The 23rd Cycle - Satellite Insurance

"Like any insurance policy the average home owner tries to get, you have to deal with a broker and negotiate a package of coverages. In low risk areas, you pay a low annual premium, but you can pay higher premiums if you are a poor driver, live on an earthquake fault, or own beach property subject to hurricane flooding.

In the satellite business, just about every aspect of manufacturing, launching and operating a satellite can be insured, at rates that depend on the level of riskiness. Typically for a given satellite, 10-15 large insurers (called underwriters) and 20-30 smaller ones may participate. There are about 13 international insurance underwriters that provide about 75% or so of the total annual capacity. Typically, the satellite insurance premiums are from 8-15% for risks associated with the launch itself. In-orbit policies tend to be about 1.2 to 1.5% per year for a planned 10-15 year life span once a satellite survives its shakeout period. If a satellite experiences environmental or technological problems in orbit during the initial shakeout period, the insurance premium paid by the satellite owner can jump to 3.5 - 3.7% for the duration of the satellite's lifetime. This is the only avenue that insurers have currently agreed upon to protect themselves against the possibility of a complete satellite failure. Once an insurance policy is negotiated, the only way that an insurer can avoid paying out on the full cost of the satellite is in the event of war, a nuclear detonation, confiscation, electromagnetic interference or willful acts by the satellite owner that jeopardize the satellite.

There is no provision for 'Acts of God' such as solar storms or other environmental problems. Insurers assume that if a satellite is sensitive to space weather effects, this will show up in the reliability of the satellite, which would then cause the insurer to invoke the higher premium rates during the remaining life of the satellite. Insurers, currently, do not pay any attention to the solar cycle, but only assess risk based on the past history of the satellite's technology.

As you can well imagine, the relationship between underwriters and the satellite industry is both complicated and at times volatile. Most of the time it can be characterized as cooperative because of the mutual interdependencies between underwriters and satellite owners. During bad years [like 1998 for example] underwriters can lose their hats and make hardly any profit from this calculated risk-taking. Over the long term, however, satellite insurance can be a stable source of revenue and profit, especially when the portion of their risk due to launch mishaps is factored out of the equation. As the Cox Report notes about all of this,

"The satellite owner has every incentive to place the satellite in orbit and make it operational because obtaining an insurance settlement in the event of a loss does not help the owner continue to operate its telecommunications business in the future. To increase the client's motivation to complete the project successfully, underwriters will also ask the client to retail a percentage [typically 20%] of the risk" [Cox Report, 1999]

According to Philippe-Alain Duflot, Director of the Commercial Division of AGF France,

"...the main space insurance players have built up long-term relations of trust with the main space industry players, which is to say the launch service providers, satellite manufacturers and operators. And these sustained relations are not going to be called into question on the account of a accident or series of unfortunate incidents".

Still, there are disputes that emerge which are now leading to significant changes in this relationship. Satellite owners, for instance, sometimes claim a complete loss on a satellite after it reaches orbit, even if a sizable fraction of its operating capacity remains intact after a 'glitch'. According to Peter D. Nesgos of the New York law firm Winthrop, Stimson, Putnam and Roberts as quoted by Space News,

This has caused insurance brokers to rethink how they write their policies, and for insurance underwriters to insist on provisions for partial salvage of the satellite. In 1995, the Koreasat-1 telecommunications satellite owned by Korea Telecom of South Korea triggered just such a dispute. In a more recent dispute underwriters actually sued a satellite manufacturer Spar Aerospace of Mississauga, Canada over the AMSC-1 satellite, demanding a full reimbursment of $135 million. They allege that the manufacturer 'covered up test data that showed a Spar-built component was defective'. Some insurers are beginning to balk at vague language which seemingly gives satellite owners a blank check to force underwriters to insure just about anything the owners wish to insist on.

One obvious reason why satellite owners are openly adverse to admitting that space weather is a factor, is that it can jeopardize reliability estimates for their technology, and thus impact the negotiation between owner and underwriter. If the underwriter deems your satellite poorly designed to mitigate against radiation damage or other impulsive space weather events, they may elect to levy a higher premium rate during the in-orbit phase of the policy. They may also offer you a 'launch plus five year' rather than a 'launch plus one year' shakeout period. This issue is becoming a volatile one. A growing number of stories in the trade journals since 1997 report that insurance companies are growing increasingly vexed by what they see as a decline in manufacturing techniques and quality control. In a rush to make satellites lighter and more sophisticated, owners such as Iridium LLC are willing to loose six satellites per year. What usually isn't mentioned is that they also request payment from their satellite insurance policy on these losses, and the underwriters then have to pay out tens of millions of dollars per satellite. In essence, the underwriter is forced to pay the owner for using risky satellite designs, even though this works against the whole idea of an underwriter charging higher rates for known risk factors. Of course, when the terms of the policy are negotiated, underwriters are fully aware of this planned risk and failure rate, but are willing to accept this risk in order to profit from the other less risky elements of the agreement. It is hard to turn-down a five year policy on a $4 billion network that will only cost them a few hundred million in eventual payouts. The fact is that insurers will insure just about anything that commercial satellite owners can put in orbit, so long as the owners are willing to pay the higher premiums. Space weather enters the equation because, at least publicly, it is a wild card that underwriters have not fully taken into consideration. They seemingly charge the same in-orbit rates (1.2 to 3.7%) regardless of which portion of the solar cycle we are in.

