Big claims, record-low rates: Reshaping the space insurance game

Before 2018’s nearly $600 million in insurance claims for several botched launches and in-orbit failures and this summer’s record-setting loss of the UAE’s Falcon Eye-1 satellite, space insurance rates had fallen to their lowest point in three decades.

Underwriters were growing concerned that continuing to charge satellite operators a few pennies on the dollar to cover losses running into the hundreds of millions was making the business of insuring satellites and launches unsustainable — a fear validated this summer by insurance giant Swiss Re’s decision to exit the space sector.

Swiss Re blamed “bad results of recent years and unsustainable premium rates” in announcing July 31 that it will no longer underwrite space policies.

The space insurance sector has finished the year in the red three times since 2013. Last year was especially bad for underwriters. According to Seradata, a U.K.-based firm that tracks the space insurance sector, 2018 saw $596.9 million in claims filed against premiums totaling $458 million.

Swiss Re’s departure won’t take a massive amount of underwriting capacity out of the market since it provided only about 5% of the insurance available for satellite launches, according to Seradata.

However, the world’s second largest reinsurance company throwing in the towel has spooked an underwriting community already bracing to lose money on space policies for the second year in a row. And that was before word filtered out that ChinaSat-18, insured for $250 million, ran into mission-ending troubles following its mid-August launch.

“Swiss Re, as a company, is one of the established leaders in the market and its actions are followed closely,” said Tim Wakeman, a London-based space client advocate at Elseco, an Emirati insurance underwriter. “Some space entities are undoubtedly asking themselves: ‘if Swiss Re cannot make a profit in space, how can we?’”

Swiss Re’s move was the first correction for a market underwriters say has been stretched to its limits by a dearth of geostationary satellite orders and low insurance prices compounded by extreme volatility — a single launch failure can mean the difference between hundreds of millions in profit or loss across all insurers.

The number of insurance firms active in the space industry has hovered around 30, Wakeman said, with little change over the past five years. Swiss Re’s exit, while unfortunate, stands to benefit the remaining firms in their pursuit of profitability, he said.

Swiss Re was feeling the pain of space-sector trends, but the company didn’t single out space in its quest to improve profitability. Citing worrisome macroeconomic factors including heightened international trade tensions and a slowing global economy, Swiss Re said it was working to cut roughly $900 million in exposure across not only space, but aviation, agriculture, healthcare and other sectors.

Calculated risk

Despite falling premiums, most years since 2007 have been profitable for space insurers, according to David Todd, who tracks the space insurance sector at Seradata. Last year ended deep in the red, however, because of payouts for the in-orbit failures of Maxar Technologies’ WorldView-4 ($183 million) and Angola’s Angosat-1 ($121 million), the off-course Ariane 5 launch of YahSat’s Al Yah 3 ($115 million), and the in-flight abort of the crewed Soyuz flight MS-10 ($71 million), Todd said, along with other smaller claims. 2019, thanks to Falcon Eye-1 and ChinaSat-18, also looks like a losing year.

“Smaller insurance premiums, while favorable for launch providers and satellite operators, have been stretching insurance profits thin,” Todd said. What’s more, insurers make most of their money covering launch plus the first year or so of operations for multi-ton geostationary communications satellites that operators have been buying at historically low rates.

This year, commercial operators have ordered 10 such satellites from manufacturers worldwide — up from five last year and seven in 2017, but still around half the market norm.

Insurers are watching the progress of broadband megaconstellation ventures planning to launch dozens, hundreds, and potentially thousands of smaller satellites, but it’s unclear they will become a meaningful source of revenue for underwriters. Todd said space insurers will definitely be involved in covering their launches, but the sheer volumes of spacecraft will likely eliminate the need for substantial in-orbit coverage.

“[S]o great will be the size of these constellations that there will probably be enough spare satellites and redundancy for satellite operators not to need in-orbit insurance at all,” he said.

Fault tolerance

So far, 2019 has seen at least two significant losses. The first was July’s Vega launch failure that destroyed the Falcon Eye-1 imaging satellite that the UAE insured for 368.3 million euros. That sum will be paid “shortly” in euros, according to Richard Parker, divisional president of Assure Space, a Bethesda, Maryland-based space insurance provider. Parker said current conversion rates put the payout around $415 million, meaning Vega’s first failure likely set an industry record, topping the $406.2 million loss of the Intelsat-27 satellite in a 2013 Sea Launch rocket failure.

China Satcom’s ChinaSat-18 satellite, which industry sources told SpaceNews is insured for $250 million, reportedly failed to deploy its solar arrays following its Aug. 19 launch aboard a Long March 3B rocket. Though underwritten by the People’s Insurance Company of China, ChinaSat-18 was reinsured on the international market, meaning foreign insurers are likely on the hook for any claim China Satcom files, industry sources said.

“It’s definitely going to be a losing year” for space insurers, one industry source said. “Last year was a losing year and this year is going to be a losing year also.”

Going up?

