Space insurers warn that current low rates are not sustainable
KUALA LUMPUR, Malaysia — Satellite insurers on Oct. 5 said the Sept. 1 failure of a SpaceX Falcon 9 rocket while preparing a static-fire test, which destroyed a $200 million satellite, wiped out 20 years of insurance premiums for prelaunch coverage and will almost surely result in a sharp rate increase.
But they said the classic space insurance market — covering the moment from a rocket’s ignition through a satellite’s in-orbit life — is unlikely to be affected by the Falcon 9 explosion because it is managed by a different set of insurance underwriters.
These insurers warned that space underwriters are playing a dangerous game of chicken in allowing launch and in-orbit insurance rates to continue to fall to a point where a single failure of a European Ariane 5 rocket carrying two telecommunications satellites would wipe out most of a full year’s premium payments.
Addressing the APSCC 2016 conference here, insurers said the Sept. 1 SpaceX failure, which destroyed Israel-based Spacecom’s Amos-6 satellite, will come as a rude awakening to the cargo and marine insurers who typically cover prelaunch events.
“These guys think they are insuring containers and that’s about it,” one space insurance official said. “I’m not sure they ever considered that the containers carry high-value satellites, or that these policies cover rocket static fire tests.”
Prelaunch rates could double after SpaceX failure
John Munro, global chief executive of space projects for Marsh, a major space insurance broker, said the Amos-6 loss will force rates up for prelaunch coverage.
“We expect [prelaunch] rates to increase, maybe by 100 percent,” Munro said, adding that the entire prelaunch insurance market generates only about $10 million to $12 million in premiums per year. “Underwriters will want to review some of the terms and conditions they have insured before — particularly the hot-fire test, which we would exclude under a traditional premium policy.”
Munro said space insurance underwriters would refuse to accept coverage for the prevailing rates in the prelaunch market, which may be one reason for the traditional separation of the prelaunch and post-launch insurance communities.
Munro did not mention it, but the severe damage suffered by Japan’s Superbird-8/DSN-1 telecommunications satellite en route to its launch site earlier this year is another example of a risk borne outside the traditional space insurance market.
As a result, there have been no claims for launch or satellite-related damages in 2016, an unusually calm year even if satellite fleet operator Intelsat ultimately files a claim for the shortened in-orbit life of its Intelsat IS-33e satellite because of a defective propulsion system.
Launch insurance costs down by 60% despite lackluster 2015
The good news so far in 2016 is offset by the fact that the cost of insurance covering a satellite’s launch and first year in orbit is at an historic low of around 5 percent, some 60 percent less than the rate 10 years ago.
The reason: The continued success of the Ariane 5 rocket, whose last failure was in 2002, and the fact that space insurance underwriting has generated good profit over the years. The promise of easy money has attracted many new underwriters, who now compete for a place in the policies of the biggest operators such as Intelsat, SES, Eutelsat and Inmarsat.
“Ariane 5 insurance rates are around the 4 percent mark,” said Russell Sawyer, executive director of Willis Towers Watson’s Inspace brokerage. “If you had talked about launch and in-orbit rates being that low 15 years ago, everybody would have thought you were crazy.”
SpaceX’s Falcon 9 rocket can be insured for only slightly higher rates than Ariane 5. Russia’s Proton vehicle, which has suffered multiple failures in the past five years, is insured at around triple the rate for Ariane 5, according to figures produced by underwriter SCOR Global.
Launch insurance rates have remained low despite the fact that 2015 was either a loss-making year for space underwriters or one with a wafer-thin profit, depending on how the failures are attributed on insurers’ books.
In 2015, Mexico’s MexSat, insured for $390.7 million, failed in a Proton launch. Egypt’s EgyptSat-2 Earth observation satellite, insured for $75 million, failed in orbit. A SpaceX Falcon 9 failure destroyed an International Space Station cargo vessel, resulting in a claim of $38.7 million.
“The overall message is that the space insurers didn’t actually make any money from your industry,” Sawyer said.
The relatively claims-free year so far in 2016 promises a profitable year for underwriters, but the total premium volume may end up between $450 million and $600 million, depending on when SpaceX returns to flight after the Sept. 1 incident. That would be a multi-year low for the industry.
In-orbit rates touching record lows, too
It’s not just the cost of launches and the first year in orbit, typically bundled into a single policy, that has dropped. Annual insurance premiums for satellites more than one year into their orbital lives have also collapsed, to as low as 0.4 percent from 2.5 percent a few years ago.
These rates appear to be holding despite the in-orbit loss of the Amos-5 satellite in 2015, whose $158.5 million claim wiped out about two years of market premiums for in-orbit coverage, said Stephane Rives, senior underwriter at SCOR. “For a standard satellite in good health you can find rates at 0.4 percent, which is really unbelievable compared to a couple of years ago,” Rives said.
Space underwriters in the past have been able to charge premiums that allowed them to absorb two or three rocket failures in a given year.
Worries about coming all-new commercial rocket lineup
Not only is that no longer the case — two failures could force the entire market into an annual loss — but the industry is also preparing for a nearly complete changeout of launch vehicles as new-generation rockets are introduced.
Denis Bensoussan, head of space risks at underwriter Beazley, said insurers have never before faced such an industry-wide generational change of rockets, a worry given that new rockets tend to fail more frequently than flight-proven vehicles.
“We have been able to insure maiden flights and returns to flight [following a failure] in the past,” Bensoussan said. “This is the first time we have faced new launch vehicles introduced to this extent. Look at the historical probability of failure for new vehicles, and then multiply that by five or six — the number of new vehicles we are facing. The probability of failure is substantially bigger than in the past.”