Space: Risk's Final Frontier

Hilary Tuttle


August 1, 2014

RM07.8_spacerisk_cvrIn 2002, early PayPal investor and Tesla Motors CEO Elon Musk started space transport -services company SpaceX. To control quality and costs, the company would develop its own components, test them in-house, and build reusable, reliable spacecraft on American soil. SpaceX has managed to offer private enterprise and government organizations some of the lowest launch prices in the industry. And Musk has expressly charted the company's course for human space travel, potentially even enabling the colonization of Mars. But with these advances also comes great risk.

According to the Space Foundation's "Space Report 2014," commercial entities are responsible for about $240.1 billion of activity in the sector-76% of the global space economy. Government spending declined 1.7% in 2013, totaling $41.26 billion in investment from the United States and $32.84 billion from other governments, yet the industry grew 4% to a record $314.17 billion.

"The space industry as a whole has supported itself well and proven itself to be quite viable," said Micah Walter-Range, the foundation's director of research and analysis. "For all that people like to gripe about government budget cuts-and those have had an effect on NASA and the Department of Defense-the fact is that most of the global space industry is commercial, so it is not solely dependent upon government budgets."

Private enterprises are revolutionizing our relationship with space. Currently, the industry centers on satellites. As communications technology gets cheaper, more countries are developing and launching their own satellites, and the primary driver of growth in the market is the demand for broadband, mobile phone and navigation services. But as space technology and access evolve, so do the aims of the industry itself.

International Obstacles
For corporations that operate satellites, getting their collections of satellites (called constellations) into the sky is far more complicated than just loading them on a rocket. Under current International Traffic in Arms Regulations (ITAR) guidelines, affordable launches on rockets like China's Long March and India's GSLV are prohibited. While exceptionally reliable, European Ariane rockets carry high prices tags to match. So the industry largely relies on either launches from Russia or critical technology that is made there. To send Americans to the International Space Station, the U.S. government pays close to $70 million per seat on Russia's Soyuz spacecraft. For commercial satellite launches, Russian Proton rockets have a long history of service, but its record of six recent failures in 36 launches leaves businesses and insurers wary. Many of the available American rockets ultimately depend on Russia as well. The Russian-built RD-180 engine powers many spacecraft, including United Launch Alliance's widely used Atlas V rocket, which is frequently deployed with U.S. defense payloads.

When Russia moved on Crimea and the United States imposed economic sanctions on its former Cold War adversary, space became a tertiary battlefield. "After analyzing the sanctions against our space industry, I suggest the USA bring their astronauts to the ISS using a trampoline," Russian Deputy Prime Minister Dmitry Rogozin tweeted in April. Two weeks later, he announced that Russia would stop flying astronauts to the ISS by 2020-four years before the expected end of the space station's life-and declared that no more RD-180s would be sold for any U.S. rocket launching a military payload.

"There's a lot of political risk that comes with relying on foreign partners," said Jeff Poliseno, CEO of Aon's international space brokers practice. "Ultimately, commercializing space will lessen our dependence on foreign entities, which is always going to be a good thing for the United States."

Companies like SpaceX offer particular promise to those who want insulation from the complex international space industry. Satellite operator Orbcomm, the first commercial client to sign on with SpaceX, bet on Musk's vision as a means of keeping production and launch of its newest satellite constellation close to home. The new satellites have been developed and built on American soil, and that proximity offers more supply chain control, according to Orbcomm CEO Marc Eisenberg. Choosing a U.S.-based launch service was the next step in maintaining that control.

Yet bringing production and launch activity stateside can be an expensive and complicated proposition "It's logistically easier," he said, "it's just not financially easier." Many other governments provide funding guarantees, help secure loans or otherwise incentivize the space industry. When satellite communications giant Globalstar needed to fund a new satellite constellation, for example, the French government helped the company secure its loan so it would buy French-built spacecraft.

"When we meet with an American company that builds rockets or spacecraft, they show up with a team of engineers," Eisenberg said. "When you meet with one of the European companies, they show up with a team of accountants whose job it is to help you find financing. I don't know how successful the U.S. space industry is going to be unless the government gets on the ball and keeps up."

This atmospheric distinction poses a greater barrier the bigger the project. "Control over managing our supply chain outweighs the cost, but keep in mind that we have a $200 million constellation," he explained. "A company like Iridium or Globalstar has a multi-billion dollar constellation, and then it's money first."

Slipping the Surly Bonds
As the space industry pursues expansion into commercial travel enterprises, further barriers emerge. Developing and testing the technology is no easy prospect, especially from a financial perspective. In the United States, NASA is seeding the process. While there is no longer a Space Shuttle program, Congress continued to approve funding to further public-private partnership toward the common aim of taking humans to the International Space Station and beyond.

In 2012, NASA awarded $1.1 billion to Boeing, the Sierra Nevada Corporation and SpaceX in a competition to design and develop spacecraft that could ferry astronauts to the International Space Station by 2017. This fall, the field will likely be narrowed to one or two finalists for further development. With its $460 million NASA investment, Boeing has created a prototype Crew Space Transportation vehicle, the seven-seater CST-100 capsule, expected to begin unmanned flight testing in January 2017. John Mulholland, vice president and program manager for commercial crew, told Time, "Our engineering is nearly complete. Starting on July 7, we start going component by component and system by system to show NASA we meet the qualifications for flight." On the downside, the craft deploys parachutes for less precise ocean landings and uses United Launch Alliance's Atlas V rocket, which relies upon the endangered RD-180 engines from Russia.

