New Frontiers
Space insurers ready themselves for a wave of new developments.
When Google Earth was launched in 2005, providing free public access to online satellite images of any location on earth, the program was called both a threat to national security and an invasion of privacy.
Eight years and more than 1 billion Google Earth downloads later, the technology of satellite imagery has become ingrained in daily life.
Society's increasing dependence on such technology is expected to drive demand for more complex satellites in the future. At the same time, new commercial satellite and launch vehicle manufacturers have entered the market, increasing competition, driving down costs and making satellites more affordable. These same commercial enterprises also have begun handling some of the space-related duties that once were the sole domain of governments.
The result: There are some new frontiers ahead for the space insurance industry.
"We're sitting on the cusp of a period of development," said David Wade, space underwriter for Lloyd's Atrium Syndicate. "We are starting to see commercial activity grow into new areas. Previously, communications and Earth observation were the only commercial sectors, but now we are starting to see new areas like delivery of cargo to the space station. There's also a lot of interest in servicing of satellites in space and possibly removing pieces of debris, ultimately mining asteroids, space tourism. There's lots of potential out there."
While these endeavors offer new avenues of opportunity, they also have the potential to disrupt a line that has enjoyed relative stability for a number of years. Worldwide satellite industry revenues have gone up from $64 billion in 2001 to almost $190 billion in 2012, according to Jan Schmidt, head of space for Swiss Re Corporate Solutions.
"In 2013, the oversupply of capacity in the space insurance market has increased competition and driven premium rates to some of the lowest levels ever seen," he said. "Swiss Re Corporate Solutions believes that premiums at today's level are not sustainable and the market will see some corrections soon. It is conceivable that an unprofitable market will result in the contraction of market capacity."
In-orbit premiums decreased annually by 15% to 20% and launch premiums shrunk annually by about 10% over the last five years, said Dr. Sima Adhya, head of space for Torus. But the current period of development could shake up the market while new technology proves itself.
"Around the turn of the century there was a push toward more powerful satellites and very quickly producing satellites that could do more and more. There were quite a lot of problems and quite a lot of claims. Testing perhaps wasn't as rigorous," Adhya said. "But we did see quite a lot of stability from around 2000 to 2010 where designs were maturing. As a result, space insurance results have been good for quite a time. But as always, these things come in cycles, and now we're seeing a period of development.
"Whether this developmental phase will be similar to the last one, or whether it will be different because of the lessons learned, such as more rigorous testing, does remain to be seen."
Not long ago satellite operators had the choices of two main launch vehicles: the French Ariane and the Russian Proton. New launch vehicles from companies such as Orbital and SpaceX, which was started by PayPal and Tesla Motors founder Elon Musk, have created options.
"It's making space more accessible for more parties," Adhya said. "It [SpaceX's launch vehicle] is marketed as a cheaper rocket, so it allows more operators to access space with it. We're also seeing more commercial Japanese launch vehicles, Chinese launch vehicles. So what we're seeing now is more competition and more launch vehicles available."
Launch of New Opportunities
Emerging market countries such as Nigeria, Pakistan, Laos, Vietnam and Congo-- which in the past bought satellite communication services from global fleet operators-- are taking advantage of this and have begun launching their own satellite programs.
"Satellite technology is getting to the point where it's cheap enough that these countries can invest in their own satellites, leapfrog generations of terrestrial technology, and put in place very rapidly all of the hardware that they need for 3G mobile phone systems and things like broadband access," Wade said.
"So what we're seeing right now is a lot of those emerging countries launch their own communications satellites and then regulating their communications sector so that any communications provider in their country has to buy services via that satellite rather than going out and buying it in the commercial market."
The commercial sector has also begun delivering cargo to the International Space Station, a job that was once the responsibility of America's now-retired space shuttles. Both Space X and Orbital have completed missions to the ISS. The expectation is that the commercial sector eventually will transport people to the station as well.
"This type of mission would not have been insured before, but we are now seeing these come to the insurance market," Adhya said. "In the case of the International Space Station, the way the contracts work is that the providers will only get paid for successful missions. So there's a real need for the operator to insure those missions."
Adhya said the financial crisis has increased interest in shifting such risks to the commercial sector.
