Space Insurance

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Space Insurance Lecture 2

• 26 January 2010

Neil Stevens Legal Counsel Space Atrium Space
Insurance Consortium
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Insurance and Wager Distinguished
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The Origins of Insurance

• Merchants engaged in shipping using the London
  mutuality concept
• Edward Lloyd's coffeehouse around 1688
• Merchants sharing in taking risk associated with
  carriage of goods by sea
• Depended on reliable knowledge of shipping,
  weather and good practice

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Modern Lloyds Market

• Lloyds today is located in Lime Street
• Billion dollar business with sophisticated
  players
• Syndicates offer insurance capacity
• Syndicate used to be individual investors until
  1992
• Reinsurance markets collapsed causing number of
  syndicates (approx 500 to reduce to about 100)
• Now corporate investors

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The Origins of Insurance at Lloyds

• Greater regulation
• Exposures tightly monitored
• Solvency requirements are higher
• Greater diversity
• Smarter reinsurance structures

• Is insurance regulated gambling?
• There is an element of fortuity
• Losses could be considered bad luck
• Some premium rating could be considered a gamble

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Wagers and Gambling

• Consideration is the stake
• Both parties are engaged in taking the risk
• In a wager, one party wins and one loses
• The stake is returned if the wager is won
• One party bets that an event will happen, the
  other bets against it happening desired
  outcomes are different
• The parties and the event are seldom connected
• Until 2005, gambling contracts were unenforceable
  in a court of law

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Wager compared to Insurance

• Consideration is the premium
• Insurance involves transferring the risk from the
  party that would have the risk to one who would
  not
• Insurance nether party should lose
• Premium rate should reflect the burn cost a
  profit margin
• The premium is not returned if the risk runs free
  of claims
• The premium charged is the statistical chance of
  the event happening same
• The party transferring the risk MUST have an
  insurable interest
• The contract is enforceable in a court of law
• The contract is subject to principle of utmost
  good faith

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Wager compared to Insurance
WAGER
GAMBLER
GAMBLER
Wager is struck within this range
INSURANCE
Premium risk
INSURED
INSURER
Cover
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Insurable Interest and Wager at Lloyds
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Insurable Interest
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What is an Insurable Interest?

• Historical basis of insurance lies in marine
  insurance
• English law based on statute and precedent
• Statute under English law
• Life Insurance Act 1774
• Marine Insurance Acts of 1746 and 1778
• Codification into the Marine Insurance Act 1906
• Section 5 of the Marine Insurance Act 1906
  defines insurable interest
• (1)Subject to the provisions of this Act,
  every person has an insurable interest who is
  interested in a marine adventure.
• (2)In particular a person is interested in a
  marine adventure where he stands in any legal or
  equitable relation to the adventure or to any
  insurable property at risk therein, in
  consequence of which he may benefit by the safety
  or due arrival of insurable property, or may be
  prejudiced by its loss, or by damage thereto, or
  by the detention thereof, or may incur liability
  in respect thereof.

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Insurable Interest

• Gain a benefit from preservation of the subject
  matter or suffer a disadvantage if it is lost
• Distinguish between indemnity and non indemnity
  insurance

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Insurable Interest - Examples
1. I want to insure my car against theft?
2. I want to insure your car against theft?
3. I want to insure my companys operations against making a loss?
4. I want to insure my own life against my death?
5. I want to insure your life against death?
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Insurable Interest Indemnity Insurance

• Meaning of indemnity
• Compensate
• make good
• guarantee
• Before UK Gambling Act 2005, law required that
  anyone taking out property insurance (contract of
  indemnity) had to have a legal or equitable
  interest in the property
• Used to be the case that contract unenforceable
  if link was absent
• Section 335 of the 2005 Act inadvertently removed
  the requirement
• the fact that a contract relates to gambling
  shall not prevent its enforcement
• Indemnity principle still requires policyholder
  to have suffered a loss otherwise cannot be
  indemnified
• Doctrine of insurable interest is under review
• Australia have abolished altogether

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Characteristics of Satellite Insurance
HIGH
HIGH
Satellite
INDEMNITY
NON- INDEMNITY
LOW
LOW
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Risks Typically Covered
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Risk Matrix
LAUNCH
L 30 minutes
L 90 days
L 12 months
Asset launch and in-orbit (operator)
L - 3 seconds (Intentional Ignition)
L - 2 years
L - 30 days
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Pre Launch Insurance
All risk of physical loss or damage
storage, transit and integration with launcher
Underwritten by marine cargo market
Rated between 03 and 0.5
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Pre-launch Covers

