Space Insurance Underwriters Defend High Rates

by

Space insurance underwriters defended themselves against charges of price gouging and arbitrary premium-rate setting, saying their business has neither the volume nor the profit levels to justify bringing down rates anytime soon.

But they did say they are ready to review several industry practices with a view to favoring satellite operators with good reliability records and reducing delays in settling claims.

In comments here April 14-15 during the 13th International Space Insurance Conference organized by Pagnanelli Risk Solutions, underwriters, brokers and satellite operators traded jabs over the justification for today’s historically high insurance premiums for satellite launch and in-orbit policies.

Christopher T.W. Kunstadter, executive vice president of U.S. Aviation Underwriters Group of New York, said space insurance underwriters in the past 11 years have swung back and forth between high profitability and steep losses. The bottom line, he said, is a cumulative profitability of between 1.2 and 1.4 percent.

“In our business we cannot accept this volatility,” Kunstadter said. In the past several years, he said, insurers have been surprised that the biggest losses have not come from launch vehicle failures, but from failures of satellites in orbit.

In recent months, several large satellite-fleet operators have decided not to renew their in-orbit coverage, which typically costs 2 percent to 3.5 percent of a satellite’s value per year. These companies have elected to rely on their in-orbit assets to provide backup in the event of a satellite failure.

These satellite owners have protested that even for companies with excellent track records of satellite reliability, insurance premiums are high. In addition, they say, policies often carry exclusions, meaning that hardware that has failed on another company’s satellite will not be covered when an in-orbit policy comes up for renewal at the end of the year.

Ramin Khadem, former chief financial officer of Inmarsat Ltd. of London, a satellite-fleet operator, said insurers “risk shooting themselves in the foot with these high premium rates” as some large, reliability -conscious satellite operators have taken to managing their in-orbit fleet risks in ways that do not include buying insurance.

As these companies leave the insurance market, the business volume shrinks, and the remaining operators have trouble assembling insurance packages at reasonable rates.

Charles R. Rudd, president of XL Aerospace, an underwriter based in Santa Barbara, Calif., said one possible solution would be for operators and insurers to agree to a range of premium rates, in which the rate that actually gets paid depends on whether any subsequent claim is made.

For example, Rudd said, an operator paying an 18 percent rate would get a rebate after a certain number of years if there were no claims. But if there were claims, the operator would agree to pay an extra amount. In this way, the effective premium would swing from, for example, 15 percent to 24 percent depending on whether claims were filed.

Rudd took issue with a characterization — made here by Yamin Mustafa, managing director of insurance broker Marsh Ltd. — that satellite operators were being taken advantage of by underwriters who act together when it suits them in policy writing, and act separately when it comes to paying claims.

“Yamin has the audacity to say clients have been fleeced,” Rudd said. “Who has been fleeced? Over the past 10 years we have made barely enough money to spend a weekend. There’s no large pile of money that’s been made. I fail to see how you’re not getting good value if we’ve made only 1.4 percent profit in a decade.”

Satellite operators also have complained that legitimate claims take too long to settle and to be paid. A year’s delay for a claim of a satellite’s total loss is not uncommon.

Ernst Steilen, head of space risks at Munich Re of Munich, Germany, one of the most active space insurance underwriters, said most delays in claim payments are due to disputes over whether the satellite is a total loss or only a partial loss.

To end these disputes, Steilen proposed doing away with the entire notion of “constructive total loss,” in which a satellite operator receives a payment for the full value of the satellite even if it has lost only 75 percent of its capacity.

It is often difficult to determine the exact amount of a satellite’s incapacity, especially when many insurance claims relate to fuel or on-board power levels. Disputes arise as underwriters say that only 74 percent of a satellite has failed, while the owner says it is 76 percent.

Steilen said eliminating the constructive total loss feature of insurance contracts would make it easier for insurers and satellite owners to settle on a payment. In the current situation, he said, the difference between a satellite that is 74 percent damaged and one that is 76 percent damaged could be $70 million or $80 million because, at 76 percent, the spacecraft would be considered a total loss under today’s policies.

“Let’s give up on this idea” of constructive total loss, Steilen said. “When the difference of opinion is reduced to a few percentage points, it is easier to resolve quickly.”

Comments: pdeselding@compuserve.com

– See more at: http://dev.spacenews.com/space-insurance-underwriters-defend-high-rates/#sthash.lEbn3OXv.dpuf