The space industry was born from a spirit of exploration. For participating nations, space capability was both a measure of a country’s technological strength and a matter of national pride. In the early days, projects were uninsurable because launch vehicles were unreliable and most payloads were experimental. As such, the industry was the domain of government agencies. It was understood to be a high-risk activity and manufacturers were allowed to operate on a “best efforts” basis. The risk was retained by governments and the space agencies that financed the flights.
For most space missions, launch vehicle and satellite manufacturers took little, if any, financial exposure on the performance of their products. They were protected by “hold-harmless” clauses in their contracts, and the entire risk of the enterprise resided with the final client, usually the government. Product warranties, common in most other manufacturing industries, were not applicable to space products.
However, as the space business matured, the technical reliability of space assets improved and, for some commercial applications, particularly telecommunications, spacecraft have become more standardized. It is now increasingly common for satellite procurement contracts to pass on some performance risk to the manufacturer; contracts may stipulate that up to 25% of the contract value must be returned if the satellite does not operate satisfactorily throughout its lifetime. This leaves satellite manufacturers with a potentially large risk. If a weakness develops on one satellite, other similar satellites may develop the same issue, which would lead to a systemic failure and, potentially, a large accumulated exposure.
Today, with the lingering effects of the global economic recession and national space budgets reduced, many government agencies are scaling back their direct participation. They are turning to private industry to provide satellite services and take on the risk that they had previously borne.
For example, after retiring the Space Shuttle in 2011, NASA is now looking to commercial companies to deliver cargo and, eventually, people to the International Space Station. These companies have a large risk exposure as they will only be paid in full if their missions are successful.
Risk Transfer in Space
The space insurance market has been in existence since the launch of the first commercial satellite in 1965. Having grown in line with the commercial space industry, it now generates global annual premiums of approximately $1 billion. For a typical space mission, insurance can cost up to 25% of the project cost. It is therefore a key consideration for the commercial viability of any space venture.
The main space insurance product is the launch policy. This usually operates on an “agreed-value” basis and covers the satellite replacement value, the cost of a re-launch and the insurance premium. This would allow the operator to replace the satellite, procure a new launch and insure the second launch as well. The policy will typically cover a 12-month period, including the launch, commissioning and early in-orbit operational phases of the satellite’s life.
Subsequent insurance policies on the satellite are typically placed on the anniversary of the satellite’s launch and renewed annually. Usually, the satellite book value is insured, which is a depreciating value from beginning until end of life.
The launch and in-orbit policy will provide cover against a pre-defined loss formula where the actual technical losses on board are translated into operational losses. For example, if a satellite has a fuel leak that results in a loss of three years out of 15 years of insured life, this will lead to a claim of 20% of the total sum insured.
Similarly, if the operator loses the ability to operate the payload in a certain configuration and cannot uplink data from one zone into another, which accounts for a certain proportion of its intended operations, this will lead to a loss of that proportion.
A satellite typically takes three years to replace following a loss. During this interval, unless the operator has spare satellites in orbit or an alternative arrangement with another provider, revenue will be lost, even if insurance later reimburses the replacement costs.
Loss of revenue cover is available, but is not very commonly procured by operators. This is partly because of the difficulty in clearly defining revenue losses with respect to satellite capability losses when the policy is defined, which can be as much as two years before launch, at which point business plans and customer bases and are not always fixed. The loss-of-revenue policies that do exist tend to cover losses over a period of two to three years and are based on formulas that relate spacecraft capability losses to agreed values in a similar way to asset cover.
Other potential losses that are more difficult to quantify, such as reputational damage, loss of customers if service cannot be maintained and even a drop in company share value, can have substantial impacts on a business. There is often a significant gap between what the operator loses and what the insurance covers. From an insurer’s perspective, the insured’s retention of a portion of the risk is a good thing, as it reduces any moral hazard aspect. For insurers, this is comforting in cases where relatively little detailed information is given regarding what is to be insured.
Some insurers will provide cover for related areas such as property damage that occur pre-launch, ground testing, liabilities and even delays. These only make up a small proportion of the total space insurance premium, but they provide an important product to operators and manufacturers.
When it comes to space, risks often occur outside the realm of more traditional industries, meaning space manufacturers must be creative in their risk management and insurance strategies. But even as some carriers boldly go where no others will, operators must understand that the most commonly purchased insurance policies may not always adequately protect the business plan of a space venture.