The sky's the limit

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After a disastrous run of losses in the 1990s, the satellite industry has recovered its poise and the space insurance market's fortunes are climbing rapidly. And, with some major launches on the horizon, that is just as well, writes Sam Barrett

It IS almost 50 years since the first satellite, the Soviet Union's Sputnik I, was launched into space on 4 October 1957. It was capable of transmitting a beep that provided information about its internal temperature and pressure, and its mission lasted just three weeks.

Much has changed since then. Today's satellites can be expected to orbit the earth for years, carrying the necessary kit to enable everything from television transmissions and mobile phone conversations to weather forecasting and military reconnaissance.

Although technology has advanced significantly, sending satellites into orbit still remains relatively high risk. "It's a very volatile area with a high level of losses," says Peter Elson, managing director of Aon Space UK. He estimates that around one in every seven or eight satellite projects fails, and with only 15 to 20 launches a year, there isn't a lot of risk to pool. Consequently, the market can swing quickly from profit to loss.

This was particularly the case at the end of the past decade, when the market suffered severe losses. "During the 1990s, there were all sorts of promises of global communications packages, with many companies launching tens of satellites only to find that their form of technology had lost out to what became the norm: Global System for Mobile Communications - GSM," says David Wade, space underwriter for Brit Insurance.

Unsurprisingly, when many of these also-rans went bankrupt, investors became sceptical and promises of funding evaporated.

The insurance industry also suffered. The great rush to become the main provider of global communications meant that a lot of satellites were launched without sufficient research, and a high number of failures were seen. "Losses increased, rates rose and exclusions became commonplace," explains Mr Wade.

Calmer conditions

Perhaps as a result of this experience, the satellite market has now become more controlled and there are fewer speculative ventures. Driving this has been increased stability; some of the players have joined forces and there are also more private equity investors involved.

Missions tend to be thoroughly tested before launch and Philip Smaje, managing director of Willis InSpace, reports that the market has bounced back since the slump that started at the end of the 1990s. "The number of satellite orders has picked up compared with a couple of years ago. This is good for premium income and the growth of the market," he says.

These improvements mean that last year proved to be a good one for the insurance industry. According to Mr Elson, of the $850m (£484.5m) premium income that was received in 2005, just $110m was paid out in claims.

In response to this improved loss record, premiums have fallen and there has been increased activity in the market with more capacity available as well as a few new entrants in the US. "The average satellite needs between $400m and $450m (coverage) for launch and, unless we have a series of failures, finding sufficient capacity isn't going to be an issue this year or next," says Bruno Ritchie, director of the aerospace division for Hiscox.

Mr Wade agrees. "When an operator's looking for more cover, it gets more difficult. For instance, the Ariane 5 rocket can launch two satellites at a time so it needs double the cover but there is enough capacity. This trend will continue if the satellite providers can show the late 1990s was just a bad period. If there continues to be sufficient caution and testing before launch, premiums could stay at this level or come down further," he explains.

Increased stability in this market also means that insurers are looking to develop more innovative products. The launch of a risk modelling system, SpaceRAT, which was developed by Sciemus and Qinetiq, has led to a new insurance offering from Liberty Syndicates (see box). Additionally, there has been renewed interest in developing a more long-term product. As well as providing more stability to the insurers, this would also appeal to the satellite operators as it gives greater certainty over cover. At the moment, operators take out insurance to cover launch plus the first year of orbit, then look to renew each year after that. If a technical issue arises, they could find it excluded when they come to renew.

"Long-term products were sold in the past and contributed to the problems in the late 1990s but this was partly because they were sold at their lowest price," says Mr Elson. He adds that there has been less interest this time around because premiums may still fall.

Inherent volatility

So the mood is upbeat but this remains a volatile market and there have been some expensive reminders of that fact already this year. At the end of March, a Saudi Arabian satellite, Arabsat-4A, failed to reach its planned orbit when its launch rocket malfunctioned. "It can be a very expensive mishap, costing anything from $150m to $250m. We haven't had a big launch failure since November 2002 and it will be interesting to see what the reasons were behind this one, but it is a strong reminder to the underwriters," says Mr Ritchie.

There was also bad news from the maiden launch of a new US private-sector commercial rocket, Falcon One. Within less than a minute of lift-off, a fuel leak triggered a fire that caused the rocket to crash-land. This, Mr Ritchie believes, was an uninsured and relatively cheap vehicle - but it was another reminder that maiden launches can easily fail.

While these two failures may have given the satellite insurance market a nudge away from any sense of complacency, commentators remain confident that they will not spoil the mood in the market. "We expect something like the Arabsat-4A failure every so often," says Mr Wade. "It hasn't had an immediate impact on the market and I think it'll just be seen as a random but inevitable failure, really."

