Fixed satellite services (FSS) companies abandoned some traditional forms of satellite insurance in the early 2000s due to high premiums and insurance rates, relying instead on self-insurance through the use of backup satellites. Now as more money flows into the market and insurance rates and premiums decline, more innovative insurance arrangements are luring FSS operators back to market insurers.

In the last decade, we have seen a full cycle of rates going up and now down again as the insurance capacity [the amount of money provided by underwriters] is coming back up,” says Andrea Maleter, technical director of space and telecommunications for Bethesda, Md.-based Futron Corp., which recently completed a reassessment of the insurance market.

The cost of standard launch coverage — launch plus 12 months in orbit — has been dropping. In the capital investment heyday of the late 1990s, insurance coverage averaged 7 percent of the overall cost of the mission, she says. As capacity tightened after 2001, the rates rose to more than 20 percent in 2002 and 2003. By last year, rates had decreased to percentages in the high teens and currently sit in the low teens. “The money is more readily available” than when Futron studied the issue several years ago, Maleter says, “because now we’re in a different part of the cycle.”
The influence of capital investments on insurance rates is clear. In the late 1990s, market capacity reached a high of $900 million for satellites, says Mark Quinn, senior vice president for Willis Group Holdings of London, which specializes in brokering insurance for satellite launches and other high-risk operations. After 2001, capacity plummeted to just more than $300 million. In the past five years, investments have grown to about $600 million, creating competition among underwriters that, in return, is driving down rates, he says.

In addition, operators are looking for innovative ways to further reduce long-term costs by locking in low rates. Intelsat in May secured a contract with 19 companies to insure eight of its satellites for $1.5 billion. Hank Courson, Intelsat’s senior director of finance, would not disclose costs, but says the rate was “well below” the 16.75 percent of costs, which is a current average rate for two years to cover the launch — “when they officially push the button” — plus a year in orbit.

Intelsat had leverage to close the deal because of its fleet, which grew to 52 satellites after its acquisition of PanAmSat. “Insurance is a long-term relationship based largely on trust,” Courson said. “One of the benefits of scale is that we have the ability to go to market with an eight-satellite package.” Intelsat proposed the arrangement as a way of locking in rates from future price volatility, Courson says. “The pricing, overall, was favorable and we knew that another loss like the NSS-8 [referring to the SES New Skies destroyed in a January Sea Launch failure] might turn the market. If we can better control our costs, then it, hopefully, will flow to our customers over time.”

Just because there is increased capital in the market and rates are going down, does not mean terms of contracts automatically get better for insurance buyers, warns Peter Nesgos, a partner with New York-based Milbank, Tweed, Hadley & McCloy LLP and head of its Technology and Communications Group. “Where there is any improvement in wording or terms it’s the result of knowing the market, experience with the latest policy wordings and tough and patient negotiating,” he says. An increase in disputes and arbitration over satellite insurance in recent years has caused improved policy language in contracts, making them clearer and less open to disputes, Nesgos says. “There is an increasing focus on getting the language as clear as possible.”

Meanwhile, satellite insurers are “at or near” a break even profit margin of about $500 million in claims and $500 million in premiums, Quinn says. That is a leveling off since the first quarter of when premium payments were delayed following the loss of New Skies’ NSS-8 satellite. Such a loss is “a double whammy for insurers” because they pay the claim in February, but premium payments are delayed by the changing launch schedule, he says. A similar pattern could take place with the September failure of an International Launch Services Proton rocket that destroyed JSAT Corp.’s JCSAT-11.

Although the loss of a satellite can throw off the schedule for insurance companies to collect premiums, it generally does not affect the insurance customer’s rates as much as that company’s internal processes for correcting failures, Quinn says. Companies stay attractive to insurers by maintaining highly-skilled engineers who adhere to fundamental test management, verification processes and oversight from beginning to end. It also helps to buy satellites and launch vehicles that use only heritage components and hardware, he says. “Unfortunately, most launchers have had some sort of failure and there is an expected response to any failure,” Quinn says. “The Proton has launched somewhere around 300 times since it was developed in the 1960s. Ariane has failed many times, but it has a comprehensive and transparent process. They demonstrate diligence in making sure they’ve identified the problem and solved it.”

Maleter agrees due diligence is important but says the overall economy has equal bearing on the climate for purchasing insurance. “What happens in the broader economic world is as much a factor as a launch,” she says. While it is still true that larger companies with better quality control and longer track records get better insurance rates, the competition “is not really between users of insurance, it’s really between insurance companies,” Maleter says. That’s because the cost of insurance is driven more by the total capital in the market, or capacity as provided by underwriters, than by the rate or types of anomalies that have occurred.

Anomalies “are the thing people focus on the most because they’re the most visible,” Maleter says, but anomalies have a greater impact on in-orbit rates, which have remained “low and stable,” while launch rates are cyclical and driven by a history of launches and launch failures, she says. Also, anomalies cannot easily be predicted. “We looked at the relationship of anomalies to various factors, including types of spacecraft, trends in the number of satellites in orbit and the size and complexity of satellites compared to the length of time to manufacture, but none of those things is a clear determinant of the number of anomalies,” she says.

Intelsat, however, has made prediction of in-orbit anomalies a priority, Courson says. While Intelsat will continue to self-insure its satellites after a year in orbit, it is developing processes to better predict anomalies. “My new paradigm for in-orbit is to develop better risk visualization tools. We need a forward view of risk,” he says. “We have to move toward methodologies that allow us to quantify risks on the side that matters most to us — cash and earnings. We’re going to take a portfolio view — satellite by satellite, arc by arc — until we see the risk of exposure that is occurring.”

One thing that has not changed on the insurance side of satellites is the “historical tension” between manufacturers and service providers that is played out with practices like manufacturers’ customary standard of providing limited performance warranties when insurers want them to insure more, Nesgos says. In the end, each operator must do a cost-benefit analysis to decide how much they are willing to pay for insurance. “It all comes down to the cost-benefit of increased redundancy and quality control at a high cost versus the cost of providing this protection through launch and in-orbit insurance, which typically is a more economical method of managing the risks inherent in building and launching satellites,” Nesgos says.