"I don't think governments are as happy to take all the financial risk anymore," she said. "They are looking to commercial operators to meet some of their demands as opposed to trying to do everything in-house without insurance."
The United Kingdom adopted this approach in 2007 when it shifted operation of its Skynet military communication satellites from the Ministry of Defense to a commercial company. "In the U.K. it was seen as good value for the money," Wade said. "Rather than having to invest up-front in a billion dollar project, they could get public-private partnership in place."
These markets are still in the early stages, however, and are expected to develop more over the next five years. In the short term, communication and Earth observation satellites are expected to drive growth. Not only has space become more accessible, but satellites are becoming more complex and, therefore, more expensive.
Typical communication satellites range from $200 million to $400 million in value, experts say, with premiums based on a percentage of the value. With bigger, ultra-high-definition satellites on the way, values of $400 million to $500 million will not be uncommon in the future, Wade said.
"Typically, newer satellites that are being launched are bigger and more complex than the ones being retired, so they're of higher value," he said. "For every three that are launched, one is retired. So the total value of assets in orbit, and insurance exposure, is gradually creeping up."
Flight Risks
The aggregate exposure of all insured satellites in orbit is just under $24 billion, Schmidt said. With so much valuable equipment hovering thousands of miles above the surface of the Earth, there is a lot to lose.
Beyond the possibility of a launch failure, the main in-orbit risk is breakdown. And while mechanical issues may remain the primary concern, there is growing concern over space debris. Swiss Re estimates the amount of orbital debris today is double that of two decades ago and more than 30% higher than just five years ago.
"Space debris is no longer an academic or environmental issue," Schmidt said. "On the contrary, it has the potential to damage or destroy high-value, operational satellites that perform vital communications and meteorological functions, with resulting revenue losses running into billions of U.S. dollars."
According to NASA, more than a half-million pieces of debris are tracked as they orbit the Earth. There are 20,000 pieces of orbital debris larger than a softball and 500,000 pieces larger than a marble. Because this orbital debris travels at speeds up to 17,500 miles per hour, even a relatively small piece is capable of damaging a satellite or a spacecraft.
"It is a risk, and it is an increasing risk because each particle that collides with another creates a shower of further particles, so you're increasing the number of particles," Wade said. "In low Earth orbit, that particular orbit is very congested. We need to monitor that carefully."
Satellite equipment can be found in three orbits: low Earth, medium Earth and geostationary. The vast majority of insured exposure-- $22.5 billion of the total, Schmidt estimated-- is in geostationary orbit, an equatorial ring 22,300 miles (36,000 kilometers) above the surface of the Earth that is home primarily to telecommunication satellites. Because objects in GEO move in the same direction and at the same speed, the potential for collision is lower.
In low Earth orbit, however, debris is a mounting problem. Located 185 to 115 miles (300 to 800 kilometers) above the Earth's surface, it contains imaging satellites, weather satellites, science platforms, some communication constellations and the International Space Station.
At that distance, objects move at various speeds and in varying directions, increasing the risk of collision.
Despite the low levels of insured exposure in low Earth orbit, insurers are taking space debris seriously.
"Although the statistical probability of a collision remains comparatively low, projections are difficult to make because of the limited ability to observe objects in certain orbits and the uncertainty surrounding past and future debris-generating events," Schmidt said. "More importantly, the likelihood of a collision is increasing. This is because in some orbital regions a growing number of satellites are being deployed and there is no natural debris-removal mechanism."
In its publication, Space Debris: On Collision Course for Insurers? Swiss Re laid out the implications of debris colliding with operational satellites.
"On their own, insurers cannot respond to the challenge space debris poses to their insured operators," he said. "The more logical and pragmatic approach is for insurers to work with insureds in, for example, promoting mitigation efforts. This could take the form of fostering a regime of legal certainty or collaborating with the scientific community to address this issue."
Learn More
Swiss Re
A.M. Best Company # 085009
Distribution: Direct
Torus
A.M. Best Company # 055853
Distribution: Brokers
Lloyd's
A.M. Best Company # 085202
Distribution: Brokers
For ratings and other financial strength information visit www.ambest.com.
by Kate Smith, senior associate editor, Best's Review