The prospects look good: the number of satellite launches is expected to increase this year, with 22 take-offs already planned. "The market is very buoyant," says Mr Elson. "There's a lot of activity in telecommunications and the insurance industry has responded with increased capacity."

Certainly the public's appetite for technology appears to be ensuring more and more satellites will be needed. "High-definition television is one of the new applications that will push demand for new satellite launches," says Mr Wade. Although it only has a limited availability in the UK, there are already a few channels offering HDTV in the US and, with programmes such as the BBC's Planet Earth shot in this format, it is set to grow. "HDTV requires two or three transponders and, as these are used, more satellites will be required," he explains.

Increasing demand

As well as advances in television, changes to the way radio is delivered will help future growth. In the US, XM and Sirius broadcast around 150 channels of digital radio via satellite on a subscriber basis, while in India and Africa listeners can tune into digital services from Worldspace. And in Europe, a project from Spanish media company Ondas is set to give us more stations too.

On top of that, mobile communication developments are ensuring a bright future for the satellite market. For example, providing television on mobile phones has already become very popular in South Korea and there is currently a French project under way to introduce this technology across Europe.

Whether all these growth factors will mean a profitable future for the satellite insurance industry is another matter, however. "It's very difficult to say whether this business is profitable unless you measure it over the long term," says Mr Ritchie. "It is profitable at the moment but the inherent volatility of the activity means this could change."

LIBERTY AND SCIEMUS: RISK MODELLING

At the beginning of the year, a new satellite insurance offering from Liberty Syndicates, in partnership with risk analyst Sciemus, was launched, claiming to enhance insurers' returns and offer some satellite operators savings of more than $10m (£5.7m) a year.

"The satellite market is fairly volatile in terms of claims and we wanted to try to gain a better understanding of what was happening and why, so we could understand the risks," says Andre Finn, chief executive officer of Sciemus. To achieve this, Sciemus worked with Qinetiq, the former research laboratories of the Ministry of Defence, to develop a risk analysis model, SpaceRAT. "Qinetiq has a team of between 300 and 400 people that look at the risks involved with space exploration and these types of projects," says Mr Finn.

Using the model, Mr Finn says, it is possible to identify 'good' satellite providers and, because the risk they present is better, provide them with cheaper insurance. "At the moment, all risks are priced the same but this means that those companies that are taking steps to improve aren't being rewarded with cheaper premiums. Instead, they're cross-subsidising the providers that aren't addressing the risks," he explains, adding that of the 80 or so satellite operators in the market, LibSat - Liberty's space insurance arm - would probably only be interested in working with around 24 of them.

The risk model has already been tested, comparing actual events against what it would have predicted from the beginning of 2004, and Mr Finn says he is very pleased with the results.

The other potential advantage of this type of offering is that it is able to offer a much higher level of cover, which will mean that satellite companies can obtain all their insurance from one provider, rather than having to have it syndicated and thus face the cost of additional overheads.

"If the industry doesn't take this type of approach, it could find itself in trouble," warns Mr Finn. "There are more private equity firms involved in the satellite market and they'll move away from insurance or look for alternative pricing mechanisms rather than tolerate the way risk is priced now."

Given the newness of the offering, the jury is still out on how it will perform. "Risk is endemic to the industry: the best and worst operators can have failures," says Peter Elson of Aon Space UK. "By being selective about the risks they're prepared to cover, they could potentially increase the volatility. However, if they've got it right, they could do very well."

GALILEO - EUROPE'S SATNAV SYSTEM

Galileo, a joint venture between the European Union and the European Space Agency, could have huge implications for the satellite market with its plans to put 30 satellites into orbit by the end of 2010.

It is certainly a costly project with a price tag of $4bn (£2.3bn), which is being raised through public and private investment. And with each of the satellites likely to have an individual insured value of $50m, and a combined value of between $1bn and $2bn, this could cause issues for the insurance industry. "Galileo has a completely different risk profile - the satellites will be at a different level of orbit, which will be harsher but their construction should compensate for this," says Andre Finn, chief executive officer of Sciemus.

Mr Finn does not believe there is currently enough capacity in the market to cover the project. But Philip Smaje, managing director of Willis InSpace, says it is still too early to say what effect Galileo will have on the market. "We're watching the developments but so far it's had no effect on the market. There's no structure in place yet about how insurance will be procured to cover the project."

Peter Elson, managing director of Aon Space UK, agrees: "The project has been fraught with European politics and I don't think the issue of insurance will arise for at least a couple of years."

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