For a typical insurance policy covering a satellite’s launch plus first year in orbit, insurance premiums dropped over the past three years, according to Seradata. In 2016, insuring a satellite to launch on Arianespace’s Ariane 5 cost about 3.25% of the insured value. By the first quarter of 2019, that already low rate had dropped to 2.75%, according to Seradata’s Todd. SpaceX’s Falcon 9 saw a steeper decline, from 5.5% for a geostationary satellite mission in 2016 down to 3.1% by the first quarter of this year, he said. Premiums for Russia’s Proton rocket, still haunted by launch failures, have hovered around 10% for the past three years, Todd said.

“It was getting to the point that, with the lack of programs and lower premium incomes, those rates were not sustainable over the long term,” said Jared Ball, the chief technical officer for Aon, a London-based firm that helped insure the Falcon Eye-1 mission.

No one insurer sets premium rates for launches, but rates for new policies started rising in the wake of the Vega/Falcon Eye-1 failure, particularly for flagship rockets trusted with the most valuable payloads.

Ball said Ariane 5 and Falcon 9 are seeing the most substantial rate hikes because their recent rates were so low to begin with thanks to their reliability. Ariane 5 had 82 consecutive successes before a partial failure in January 2018 sent Al Yah 3 and SES-14 into wrong orbits, requiring the satellites to burn fuel reserves to reach their target destinations. Ariane 5 has flown eight successful missions since returning to flight in April 2018.

Between Falcon 9 and Falcon Heavy, which both use the same first stage, SpaceX has 49 consecutive successes. Its most recent failure was in October 2016 when a Falcon 9 carrying Israel’s Amos-6 satellite exploded during a pre-launch fueling exercise.

Proton, marketed by International Launch Services for commercial missions, is less likely to see big rate hikes because its premiums are already high thanks to a spotty track record, Todd said. Proton had six failures between late 2010 and mid-2015. The rocket has flown seven times since, all successes.

Hope for stability?

Some insurers blame an oversupply of underwriters for what they consider unsustainably low premiums. When a new satellite program surfaces, more insurance capacity is available than the project typically requires, giving leverage to satellite operators and launch providers, seeking lower rates, Parker said. “It’s a reverse auction that forces the price down to the point where the client gets the cheapest rate possible,” he said.

Satellites and launches have also gotten cheaper, Parker said, meaning the small number of geostationary satellites is also becoming less lucrative to insure. “What used to be a $300 million risk is now $200 million,” he said. “That puts more pressure on the people left in the market to underwrite those risks.”

Not everyone agrees that the problem is over capacity. Todd said Ariane 5 missions, which typically launch with two geostationary satellites, challenge insurers to find enough coverage for both customers. He offered a different reason for the recent persistence of below-market insurance rates — a shift in how underwriters themselves are pursuing business.

“Unlike some other insurance classes, there are no expert ‘lead’ underwriters getting the best rates anymore,” Todd said. “All underwriters now bid their premium rates directly against each other. While good for competition by helping brokers secure the best rates for their clients, the battle to secure enough premium revenue has often meant that, just to remain on the ticket, the better ‘expert’ space underwriters were forced to accept lower rates than they would otherwise wish to.”

That shift to so-called vertical marketing took place around 15 years ago, Todd said, driven by broker pressure in a weak market and the threat of a European Union crackdown against anti-competitive behaviors. It stayed around for the same reasons, he said, and now has a powerful influence on insurance pricing.

Premiums are rising, but where and when they will level out is still to be determined. In an interview not long before ChinaSat-18’s launch, Parker speculated that one more big claim could force more insurers out of the market, and lead to a tripling of 2018 insurance rates.

While the immediate impact of ChinaSat-18’s anticipated $250 million claim is expected to be a second consecutive losing year for insurers, longer term it could shift pricing power back into their hands.

Insuring smallsats: A double-edged sword for underwriters

Operators of small satellites weighing up to 100 kilograms are starting to buy space insurance, but the business case for underwriters to insure them isn’t always clear.

“It takes a lot of those programs to make up for one or two traditional GEO programs,” said Jared Ball, chief technical officer at Aon, a London-based insurance firm.

Ball said smallsat operators are beginning to use insurance, even if just for the launch part of their missions, but that their spacecraft still have a higher failure rate, making for an elevated risk to insurers.

Aon does count Rocket Lab and HawkEye 360, a signal mapping startup with three smallsats in orbit and another 18 financed, among its customers, Ball said, but the insurance firm devotes less effort to smallsat programs.

“What is important is that the space insurance community adapts to the changing technological environment,” said Tim Wakeman, a London-based space client advocate at Elseco, an Emirati insurance underwriter. “[That] means investing in additional skills, diverse sets of data sources and the development of differentiated pricing tools, all of which will require sustainable pricing.”

Richard Parker, divisional president of Assure Space, a Bethesda, Maryland-based space insurance provider, said some smallsat operators want so little insurance that it costs more to put the policy in place than it returns in revenue. David Todd, an authority on space insurance at Seradata, a company that tracks the sector, said some underwriters are working on automated packages similar to car insurance. Aon is among the firms working on such solutions.

“It’s a matter of trying to make our process more efficient,” Ball said. “Because you can’t spend a lot of time customizing policy and doing all that work for a sum insured of $2 million.” — Caleb Henry

This article originally appeared in the Sept. 2, 2019 issue of SpaceNews magazine.