The Sierra Nevada Corporation received $212 million to further develop the Dream Chaser, a winged vehicle about the size of a regional jet that takes off atop a rocket and lands like a shuttle. The reusable spacecraft seats seven passengers and resembles a classic shuttle, but, according to vice president Mark Sirangelo, can land on any runway capable of handling a 737, easing reliance on specialized landing strips in California and Cape Canaveral. The Dream Chaser also launches with an Atlas V, however, perpetuating the need for RD-180s.

SpaceX has created the Dragon V2 "space taxi," launched with the company's thus-far successful, American-made Falcon rocket series. The company used its $440 million grant to improve upon the existing Dragon model it developed and already employs to resupply the ISS. Unlike the Boeing craft, it is designed to land on four footpads that are lowered to the ground by rockets, an innovative precision-guided system that Elon Musk told reporters will be able to "land anywhere on Earth with the accuracy of a helicopter." In July, the Federal Aviation Administration approved plans for SpaceX to build a private launch facility in Texas, offering further launch flexibility.

Such public-private partnerships may yield the most viable results for both state-sponsored and commercial travel. NASA's influx of much needed funding means government strings are attached-and that may be a good thing. "They have a tremendous amount of oversight, and many companies don't have that," Poliseno said of SpaceX, specifically. "I'd call it a luxury rather than a burden. You have NASA watching, the Air Force is watching, and they have people in-house. That's more engineering talent and more oversight, and it creates a better product and a level of quality control that is world class."

Navigating the Atmosphere
Determining an approach to regulating and insuring commercial space ventures grows more complex as new technology emerges. Thus far, the FAA has regulated all commercial rocket launches into orbit since at least the early 1990s, requiring a licensing system for launch operators and overseeing launch schedules. As more private entities send material into space and pursue human spaceflight, the government's role must be determined.

So far the FAA has opted to regulate behaviors rather than technologies, according to the Space Foundation. As activity increases, some regulations target operators, for example. "The FAA's concern is not just about those onboard, but also those on the ground," Walter-Range said. "They want to make sure that nothing comes down in a populated area, for example, and ensure that, if that looks likely, there is a protocol in place."

Such protocols are critical to developing a viable commercial spacecraft industry. Thus far, the FAA has allowed the industry considerable latitude to self-govern, and safety records have not required further intervention. "The fatality rate for climbing Mt. Everest is roughly the same as for people going into space-in fact, it may now be a little worse," Walter-Range said. "This is an adventurous activity that people choose to undertake, so everyone involved wants to continue moving forward and providing service. The companies have all thought about it and have plans in place for what to do if anything should happen."

Insurance companies are still grappling with how to develop coverage for such incidents. Space insurance has long been available for satellites and commercial launches thereof, but it is unclear whether any trips that involve humans will fall within the existing market. The space insurance industry has decades of experience covering the risks of the physical vessels and the launch process. Pricing is established based on the reliability of different vehicles. And, indeed, human spaceflight would likely occur on previously-launched vehicles with a proven record. But live passengers require casualty coverage, and would necessitate collaboration across insurance disciplines. As a result, it could fall out of the sector entirely.

Aon's space brokerage has dipped a toe in the spaceflight waters, but Poliseno still sees uncertainty for the market overall. "We have been involved in a number of insurance transactions related to spaceflight participants who have gone up on the Russian vehicles through Space Adventures," he said. "Most of those are all liability-related, however. It's a new area for the industry. Groups like Virgin Galactic that are on the precipice of going public and offering their services to the masses will create new challenges."

The case of Virgin Galactic encapsulates this dilemma. The parent company already obtains aviation coverage to operate an airline, and currently aims for "space tourism" to take passengers into low-earth orbit, which is only about 60 miles up. Because the aviation market already has experience insuring humans, it may be a more natural fit than seeking insurance in the space market, which has experience covering the technology but has not had to address humans aboard, said Sima Adhya, the head of space for Torus. For a company like SpaceX, however, that plans to venture further from home, it gets far more complex.

"It varies so much with where you go," Adhya said. "With Virgin Galactic, you're basically talking about going 60 miles high and doing an orbit of the earth. That's quite different than, say, a flight to the International Space Station several hundred kilometers away and, even beyond that, travelling to the moon. The scope is so wide and the risks will be different-as will the costs."

It is too early to estimate just how much it would cost to insure space travel. "Space is a risky business, so you'd expect it to get expensive," she said. "It's a challenge we look forward to responding to, but that we haven't really encountered yet."

Checking the Horizon
The delays should not be taken as a sign that businesses or insurers doubt the viability of commercial spaceflight.
"One thing in our industry is that you need to be patient, because there is a lot at risk, especially when you are looking to fly humans into space," Poliseno said. "There is really no substitute for doing your due diligence and following all safety procedures. If that means delaying a commercial or human launch, then that is part of the equation."

Walter-Range agreed, asserting that the ever-changing timeline for viable human spaceflight is actually a good sign for the nascent industry. "The fact that this has taken them so long is a very good sign that they understand all the risks involved," he said. "If you start off with a horrible accident, it's going to be very difficult to get people to keep hopping aboard. That careful approach shows a great deal of maturity, both on the engineering and business end of things.'

"First and foremost, the biggest challenge is safety," Poliseno said. "There is no proven track record yet, and any new industry goes through turbulence, pardon the pun. At the end of the day, we first have to ensure that space travel is as safe as airline travel. There is just not enough history to draw on yet, and I think that is what limits the industry-the willingness to take that risk."

Hilary Tuttle is managing editor of Risk Management.