By Jason Bates

The factors that led some of the largest fixed satellite service operators to abandon satellite insurance providers and rely more on self insurance look to be easing, according to industry officials. Improvements in satellite quality, increases in utilization rates and new satellite technologies may have many operators seeking coverage from providers in the near future.

However, the factors that led to problems in the first place have not disappeared entirely, and large satellite operators may not rush back to the insurance industry. The large fleet operators look to continue to rely instead on self-insurance and the backup capacity offered by their large fleets, while the smaller operators still may have a hard time finding coverage from underwriters who are approaching customers relying on new technology more cautiously.

Stable Environment Today

A series of launch failures in the 1990s, followed by a series of in-orbit problems with platforms such as Boeing Satellite Services’ 702 series, contributed to the reduced capacity and restrictive conditions placed on satellite operators. A 2002 Futron Corp. report found that the number of major on-orbit anomalies rose 146 percent throughout a four- year period, while insurance rates rose by 129 percent.

"We saw a shift from a launch-failure dominated environment to a satellite-failure dominated environment," says Eric Allenspach, senior underwriter space, and managing director, global and large risks at Swiss Re. "The 90s were characterized by an intent of the industry to produce faster, better, cheaper. In fact, it wasn’t cheaper for us nor for operators. At the end of the day, the operators lost clients and the confidence of investors and capital providers. Overall, it was a very painful period, and as a reaction, the risk appetite, both from capital providers and even more so from insurers was significantly reduced."

But the insurance market has entered a more stable environment today, as both launch vehicles and satellites have proven more reliable in recent years. But the lessons of the past decade has altered the behavior of the industry, Allenspach says. "Quality clearly is a top concern, not only to insurers, but on the operator side," he says. "I think they have seen that just getting the insurance money is not sufficient to run a business. Looking back, the figures clearly show there has been an improvement. Having said that, we have to be very clear that we are operating in an industry that is dealing with highly complex technology in a high-risk space environment pared with a low number of risks, making the business extremely volatile."

While Boeing’s 702 series problems have received the lion’s share of attention, all satellite manufacturers have experienced their share of problems, and a collective effort by manufacturers and operators to improve the quality of the spacecraft has helped improve the insurance market. "We see an improvement in the stability of the space insurance industry," says Dee Vallaras, a spokeswoman for Lockheed Martin Corp. "The year 2005 marks the fourth consecutive year in which space insurers have earned a profit, although several significant claims from previous years are still open." In 2005, total gross premium of the industry totaled $876 million, with current estimated claims at $103 million, she says. "It would appear that the recent year-over-year successful space underwriting results discussed above are stimulating additional capacity in the launch insurance market. This is likely a factor in the easing of launch insurance rates that we are seeing. Of course, solid financial performance of the insurance industry signifies that the manufacturers and operators are working together to continually improve launch vehicle and satellite reliability." Boeing declined a request to comment.

The insurers themselves also have stepped back from the rush days of the 1990s, when there was so much business available, the insurers sometimes rushed to sign deals without doing enough investigation, industry officials say. Today, insurers are approaching deals more cautiously and asking more questions about potential customers.

Large Operators Happy With Self-Insurance

Intelsat Ltd., which operates 28 satellites, moved to self-insurance and likely will continue using that method even as insurance rates have begun to drop, George Giagtzoglou, the company’s senior director of strategy and planning. Today, no single Intelsat satellite provides more than 10 percent of the company’s revenue, and the size of the fleet will increase to 53 spacecraft once the operator completes its planned acquisition of Panamsat Corp.

"The rates of insurance have definitely dropped from where they were a few years ago, which is definitely heartening," he says. "But in the last few years, more aggressive cost management from Intelsat and other operators has taken us a decision not to buy in-orbit insurance. … We’ve taken the decision where if the net value of the satellite is greater than $150 million, we would look at insuring, but all the satellite in our network have a value of less than $150 million, which leads us to self-insure." Intelsat also has been working with the satellite manufacturers to make its spacecraft more reliable, including adding additional levels of redundancy for key systems, he says.

But as the satellite operators seek ways to increase transponder utilization rates, they may be forced to abandon self-insurance to an extent. "If you have a fleet of 20 spacecraft and you put aside one or two for redundancy then you can’t generate revenue as you could have," Allenspach says. "If you have backup satellites, you are putting money aside. The question is whether it is worth it for operators to keep free capital aside for failure scenarios or whether they should rely on reinsurers capital."

