With Virgin Galactic edging closer to launching tourists through the stratosphere for the first time, what part will the insurance industry play in this uncharted territory?
Having been confined to the scripts of Hollywood science-fiction movies for much of the recent past, the impending reality of space tourism is set to launch the insurance industry towards the final frontier.
If all goes to plan, 2013 will be remembered as the year the man on the street – albeit one with pockets deep enough to afford the £130 000 price tag – first experienced the wonders of weightlessness on a sub-orbital voyage aboard a spacecraft. While a firm date has not yet been fixed for the launch of Virgin Galactic’s Space Ship Two, it is believed the half-dozen amateur astronauts taking part in the landmark launch – including Virgin boss Richard Branson and Professor Stephen Hawking – have not got long to wait, having already experienced six years of delays.
The sheer scale of Virgin’s project has inevitably captured the imagination of a global audience, with forthcoming ventures planned as far afield as Brazil and Russia.
However, it is the unprecedented opportunities that come with taking
high-rolling holidaymakers on a trip to the stars that are beginning to catch the attention of the wider insurance market. In 2011, Allianz Global Corporate & Specialty teamed up with the International Space Transport Association to offer cover for space tourism and commercial space flight. Speaking at the time, Erick Morazin, director of global accounts at the insurer, said: “Space is decidedly our new frontier and we are now ready to take this giant leap forward to ensure peace of mind and well-being of all our future space-travelling customers.”
Since then, few have been willing to take a similarly public stance, resulting in a lack of commercially available space travel insurance policies. Such a dearth in cover is perhaps not surprising given that the space tourism industry’s development is at an early stage and combines high risk exposure with low consumer engagement – six passengers will travel with Virgin Galactic, while the next expected rocket, Xcor’s Lynx, will carry just one tourist.
When considering the identity of the players likely to take a slice of the market, talk turns to those already prominent within the aviation sector, with space coverage seen by many as a logical step. Ludovic Arnoux, aviation and space technical referent at Allianz Global Corporate & Specialty, concurs: “The supporters of this market will probably be the aviation insurers, which are also providing space capacity. This market will require both specialties’ expertise, as it is in the boundary of aviation and space technologies.”
While the assumption that traditional aviation insurers will take on space cover is common, the presence of the London market and specialist firms has not been discounted. Greg Lawson, head of retail at Columbus Direct, says: “The Lloyd’s market has always led the way with unusual risks, and existing space specialists such as Aon and Atrium already exist. Allianz has made noises around its launch of space travel insurance linked to Virgin Galactic but no one seems to have published a commercially available policy. It is unlikely many specialist travel insurance providers will expand into space tourism due to the low number of travellers and high risk exposure.”
Yet at both Atrium and Aon there is an impression the immediate future of space tourism insurance will fall into the hands of the aviation market while emerging risks and question marks over profitability are fully explored. David Wade, underwriter at Atrium Space Insurance Consortium, says: “There seems to be a lot more engagement with the aviation market than with the space market. However, as far as I’m aware, nothing has actually been placed yet. At the moment the test flights are being done.
“In terms of risk, you should always look at the weakest link in the chain, which from the reliability point of view is the rocket engine.
“The other reason why Virgin will be looking at the aviation market is because there isn’t an awful lot of money in this yet. There are six people on Virgin Galactic paying $200 000 (£128 441) per person, so that’s only $1.2m for the lot. Xcor’s Lynx, which will be probably the second vehicle to fly, only carries one passenger and that’s $92 000 per flight.”
As cost becomes an increasingly crucial factor, Wade believes Marsh – Virgin’s broker of choice – will be pushing for rates more akin to the aviation market. “Virgin’s price per passenger was set 10 years ago when surveys were done about what people would be prepared to pay,” he says. “This craft was expected to fly in 2007, but there have been huge delays and cost increases. At $1.2m of revenue per flight, there is not going to be a lot left in the tin.
“Virgin will be very keen to engage with the aviation guys to try to get aviation-type rates rather than space rates. In reality, it might have to be some kind of hybrid cover between the two – but then you run into difficulties in terms of the transition point between one and the other.”
As a specialist operator in the existing space market, Atrium was among the first to test the water when the embryonic space tourism industry initially reared its head. However, Wade concedes it was apparent early on that Virgin was targeting aviation players: “We cover communication and observation satellites, but we did start looking at space tourism five years ago. After a few initial discussions, we could see that firms like Virgin were clearly targeting the aviation market.
“My concern is that rockets are incredibly sensitive and you only need a minor deviation in some manufacturing process and you could be in trouble. It’s certainly not the same situation as a 747 aircraft, so it shouldn’t have the same rates.”
Like Atrium, Aon commands a reputation as a prominent player in the space market. Tim Wakeman, executive vice-president of the firm’s international space broking division, shares Wade’s view that the space tourism market composition straddles two sectors. When asked whether those well placed within the aviation market will become frontrunners space tourism coverage once the industry takes off, he says: “I can see it going that way – certainly for the stuff that’s been talked about, which is sub-orbital flights that don’t involve going up to a space station.
