Capacity, Not Track Record, Drives Launch, Satellite Insurance Rates

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  Space News Business

Capacity, Not Track Record, Drives Launch, Satellite Insurance Rates

By PETER B. de SELDING
Space News Staff Writer
posted: 23 September 2008
05:00 pm ET






PARIS
— Insurance underwriters and brokers said the market remains healthy despite the fact that claims slightly exceeded premiums in 2007. They said they discriminate among launch vehicles and satellite designs when they can to reflect manufacturers’ different success rates, but that the market remains too small to overturn the general principle that the most reliable designs in effect subsidize the insurability of the less reliable hardware.

“Everyone wants to differentiate and everyone differentiates” when assigning insurance premiums to a given satellite or rocket design, said Thierry Justice, director of space insurance broker Marsh’s aviation and space department. Still, he said Sept. 11 during the World Satellite Business Week conference here that underwriters usually are obliged to reach a compromise premium rate, whatever the project in question, if they want to continue writing policies.

Matthieu
Caillat, head of space underwriting at Axa Corporate Solutions, said “fair differentiation [based on past hardware performance] is limited because market capacity remains the main driver” determining whether rates move up or down.

Clive Smith, executive vice president at International Space Brokers, said underwriters as of mid-September had collected more than $550 million this year in premiums and paid out $300 million in claims following rocket or satellite failures. He said the total market capacity, meaning the theoretical maximum amount of coverage available for a single launch or satellite program, is more than $600 million.

“This is putting downward pressure on rates,” Smith said. “The market today is robust and able to sustain another loss.”

Andreas Peter, a director of Flagstone Re, an underwriter, said any launch whose customers are seeking more than $450 million in total coverage will find it difficult to complete the insurance package.

Because its heavy-lift Ariane 5 rocket carries two telecommunications satellites at a time, the Arianespace consortium of
Evry
,
France
, is usually the focus of the biggest insurance packages assembled for a single launch.

To assist customers in obtaining insurance, Arianespace has long offered its own, in-house Launch Risk Guarantee (LRG) to customers, for a fee. The company continues to believe that, despite currently obtaining the lowest premiums in the market, it is the victim of the market’s lack of capacity.

Jean-Max Puech, Arianespace vice president for finance, said the company has used its LRG 95 times since 1986 at the request of customers. Under the LRG, customers receive a free reflight within 10 months of a failure, or a cash payment or credit toward a future launch in the event of a partial failure.

The LRG compensation has been applied four times in 22 years, twice for the Ariane 5 rocket and twice for its Ariane 4 predecessor.

Insurance and launch services officials agree that Arianespace, with 27 consecutive Ariane 5 successes, now benefits from the lowest launch insurance premium rates.

Puech
produced figures that demonstrated the effect of the more favorable rates. In the past five years, he said, policies known as “L Plus One,” meaning the satellite’s launch and its first year in orbit, have totaled $20.7 billion in value. Launches aboard Ariane rockets have accounted for $6.4 billion of this amount, or 31 percent.

Arianespace customers have paid $935 million in insurance premiums, or 27 percent of the total of nearly $3.5 billion in premiums collected industry-wide for launches. “Arianespace launches account for 31 percent of the total sum insured, and 27 percent of the premiums, clearly showing that Arianespace is enjoying a lower insurance rate,” Puech said.

In the same five-year period, insurers have paid out $835 million in claims related to launch failures, leaving them with a gross profit of $2.64 billion. These figures do not include claims for in-orbit satellite failures, for which claims in a given year often exceed claims for launch-related failures.

Caillat
of Axa, reflecting the market conservatism that usually separates underwriters from brokers, said the sector remains so small that a single event may upset it and cause rates to climb. He said underwriters are concerned that the number of insured launches scheduled to occur between September and December is high enough that, depending on their success, the market might react with higher or lower overall premium rates.

Peter of Flagstone Re said satellites currently in orbit carry aggregate insurance coverage of $18 billion – a potential risk that underwriters must take into account when setting rates.