• Placed in the marine cargo markets which means it
  is subject to the peculiarities of Marine
  Insurance Law
• Most notably the exclusions
• Process Clause excludes cover where loss is due
  to a process of manufacture
• Date Recognition Exclusions
• Cover is for all risks of physical loss or damage
• Normal risks associated with property cover
• Transit risks
• Integration and assembly with launcher
• Assembly through to launch or lift off no gaps

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Satellite Insurable Typical Interests Covered
under Launch Policy

• Covers the riskiest part of the mission
• Cover to reinstate cost of

• Launch insurance premium calculated on the
  insured items

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Launch Insurance

• Third largest mission cost
• Risk of loss rated between 10 and 20 - depends
  on satellite / launch vehicle combination
• Historical burn rate 1 in 7
• Covers satellite from launch through in orbit
  testing and up to 365 days after launch
• Placed in specialist insurance market
• Communications satellites generally covered for
  between USD200m to USD300m

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In-Orbit Insurance
LAUNCH
L 90 days
L 12 months
Separation
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In-Orbit Cover

• Placed in specialist space insurance market
• Cover for loss damage or failure of the satellite
  on a fixed value basis
• Losses determined by telemetry data or lack of it
• Rates are in region of 1.5 for 12 months cover
  depending on satellite health and type
• Insurance Capacity is high which is presently
  causing rates to fall

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Third Party Liability Insurance
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Third Party Liability Insurance
Red-hot piece of space junk crashes through
pensioner's roof 16th October 2009
Mr Peter Welton of Hull
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Third Party Liability Insurance

• Basis of cover is to protect insured parties from
  liability claims for damage caused by space
  related activities
• Cover is for the consequences of an occurrence,
  typically to indemnify the Insured for all sums
  that it becomes legally obligated to pay due to
  an occurrence that causes death or personal
  injury to any third party
• Cost is relatively cheap (0.1) because there are
  relatively few accidents
• Cover generally provided for the initial 12
  months through the launch service provider
• Cover for satellite life depends on obligations
  on the operator and attitude to risk

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Indemnity and Insurance
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Space Insurance Risks
LAUNCH

• TPL is indemnity based insurance
• Settling claims
• Paying lawyers fees
• Unquantifiable in advance

• Pre-Launch is indemnity based insurance
• Property insurance
• Satellite only
• Cost to rebuild/repair/re-test

• Launch and in orbit insurance is non-indemnity
  based
• Launch Service Cost
• Satellite cannot be repaired (few exceptions)
• Extra expenses Satellite only
• Cost to build new satellite and launch it
• Insurance costs

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Indemnity Based Space Risks

• Pre-launch Scenario
• Satellite is damaged at facility
• Claim is based on physical loss or damage to the
  satellite
• Policy may be held be manufacturer or operator
  depending on contract terms
• Basis of claim is to put the satellite back into
  its pre-loss state
• Indemnity in this situation is based on repair or
  replacement

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Non Indemnity Based Space Risks
Purpose of the cover is to fully reinstate the
insured party
Sea Launch
Titan 4
Long March 3B
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Difference between Indemnity and Non Indemnity

• Policy language will be different
• to indemnify the Named Insured for Partial Loss
• to pay the Named Insured for a Partial Loss
• Significant difference between what you may get
  back as a purchaser of insurance particularly in
  relation to Constructive Total Loss (CTL)
• CTL point in space policies is usually 75
• Available communications capacity is reduced to
  below 25
• Can a satellite operator provide a meaningful
  commercial service with only 25 capacity
  remaining
• Eventually need to replace the impaired satellite
  
• Cannot buy 3 quarters of a satellite

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Space Risk Constructive Total Loss

• CTL points are included to accelerate the loss
  payment to 100
• Indemnity policy would only pay for what is
  actually lost
• CTL point of 75 comes with a quid pro quo
• Insurers acquire salvage rights
• Could mean impaired satellite is sold to a
  competitor
• Alternative is to have a higher CTL point (90)
• Insurers generally agree to relinquish salvage
  rights
• Operator can continue to offer service and earn
  revenue
• Operator may have regulatory requirements to
  maintain

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Satellite Insurance Profile of Risks
Full Cover
Depreciation based on revenues
Amount of Insurance
Satellite only
Incentives
Depreciation based on asset value
End of Life
Launch
Construction
Time