Insurance

About 4 pages (1,119 words)

Insurance Summary

Know this topic well? Help others and get FREE products!

Insurance

Every ten days, on average, another rocket carrying a telecommunications satellite thunders heavenward. This satellite might be destined to become part of the international telephone network, or to provide direct-to-home television, or be designed to provide a new type of cellular phone service or Internet backbone links. Regardless of its eventual purpose, a wide range of people around the world will be focused on its progress as its fiery plume streaks upward. Flight controllers monitor its position while the manufacturers of the satellite check critical systems. The satellite owners wait anxiouslyto see if their critical investment will successfully reach its orbital destination. But there is another group of people, often overlooked, who also intensely monitor the fate of the rocket and satellite—the space insurance community.

It can cost hundreds of millions of dollars to build and launch a satellite. Because there is a 10 percent rocket failure rate, insurance is a critical element of space business.

The commercial space industry would not exist today without the space insurance industry. For example, in the case of a satellite slated for launching, unless the owners of and investors in the satellite are able to obtain insurance, the satellite will never be launched. A typical telecommunications satellite costs around $200 million. Another $80 million to $100 million is needed to launch this satellite into its proper orbit. Given the historic 10 percent failure rate of rockets, very few private investors or financial institutions will place this amount of money at risk without insurance to cover potential failures. Insurance is an essential part of the financing for any commercial space venture.

The Growth and Development of the Space Insurance Industry

The growth of the commercial space industry and the growth of the space insurance industry go hand in hand. National governments did not require insurance at the beginning of the space age, so it was not until the early 1970s, when companies decided to build the first commercial satellites for the long-distance phone network, that space insurance was born. In theseearly years the few space insurance policies were usually underwritten as special business by the aviation insurance industry.

The explosion of the space shuttle Challenger in 1986 marked a dramatic new phase in space insurance. The National Aeronautics and Space Administration (NASA) decided that the shuttle would no longer be used to launch commercial satellites. This forced commercial satellites onto expendable launch vehicles, which had a higher risk of failure than the relatively safe shuttle. Owners and investors actively sought insurance to protect their satellite assets, and this growing demand established space insurance as a class of insurance of its own.

The success of commercial satellites led to strong growth in the space insurance industry, which exceeded $2 billion revenue annually worldwide by 2001. Similarly, the ability to obtain insurance against failures enabled investors to achieve commercial financing for space projects. In turn, this stimulated the growth of the commercial space industry such that commercial spending on space projects equaled government spending in 1998. The role of space insurance in securing commercial financing is so well-established that government agencies, such as NASA and the European Space Agency, now also insure selected projects. This trend will continue and space insurance will play a central role in unlocking financing for new commercial ventures on the International Space Station and beyond.

Insurance—A Global Industry

Space insurance, like other forms of insurance, is a global industry. The largest concentration of companies is in London, where space insurance and insurance in general originated. Major companies exist all over the world, however, including in the United States, Germany, France, Italy, Australia, Japan, and Scandinavia. Virtually every country that has commercial satellites participates in the space insurance industry, either through direct underwriters or reinsurers. Reinsurers insure the insurance companies, agreeing to accept some of the risk for a fee. This spreading of risk is crucial, as it is difficult for one company or country to absorb a loss in the hundreds of millions of dollars from a single event. The global spreading of risk takes advantage of worldwide financial resources and is a fundamental aspect of the insurance industry.

Insurance premiums can vary from 4 percent to 25 percent of the project's cost depending on the type of rocket and satellite, previous history, and new technology being used and policy term. Accurate and up-to-date information is essential in setting rates and a major issue is government restrictions on the flow of technical information. Market forces and recent losses also affect rates. Rates were increasing in the early twenty-first century as companies adjusted to the very high insurance losses incurred from 1998 to 2000.

Brokers and Underwriters

The space insurance industry is essentially made up of two types of companies: the brokers and the underwriters. The broker's task is to put together an appropriate insurance program for the satellite owner, while the underwriter puts up security in the form of insurance or reinsurance. The broker identifies the client's insurance needs over the various phases of asatellite's life: manufacture, transport to the launch site, assembly onto the rocket, launch, in-orbit commissioning, and in-orbit operations. The broker then approaches the underwriting companies and asks how much coverage they will provide and what premium rate they will charge. Most underwriting companies will not take more than $50 million of any one risk. Hence the broker must often contact several underwriters to place the client's total risk at consistent rates. Once the package is agreed to, legal contracts complete the arrangements.

Jobs in Space Insurance

The space insurance industry can offer fascinating work for those interested in space. There are two main roles: the broker, who has a business development role—finding clients and negotiating insurance programs; and the underwriter, who leads the complex task of establishing the insurance rates. Experience in the space insurance industry is essential for both of these roles, and often a business, legal, financial, or technical background is required. Companies also have technical experts who understand satellites and rockets, a legal department for writing contracts, a finance department handling the accounts and money transfers, and a claims department for assessing losses and processing claims. Actuaries, who generally have a mathematics background, model the expected losses and help the underwriter and the technical experts set the rates.

As permanent habitation of space through the International Space Station leads to the discovery of new commercial opportunities, space insurance will evolve to cover these new commercial realities. Insurance remains an essential ingredient for commercial space business and will continue to play a vital role in humanity's growing commercial exploration of space.