The Final Frontier

On December 8, 2012, Yamal-402 lifted off from a launch site in Kazakhstan on board a Proton-M carrier rocket and hurtled towards its designated geostationary orbit. But a rocket malfunction—a burn that ended four minutes too early—left the communications satellite stranded too low. Fortunately, satellite manufacturer Thales Alenia Space was able to use pulses from the satellite’s own engine to nudge it into place. The downside: the correction cost valuable fuel and shortened Yamal-402’s expected operational life.

“Whilst the claim has not been finalized, insurers are relieved that the economic loss is likely to be around four out of the 15-year design life,” says London, England-based Clive Smith, space business unit leader for Aon ISB, one of the “big three” insurance brokers in this field, alongside Marsh and Willis.

While not a catastrophic loss, what happened to Yamal-402 underscores the need for insurance in the high-tech, high-risk space. In Canada, Jason Hutchings, who works in Aon’s aviation practice in Toronto, insures what he calls the “business of space”—manufacturing facilities, transit exposures, contractors, sub-contractors and sub-sub-contractors.

“There’s an area where space and aerospace overlap and that gets done largely domestically,” he explains. “But when you get into things like launch and in-orbit insurance, we would be the bodies on the ground in Canada but we would then access our Aon professionals in either the US or the UK to access specific space markets.”

A typical package of on-the-ground coverage for a manufacturer might include property and business interruption, boiler and machinery, commercial general liability, directors and officers (D&O) liability, fiduciary liability, crime, employment practices liability, marine transit, environmental impairment liability, aviation or aerospace products liability insurance, and more, says Hutchings.

“It is not uncommon for a manufacturing facility to have a property limit of several hundred million dollars, depending on where it is and what it’s doing,” Hutchings adds, pointing to the requirement for “clean” rooms and other specialized manufacturing requirements as a significant factor considered by insurers.

When a satellite is ready to be shipped out the door, other types of insurance kick in. Thierry Colliot is the Paris, France-based managing director of SpaceCo, the Allianz entity dedicated to underwriting space risks. He describes three guarantees his company offers: pre-launch (including transportation from the manufacturing facility to the integration into the rocket until the lift-off of the rocket), launch-plus-one-year (including ignition, separation, injection into an intermediate orbit, manoeuvring to the final orbit, commissioning to test that the satellite works, and in-orbit life for the rest of the first year) and annual renewals for in-orbit life until the end of the satellite’s life (a time span that may vary from six months to 15 years, with satellites in geostationary orbit lasting longer).

“The pre-launch guarantee is usually underwritten by the manufacturer, so we insure only the cost of the satellite not the launch service. When you insure the satellite into orbit, you need to insure the total value, meaning the cost of the manufacture plus the launch plus usually the interest of financing and insurance premiums,” he says. “The value in orbit is much higher, much more expensive than the simple manufacturing cost of the satellite.”

Limits are often the full replacement value into orbit and may range from US$100 million to US$700 million, with the highest numbers associated with scientific satellites, says Colliot. A launched telecommunications satellite usually has a replacement value between US$200 million and US$400 million. The launch itself contributes about US$100 million to the cost.

“There is one particularity of this activity for insurance,” Colliot adds. “Where all other risks could be fixed on the ground, even planes … If you lose control or communication with a satellite, really you can’t fix it, as of today.”

Liability limits, Colliot says, are regulated by linked US and European conventions: in France they’re set at 60 million euros, but other jurisdictions may require 100 million or 200 million euros. Smith says the biggest players might purchase up to 500 million US dollars or euros in third-party liability coverage. This protection comes into force to defend and pay damages awarded if an insured causes physical damage or bodily injury to a third party—which may happen, for example, if a satellite crashes to earth or collides with another satellite.

The Space Crew

Colliot’s team includes experts in rocket science, satellites and telecommunications, finance and, of course, insurance. Smith is himself an aeronautical engineer with experience working for British Aerospace (now ASTRIUM) on satellite design and engineering, and he was also a reserve cosmonaut in the late 1980s. The Aon ISB space team draws on the expertise of other experienced engineers, as well as legal, satellite contracts and insurance experts.

“We need to include within the policy wording a bespoke loss formula [and] we need the technical expertise to be able to describe on paper how the payload behaves and what happens in various loss scenarios,” Smith says. “An engineer becomes very important from that point of view, and actually assists some of our clients with risk management decision-making as well.”

 “The value in orbit is much higher, much more expensive than the simple manufacturing cost of the satellite.”

In terms of industry capacity, Smith estimates that 30 to 35 insurers participate in underwriting the space industry. “The number of insurers required on each placement depends on the capacity required per launch to cover the sum insured, which consists of the value of the satellite, the launch vehicle and the insurance premium,” he says.

Colliot says that a dual launch of the Ariane 5 rocket, designed to place payloads in geostationary orbit, needs around $700 million in capacity. “For this, you can have traditional players and opportunistic players,” he says. The opportunistic players are essentially investors seeking diversification and may provide less than 1% of the replacement value, he points out.

And where is the industry headed? Both Smith and Colliot say more insurers are entering the market. However, Aon, Marsh and Willis continue to dominate as insurance brokers. Smith and his team keep a close eye on market trends, including the space insurance industry’s capacity, which tends to follow a classical supply and demand curve, differentiation across different space hardware, capital expenditure cycles of the major and emerging satellite operators, emerging technology and new areas such as space tourism. For Colliot, innovation and competition are the trends to watch—along with China’s entry into the satellite manufacturing business.

If you are intrigued by opportunities in this field, “Make sure you have a full appreciation as to where the space industry, from an insurance perspective, overlaps and needs to be integrated with what we’ll call traditional insurance products,” advises Hutchings. “It’s very easy for people the fall into a siloed view of the industry … when in fact the best insurance solution is not one of a series of siloes but a package that works together and is integrated appropriately.”

More from the report: Scheduled Take Off (space travel insurance), Getting a View from the Stars (satellite imagery and underwriting)

___________________________________________________________________________

Copyright 2013 Rogers Publishing Ltd. This article first appeared in the February 2013 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.