According to Swiss Re, the latter clearly is a more efficient way to manage this risk since operators cannot outperform the globally diversified insurance market by tougher risk management. To launch a satellite is a significant cost, especially if you just place it in orbit to use as a spare. "It is a constant balance between having spare capacity and being more efficient. This is a very individual judgment that our customer has to make. We have seen in the past that even the best operators have losses. It is not always the most complex satellites that fail."

Smaller Operators Face Same Old Problems

The self-insurance option is not available to everyone, particularly satellite operators with small fleets or ones relying on new technologies. Telesat Canada, which operates four satellites, continues to rely on the insurance market to cover its spacecraft, says Ted Ignacy, the company’s vice president, finance and treasurer. "For us, insurance is still an important part of our risk management," he says.

For those companies that do have to seek in-orbit coverage, the rebound in the insurance market is welcome news, Ignacy says. "Prices today are lower than their peaks of three or four years ago," he says. "With respect to the conditions of that insurance, there was a fair bit of tightening that took place during the early part of the decade and those revised conditions have more or less set the norm for insurance policies today. However, the situation has stabilized and we are seeing fewer requests for revisions in today’s market. … There is sufficient capacity in the market to insure an average size satellite through launch or in-orbit at competitive rates. But that capacity is finite and if you have a very expensive satellite, say $500 million or more, you will find it difficult to get the satellite fully insured. Also, the higher the insured value you require, the higher the premium rate you will be required to pay. So the lower the value, the easier and cheaper it is. The higher the value, the more difficult and more expensive it is."

But even as the market has improved, operators introducing new technology into the market will face scrutiny from underwriters. The Spaceway satellite, being developed by Hughes to provide broadband service under the company’s Hughesnet brand, will require Hughes to seek coverage from underwriters rather than rely fully on self-insurance, says Dean Manson, the company’s general counsel. Spaceway will be Hughes’ first satellite. The company currently provides service by leasing transponders from other operators. "Self- insurance may make sense when you have a fleet of satellites, whether by accelerating the launch of a satellite under construction or repositioning satellites in orbit," Manson says. "That kind of contingency planning is feasible with larger fleet. We’re not a DirecTV or a Panamsat that regularly procure and launch satellites."

But even with improved market conditions, Hughes is carefully considering its risk management strategy for Spaceway. "There has been some improvement in the market since 2003- 2004, when conditions were at their worst in recent times, but we would like to see more," he says. "We do want full insurance limits for Spaceway, but it’s not as if we can focus only on that without also factoring in market conditions, including rates and coverage terms. Terms such as loss formulas, exclusions and other conditions will affect our analysis of what we are getting for the premium we are willing to pay. All of those tradeoffs have to be considered carefully."

Hughes has just begun the insurance process and will refine its approach as launch of the Spaceway satellite, scheduled for early 2007, draws closer. "We do not intend to go uninsured on Spaceway 3," Manson says. "The question is, ‘Where is the optimal point in the cost-benefit analysis?’ If we are willing to allocate X dollars to insurance, our sense is that there are various ways to design our coverage. Space insurance has real value, but it is expensive and we want to be sure we are getting maximum value from the coverage we obtain."

Allenspach acknowledges that insurers are approaching new technologies much more cautiously than in the late 1990s, as the rush to offer coverage in the boom times resulted in some of the heavy claims for underwriters. "If you have unproven technology, we will see how this fits into our portfolio," he says. "I have to weigh my risk appetite and make a judgment accordingly. High-technology satellites can pose a problem that is not necessarily solved by increase the rate for insurance. If the underwrite thinks the technology is too complex, they may think the risk is too big to take."

Caution Going Forward

Today’s satellite insurance market is governed by caution, both from the providers and operators seeking coverage. "The space insurance market is a volatile market," Ignacy says. "It reacts to anomalies on spacecraft, satellite failures, launch failures as well as the state of the international economy in general. Over the last couple of years, the environment for space insurance has been relatively stable and, as a result, conditions in the market have been improving. However, there has already been a launch failure and reports of a partial satellite failure this year. If there are more failures or claims upon the insurers, this relatively stable situation could change."