“I can see the Virgin Galactic and Xcor flights more naturally fitting the aviation market but, in terms of insurers with a likely interest, obviously Lloyd’s is a major player; then there are, of course, the big global companies like Swiss Re and Munich Re, and specialist companies such as Global Aerospace in London and AIG.”
Clearly the risks involved with space tourism, while difficult to surmise in their entirety, are close to typical aviation policies – notwithstanding the added extremes the spacecrafts will be subject to. Wakeman adds: “It’s going to be similar to aviation. Obviously these crafts are more technical than your average aircraft, as they operate at a much higher altitude, so that’s an aspect to consider. Another factor is that there are going to be passengers on board experiencing weightlessness with only a limited amount of training.
“While in aviation considerations have to be made around mid-air collisions and takeoffs from busy airports, the main concern from a space tourism point of view is going to be mechanical error within the craft or some sort of pilot error.”
Arnoux agrees: “The main difficulty will be the adaptation of space technology, particularly rocket engines on airplanes, for manned commercial flights. This is why a strong expertise in both fields is required to assess the risks involved in this activity. Space trip cancellation is probably a risk we will need to cover in future. Several elements are making this risk difficult to predict, and the flexible policy cancellation is reducing the interest in such cover.”
Bearing in mind the untested nature of the market and the risks involved, some early estimates of policy pricing have raised eyebrows. Lawson explains: “Tickets with Virgin Galactic require a $20 000 deposit. Standard travel insurance currently tends to cover cancellation costs between £5000 and £10 000, but it is dependent on the terms of the booking. Questions need to be asked concerning whether dependencies such as fitness, health and training allow refund of the deposit, or whether it is non-refundable. I would guess at a travel insurance policy cost of around $2000 to $3000, but other companies seem to have led with quotes of €700, which seems light.
“Knowing the size of the potential market is key to understanding pricing, as it shapes the potential pool of premium. Equally, until the market gets sight of the booking information and legal contract, it is difficult to build a product that meets the needs of any space tourist.”
One area of risk that remains up in the air in relation to the overall pricing mix is personal accidents sustained by the craft’s passengers. Listing the range of insurance requirements facing the market, Wade reveals that those taking part in Branson’s Virgin voyage will be doing so having signed a legal waiver. He explains: “There will be coverage for spacecraft hull. It’s not a huge value because it’s not a huge vehicle – we’re probably talking tens of millions, compared with an A380 Airbus, which might be about £300m. So it will be relatively easy to tuck this away with a few aviation underwriters.
“[Virgin] will have to buy third-party liability cover in case [the craft] hits anything on the ground, but it is operating in the middle of New Mexico, which is miles away from anywhere, so it might kill a few cows but the chances of hitting anything significant are minimal.”
He adds: “At this stage that really is the extent of [Virgin’s] insurance requirements. It has these legal waivers now where the participants have to fly under an agreement where they are told about the risks in advance and if they still decide to go ahead then so be it.
“There are a lot of people in the legal sector who wonder how watertight those agreements will be, especially when you’re dealing with high-net-worth individuals flying on these things.”
It is believed that approximately 500 people have now paid the Virgin Galactic deposit, all of whom will be subject to the 2004 amendment to the Commercial Space Launch Act in the US which, according to Holman Fenwick Willan aerospace partner Nick Hughes, was sought to protect the fledgling space tourism industry.
Hughes says: “The scheme that was adopted was to provide for the US government acting through the Federal Aviation Administration Office of Space Transportation with a waiver – or immunity from legal action – at the behest of any flight participants who suffered injury or worse during the course of the flight.
“The legislation went further and provided for there to be waivers also given for the benefit of the operator on the basis of ‘informed consent’. This requires the people who sign up to these ventures to sign waivers in favour of the operator, which is basically a very lengthy exclusion clause.”
Meanwhile, as discussions relating to policy construction and the scale of risk difficultly gather momentum ahead of a launch date anticipated later this year, certain market players have wasted no time in exploiting the public excitement that underpins the journey into the unknown. As one of the first insurers to piggyback on the publicity surrounding the Virgin voyage, Columbus Direct is hoping to build a space tourism add-on later this year as part of a marketing campaign in association with the launch of After Earth, a forthcoming sci-fi film starring Will Smith.
Lawson concludes: “While the cover will be real, it is nevertheless designed to be more for marketing purposes than an effective space tourism cover. Other quirky cover will undoubtedly appear in the market related to the space element, covering risks such as radiation sickness, meteor collision and alien abduction, but these will be window dressing and promotional PR.”
- Top 100 Insurtech: Quarter four update
- Charles Taylor bolsters liability team by hiring senior sextet from Vericlaim
- Roundtable: Is a single customer view taking off in insurance?
- I work in insurance: Stephanie Horton, River Canal Rescue
- Insurtech diary: Getting stuck into insurance
- Gallagher Bassett acquires claims management firm
- Analysis: The mystery of the missing Insurance Fraud Taskforce report