More and more often, satellite insurance companies are finding themselves in the position of paying-out claims, but not for the very familiar risk of launching the satellite with a particular rocket. In the past, the biggest liability was in launch vehicle failures, not in satellite technology. As more satellites have been placed in orbit successfully, a new body of insurance claims has also grown at an unexpected rate. According to Jeffrey Cassidy, senior vice president of the aerospace division of A.C.E. Insurance Company Ltd., as many as 11 satellites during 1996 have had insured losses during their first year of operation. The identities of these satellites, however, were not divulged nor even the names of their owners.

Despite the rough times that both manufacturers and insurers seem to be having, they are both grimly determined to continue their investments. Assicurazioni Generali, S.p.A of Triests, the biggest underwriter has no plans to reduce its participation in space coverage, but at the same time thinks very poorly of the satellite manufacturing process itself. Giovanni Gobbo, Assicurazioni's space department manager, is quoted as saying "I would not buy a household appliance that had as many reliability problems as today's satellites". The biggest pay out in 1998 was for $254 million for 12 satellites in the Iridium program; five were destroyed at launch.

Despite all the dramatic failures, the satellite insurance companies have actually lowered their insurance rates for launches from 15-16% in 1996 to 12-13% in 1997. Meanwhile, in-orbit insurance rates, the kind affected by space weather problems, have remained at 1-2% per year of the total replacement cost. Industry insiders do not expect this pricing to remain so inexpensive. With more satellite failures expected in the next few years, these rates may increase dramatically.

The nearly $600 million in in-orbit satellite failures that insurance companies have had to pay on in 1998 alone, has prompted questions of whether spacecraft builders are cutting costs in some important way to increase profit margins especially with the number of satellite anomalies continuing to rise. Between 1995 and 1997, insurance companies paid out 38% of the $900 million in claims, just for on-orbit satellite difficulties. Since the early 1980's, satellite failure claims have doubled in number, from $200 to $400 million annually. The satellite manufacturers argue that compared to the number of satellites launched and functioning normally, the percentage of anomalies and failures has remained nearly the same over the last two decades. Hughes Space and Communications, for example, has 67 satellites and there has been no percentage change in the failure rate. They use this to support the idea that the problems with satellite failures are inherent to the technology, not the satellite environment that changes with the solar cycle. According to Michael Houterman, president of Hughes Space and Communications International, Inc of Los Angeles, the spate of failures in the HS-601 satellites is a result of 'design defects' not of production-schedule pressure or poor workmanship:

"Most of our quality problems can be traced back to component design defects. We need, and are working toward, more discipline in our design process so that we can ensure higher rates [of reliability]".

Satellite analyst Timothy Logue at the Washington law firm of Coudert Brothers begs to differ:

Curiously absent from virtually every communications satellite report of a problem, is the simple acknowledgment that space is not a benign environment for satellites. The bottom line in all of this is that communications technology has expanded its beachhead in near-earth space to include thousands of satellites. These complex systems seem to be remarkably robust, although for many of them that may be in the wrong place at the wrong time, their failure in orbit can be tied to solar storm events. The data, however, is sparse and circumstantial because we can never retrieve the satellites to determine what actually affected them. Satellite manufacturers often look for technological problems to explain why satellites fail, while scientists look at the spacecraft's environment in space to find triggering events. What seems to be frustrating to the satellite manufacturing industry is that, when in-orbit malfunctions occur, each one seems to be unique. The manufacturers can find no obvious pattern to them. Like a tornado entering a trailer park, when space weather effects present themselves in complex ways across a trillion cubic miles of space, some satellites can be affected while others remain intact.

For years, Joseph Allen and Daniel Wilkinson at NOAA's Space Environment Center kept a master file of reported satellite anomalies from commercial and military sources. The collection included well over 9000 incidents reported up until the 1990's. This voluntary flow of information dried-up rather suddenly in 1998 as one satellite owner after another stopped providing these reports. From now on, access to information about satellite problems during Cycle 23 would be nearly impossible to obtain for scientific research. More than ever, examples of satellite problems would have to come from the occasional reports in the open trade literature, and these would only cover the most severe, and infrequent, full outages. There would be no easy record of the far more numerous daily and weekly mishaps, which had been the pattern implied by the frequency of these anomalies in the past.

2005 - "EchoStar Settles Satellite Insurance Claim" BusinessWeek.com, reports that on March 9, EchoStar settled its 5.5-year claim against satellite insurers for the failure of their satellite. The settlement could net $250 million. Echostar had filed a claim totaling $219.4 million against satellite insurers in 1998 when one of its satellites was placed into the wrong orbit and failed to operate properly. The ensures initially offered $88 million to settle the claim - arguing that the satellite was not a total loss and that EchoStar had failed to comply with the terms of the contract. Echostar sued for breach of contract and 'bad faith'. EchoStar, meanwhile noted the loss of the satellite as $106 million so that the settlement represents a net 'profit' against the actual earnings of the satellite of $144 million.

