulting to third parties, caused by launch vehicles or in the deferral of a satellite venture’s vital payloads launched under their jurisdiction. revenue streams. With such valuable assets $1,800 $1,585 $1,600 $1,400 $1,200 $985 $1,000 - $625 $800 $150 $600 $271 $391 $400 $151 $200 $0 -$11 In Millions U.S. $ -$200 -$65 -$144 -$147 -$19 -$400 -$277 -$304 -$288 -$287 -$600 -$800 -$1,000 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Annual Losses Paid Annual Premiums Collected Cumulative Net Gain or Loss Figure 1. Approximate Launch Premiums Collected and Claims (1982-1997) (Source: International Technology Underwriters, International Space Brokers, and International Space Industry Report) Federal Aviation Administration • Associate Administrator for Commercial Space Transportation Special Report SR-2 Table 1. Types of Space Insurance THE SPACE INSURANCE MARKET – ISTORICAL Launch Insurance H Pays the owner of a satellite for a failed launch or for a satellite damaged on that launch. The space insurance industry dates from the Government Property Insurance 1960s, when it appeared as a response to the Pays the government for the loss of any development of commercial communica- government property due to launch operations. tions satellites. Aviation insurance specialists Third Party or Liability Insurance issued the first policies, which featured low Pays a third party for loss from a failed launch (e.g., debris falling on private property). It is premiums and compensation that was paid required for a launch license. on the provision of a minimum of evidence. Re-Launch Insurance In the late 1960s and the early 1970s, space Guarantees a second launch if the first launch insurance markets changed dramatically results in failure. when a substantially larger number of insured Business Interruption Insurance launches failed, causing underwriters to Makes payment for revenue losses by organizations using a satellite. suffer heavy losses. Brokers began to On-Orbit Insurance specialize in space insurance, and some of This refers to insurance applicable during the on- them hired space experts as consultants or orbit operations time period. staff members in an attempt to better Constellation Insurance understand and predict the space industry. This covers the services provided by a LEO This technical approach to underwriting was constellation, not the individual satellites in the constellation. by no means universally accepted, however, and many underwriters continued to use As a whole, space insurance comes in many more traditional actuarial methods to make different forms. It can help compensate for underwriting decisions. the failure of a launch or the partial or total loss of an on-orbit satellite, for losses When a second wave of launch failures suffered by third parties, and even for losses occurred in the mid-1980s, the space due to canceled government funding. Table insurance industry’s cumulative losses (total 1 above summarizes the principal types of premiums collected less total claims paid space insurance (see also Appendix 1). out) reached close to $300 million by 1986. Underwriters raised premiums above 30 Launch insurance indemnifies the owner of a percent to cover previous losses and to satellite for a failed launch, failed vehicle, restore industry profitability. Some satellite and/or failed satellite. Typically, $250 operators decided to self-insure rather than million to $300 million of coverage is pay premiums at these levels, and high provided, with the average premium for insurance cost was regarded as a barrier to launch insurance currently ranging from entry into the market. By the end of the around 15 percent to 25 percent. Third- 1980s, the industry was nearing restored party liability insurance indemnifies a third profitability with launch insurance premiums party from loss or damage caused by a in the early 1990s falling to the 15 percent to satellite or launch vehicle. Usually, only 20 percent rate. $150 million to $200 million coverage is required (which typically sells for a 0.1 percent to 0.2 percent premium) for large vehicles. Federal Aviation Administration • Associate Administrator for Commercial Space Transportation Special Report SR-3 THE SPACE INSURANCE MARKET – 40 RECENT 35 The space insurance industry has been 30 profitable since 1991. The industry’s 25 cumulative profitability for the 1982-1997 20 period is approximately $1.6 billion1 (see 15 also Figure 1). The 1990s have seen an expansion in the number of insured launches 10 following a period of slow growth in the 5 1980s. In 1997, there were 35 major insured launches, nearly double the 18 in 1990 (see 0 1990 1991 1992 1993 1994 1995 1996 1997 Figure 2). Figure 2. Insured Launches 1990-1997 The increasing profitability of the space (Source: International Space Brokers Group) insurance market has drawn ever-increasing amounts of money into space insurance. As insurance package, the largest such package a result, insurance premiums in 1998 are to date (further discussion of this is provided quite low and the market soft (a soft market below). However, lost revenues associated is one in which more money is available for with the destruction of this satellite and the insurance than is needed to cover demand). on-orbit failure of the Galaxy 4 satellite in Although premiums are difficult to estimate May 1998 were not covered under the precisely, a series of recent interviews by the insurance deal. Satellite Industry Association produced the list of approximate launch insurance rates in The second failure, that of the Zenit 2 in Table 2. September, will delay the deployment of the Globalstar LEO constellation, which will This year has seen two commercial launch enter service with 12 fewer satellites than failures thus far. The launch failure of the were initially planned. Globalstar’s new first Delta 3 resulted in the loss of launch plan will cost an additional $85 PanAmSat’s Galaxy 10 communications million (beyond what it will receive from satellite. The cost of the Delta 3 launch and insurance for the Zenit 2 failure). satellite were covered under a $4 billion PROFITS AND VOLATILITY IN SPACE Table 2. Launch Insurance Rates as of June 1998 INSURANCE MARKETS USA Atlas 15 – 17% USA Delta 15 – 17% Almost every launch, launch vehicle, and Europe Ariane 4 15 – 17% payload has its own unique characteristics. Russia Proton 20% This uniqueness (and the small number of China Long March 3B 25% launches in general) reduces the information that can be drawn from individual launches (Source: Satellite Industry Association) so that launch insurance has a relatively small actuarial base. An actuarial base may 1 This cumulative profitability does not take into become larger with large constellation account the time-value of money. Federal Aviation Administration • Associate Administrator for Commercial Space Transportation Special Report SR-4 deployments like Navstar/GPS, in which A great deal of volatility remains in the many identical payloads are launched on industry even in the most profitable of times. multiple identical launch vehicles, or Iridium, The increasing reliability and stable price of which used many similar launch vehicles, launch vehicles, along with the growing pool mainly Delta and Long March vehicles. of available underwriting money, help cushion the market against potential shocks, Generally, insurance spreads risk over either but the increasing value of some satellites multiple events or long periods of time. The (and, hence, higher possible claims for those predictability of events increases as the launches, if they fail) provides a number of occurrences grows. The total countervailing force. As an example, number of orbital launches is small and each consider Intelsat satellite prices. The Intelsat launch is different enough that insurance 5 series (first launched in 1980) were built rates are difficult to determine. Space for approximately $60 million per satellite. insurance rates (particularly launch insurance Intelsat 7 A8 (lost in a 1996 Long March rates) are, therefore, as much a matter of launch failure) cost $140 million, 2.3 times market forces as a matter of actuarial tables. the price of the earlier Intelsat 5. Such increases in the price of satellites greatly In addition to the lack of a strong actuarial increase the size of underwriters’ exposure basis, space insurance differs from most to losses, exacerbating insurance market other forms of insurance in that it has short volatility.