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Satellite Insurance

Published on Sep 22, 2008 at 10:36 am. 1 Comment.
Filed under space businesses.

Usually, I write about astronomy and space exploration topics. But I read this article, and that got me to thinking about the commercialization of space. If we are ever to develop a true space-faring civilization, then we need to go beyond just exploring space to working, living, and doing business in space. And, in today’s world, insurance is a routine business commodity, so it is no surprise that satellites are insured.

When you buy a car, you should get insurance. Most states require you to have liability insurance. If you get a loan to pay for the car, most lenders also require you to insure the vehicle for loss. You insure it against theft, a collision for which you are at fault, and for damage from nature (hail, flood, etc).

A lot of people don’t think about it, but satellites are also routinely insured. Back when the only satellites were government research missions, then satellite loss was routinely expected. But, soon, private companies started to put satellites into orbit. At first, they had to do this aboard government operated launch vehicles. Today, there are a variety of choices between government and private launch vehicles. In fact, private launch vehicles, once an oddity, have become quite common. And, of course, more and more private companies are competing to launch payloads. This drives cost down. But, satellites are expensive, so you don’t want to risk an expensive satellite on a rocket that is notorious for failing, no matter how inexpensive it is to launch. So, that provides pressure on launch companies to make their launch vehicles more reliable, otherwise they’d have no customers!

But, satellites can cost tens of millions of dollars, or more. The launch is expensive, too. So, the loss of a satellite can be a major blow to the company that paid for it. The satellite insurance market gradually came into being as private companies began to become more involved in space exploitation and as satellites got more expensive. There have always been a few insurers that would insure pretty much anything. But, insurance companies are in the business to make money. So, they need more money coming in than is going out. Naturally, they could insure a satellite for nearly as much as it was worth, but then who’d be willing to pay that much? After all, you could just go buy another satellite if the insurance cost as much as the satellite. But, if you have insurance that costs only 10% of the price of the satellite, the insurance company would lose money if they had to pay out the price of satellites for one satellite in four. This is where the actuaries come into play. They have to assess the risk of loss. The insurance company then uses that data to set rates. The goal is to charge customers more than the company pays. Of course, if the insurance is too expensive, customers will balk and will not buy insurance, instead taking their chances themselves on losing the satellite. It is a betting game. The insurance company bets that the satellite won’t be lost, the customer bets that it will. That’s pretty much how insurance goes. But, with rockets so new, and development and improvements in both satellite and rocket technology so fast, it was very difficult for the actuaries to actually determine the risk of satellite loss. The satellite insurance business was purely a guessing game until statistics began to improve in the 1980s. Even today, there are still relatively few satellite launches compared with other things that actuaries study, so there is still a bit of a guessing game. (Note that I am only talking about insurance covering launches, not loss of a satellite in orbit. Satellites are insured for loss in orbit, too.)

According to the article that I referenced at the top of this post, one of the problems with satellite insurance is that there is often a cap on how much it will pay. That cap is huge, of course, but then so are the costs of satellites. The problem comes with you have a heavy lift vehicle that is capable of putting multiple satellites into orbit at once. So, these large rockets are able to lift payloads more expensive than the maximum payout for most policies. According to the article, Arianespace offers a relaunch guarantee to launch for free a payload to replace one lost by a launch failure. That is particularly important on their largest booster, which is expensive to launch and can easily lift payloads costing far more than the insurance limit. Fortunately, the Ariane 5, Arianespace’s large booster, is also extremely reliable. But, NASA is developing their Ares V booster, which I gather that they hope to contract out to lift commercial payloads in addition to NASA payloads. That can easily get into the same issue as with the Ariane 5, only the Ares V won’t have a track record by which actuaries can estimate launch risk. That could lead to difficulties if customers can’t fully insure their satellites. And, I rather wonder how this sort of thing also affects other start-up launch companies. The insurers would not have a track record for operational launches, and development failures are not an entirely reliable predictor of failures once the operational phase of launches begins.

So, I don’t have anything really useful to add to this discussion. Insurance is outside of my field of expertise. I just thought that it might make an interesting thing to write about for some of my readers who have never even thought of that aspect of the commercialization of space.

-Astroprof