2005 - "Intelsat to end on-orbit insurance of satellites" - Spacetoday.net ( March 4) announced that Intelsat executives claim they can save $15 million by no longer purchasing coverage for satellites already in orbit. They will continue to purchase insurance for the launch plus first 12 months in orbit which are well known critical stages in the lifetime of a satellite. They have already declined to purchase insurance for satellites worth less than $150 million. [Intelsat press release]

2004 - Commercial Satellite Bus Reliability' - Frost & Sullivan has analyzed the on-orbit performance of the major commercially available satellite buses and considered the strengths and weaknesses of their manufacturers in order to determine which satellite bus (or platform) is more reliable. Based on both Frost & Sullivan and Airclaims data, this study highlights reliability records, anomaly trends, and the impact of these factors on the insurance industry and hence, the satellite industry overall....In terms of satellite insurance claims, the period from 1998 through 2001 was particularly bad. The unusually high number of satellite anomalies and resulting insurance claims have seriously affected both the quality and reliability of services provided by commercial satellite operators and have (along with notable launch vehicle failures) had a negative impact on investors’ perceptions of the space industry as a whole. Beyond that, such problems have resulted in billions of dollars of losses for space insurance underwriters, increasing space insurance premium rates and hence the cost of ownership for commercial communications satellites in general. Although the last two years have seen a reduction in the number of serious anomalies the affects of the 1998-2001 period remain. Insurance costs have risen considerably and attitudes towards satellites and their manufacturers have changed. Before 1998 the satellite industry and its customers were moving toward a vision of satellites as a commodity. Satellites were expected to function well and new technologies to expand their capabilities were embraced. Satellite manufacturers built new manufacturing facilities and anticipated ever-increasing orders. This vision proved faulty when the new technologies showed flaws once in service and previously reliable satellites began to develop problems as well. The large market for satellites that had motivated the more production-orientated manufacturing techniques failed to appear and the commodity model of satellite manufacturing has now generally been abandoned. [Report from Frost & Sullivan]

2003 - "Delbert Smith addresses developments in satellite insurance" - In February, Delbert Smith, Senior Telecommunications Counsel at Jones Day, was a member of panel on satellite insurance, along with industry leaders and insurance providers, at Satellite 2003, the world's premier satellite industry conference. In his remarks, Mr. Smith stated that he believed satellite insurance premiums were likely to increase due to the current activities at the United Nations Office of Outer Space Affairs to improve satellite design and end-of-life de-orbit. " [Jones Day News]

2002 - "Satellite Anomalies pushing insurance rates up" SpaceDaily.com reports that the insurance industry has begun to increase their rates for a satellites because of the sharp rise by 146% in the numbers of severe anomalies experienced by insurred satellites in recent years. A 'White Paper' developed by Futron discusses the changing climate of satellite insurance and sees the 129% increase in insurance rates a necessary industry 'correction' to stem the tide of financial losses from increasingly large payouts.

2002 - Insurance Rate Hikes Worry Industry - by Paul Dykewicz (Satellite 2002 Europe) The Nov. 26 launch of the Astra 1K satellite into the wrong orbit may well lead to another hefty insurance claim that will put upward pressure on rates, a top engineering consultant warned. Marshall Kaplan, director of space practices at Strategic Insight Ltd., told SATELLITE TODAY: “If you are in the insurance business, the Astra mishap is a big hit. Insurance rates are as high as 24 percent right now. If it goes much higher, people will stop buying insurance.” Insurers need to recoup their payments for losses, but Kaplan is among those who wonder whether satellite operators will continue to buy protection if rates keep rising. This rise in insurance premiums will be a hot topic of debate at the Satellite 2002 Europe conference this week in Paris. "The rates are going so high that the cost-benefit ratio is too high and people will tend to self-insure,” Kaplan warned. “That would be risky from a business practice standpoint but might be the only move that would make sense. The risk of a launch vehicle failure is not as high as the value of the insurance at that rate.” [Satellitetoday.net report]

2000 - Insurance industry funds new research into satellite failures" - The space insurance industry and the TSUNAMI initiative has put up £120,000 into two one-year research projects examining the role of space weather in satellite failures. Scientists from Mullard Space Science Laboratory and British Antarctic Survey (BAS) will attempt to match known violent space weather events with satellite failures using data from the space and from the ground. MSSL will also develop a spacecraft 'black box' to measure the amount of exposure to 'killer' electrons from the Sun. Space weather has been blamed for satellite failures that have cost the insurance industry billions of pounds. Solar conditions drive the space weather environment near Earth. Explosions on the Sun send gigawatts of energy hurtling towards Earth via the solar wind, causing space storms around Earth. This activity increases when the solar cycle reaches its peak every 11 years. This year sees the peak, making the studies even more urgent. Both projects will help space insurers minimize losses and set premiums. T he research funds are awarded by the Tsunami consortium, a group of scientists and insurers that was formed to stimulate new research proposals to improve understanding of natural hazards specifically to meet the needs of the industry. " [BAS Press Release]