Insurance Rates Contradict Recent Successful Launch Trend

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  Space News Business

Insurance Rates Contradict Recent Successful Launch Trend

By PETER B. de SELDING
Space News Staff Writer
posted: 02 April 2007
04:24 pm ET




MILAN — Launch vehicles active in placing commercial telecommunications satellites into geostationary orbit have an average 8 percent failure rate over the past decade, while satellites that are successfully launched have a 7 percent failure rate in their first 12 months of operations, according to figures compiled by insurance underwriter XL Insurance.

Presenting the figures here March 22 during the 14th International Space Insurance Conference organized by Pagnanelli Risk Solutions, XL Vice President Christopher Kunstadter said these results explain why some insurers remain reluctant to further decrease satellite insurance premiums despite several years of healthy profits.

Insurance brokers trying to cut the best deals for their satellite-owner clients look at the space insurance market’s performance since 2002 and see an industry awash in profit.

“Underwriters have made $1.8 billion in profit over the past five years,” said Roger Bathurst, chief executive of International Space Brokers. Bathurst urged underwriters not to raise rates any time there is a loss.

“Please don’t overcorrect when losses happen,” Bathurst said. “With $1.8 billion in the bank, you can afford it.”

Underwriters are more likely to look back 10 years, not five, when assessing profitability. A 10-year assessment includes 1998, 2000 and 2001 — years in which insurers suffered substantial losses as claims exceeded premiums.

Kunstadter said that since 1998, space insurers have earned a cumulative return of 5 percent on their investment.

Kunstadter’s numbers show the dramatic difference in performance among commercial-rocket providers, and among commercial satellite manufacturers.

XL Insurance’s figures assessed eight launch vehicles — the U.S. Atlas 5 and Delta 4, Europe’s Ariane 5, Japan’s H-2A, China’s Long March, the Russian-Ukrainian Zenit 3SL used by Sea Launch Co., and Russia’s Proton-M and Soyuz-Fregat rockets.

Kunstadter declined to identify which failure rate belongs to which rocket. Two vehicles have zero failures in the period covered, three have failure rates of 6-8 percent and three have failed 13-14 percent of the time.

The same disparity shows up for satellite manufacturers. The 7 percent failure rate among seven commercial satellite manufacturers includes one manufacturer whose hardware has failed more than 20 percent of the time in the last decade, and another with a failure rate higher than 10 percent.

Two other satellite builders’ products have failed about 6 percent of the time, two more have failure rates of about 4 percent. The best performer has a 2 percent failure rate.

Kunstadter said that in calculating rocket and satellite failures, XL uses a weighted average to account for the fact that some rockets, and some satellite models, fly only rarely.

Some satellite operators have decided to forgo or reduce insurance coverage for their in-orbit fleets, saying that they are, in effect, subsidizing those operators who do not insist on quality merchandise.

As the commercial satellite business consolidates — currently, more than half of the 260 satellites in geostationary orbit are owned by just five companies — even a partial withdrawal from the insurance market by one of the biggest satellite owners can have a broad effect on the market.

SES Global, the second-largest commercial fleet operator after Intelsat, has decided that its in-orbit backup is sufficient to reduce its coverage for in-orbit failures. Insurance for a satellite after its first year in orbit costs 2 percent to 2.5 percent per year.

Padraig McCarthy, chief financial officer of SES Astra, the European division of SES Global of Luxembourg, said SES has concluded that continuing to pay in-orbit premiums “really is just subsidizing the rest of the market.”

Insurers and brokers say the market has been able to secure lower-cost coverage for rockets or satellite designs, or for satellite operators, that have demonstrated their ability to assure quality. But because the market is so small — no more than 25 commercial telecommunications satellites are launched each year — underwriters resist discriminating too much.

“Insurers cannot afford to chase even bad risks from the market,” said P. Ruari McDougall, senior underwriter at Munich Reinsurance. “Even a satellite manufacturer under suspicion of having violated agreements is able to stay in the market and enjoy just about the same rates as everyone else.”

McDougall said space underwriters already have enough trouble spreading their risks among satellite launches and in-orbit spacecraft. Restricting coverage to those with the best track record would threaten the viability of the market.

Kyoichi Shirai, head of space risks at Tokyo Marine and Nichido Fire Insurance Co., said the space market is peculiar in that insuring a rocket launch and the first year of in-orbit life of the satellite cost about the same — 15 percent of the value of the rocket and satellite — as it did 20 years ago.

Insuring the hull of a Boeing 747 aircraft, on the other hand, cost 1.5 percent to 2 percent in 1972 but by the early 1990s had dropped to as little as one-fiftieth of that amount.

Shirai said rocket reliability has continually improved since the early 1980s. If insurance rates have not come down, it is partly because the number of launches has not increased, he said.

Shirai said insisting on similar premiums for everyone encourages the entry into the market of new rocket and satellite manufacturers, which is a positive trend for the industry. New entrants, he said, would never appear if they were forced to pay premiums commensurate with their risk relative to established players.