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Space Programs remain a high-risk, high-reward venture for those seeking to enter ‘NewSpace’ markets, with a rather complex, often interlinked web of risks for the participants. As part of this article, we will seek to address the kind of risks that might face market players, and suggest a strategy for insuring against such risks. The insurance industry can help in managing private investment risks against property, financial and liability losses. The insurers, however, need to make use of particularly careful, anticipatory risk valuations, competent inspectors and highly specialized know-how in pricing and claims handling. Therefore, it is invaluable that companies in the NewSpace sector (referred to hereinafter as 'SpaceCos.') understand these dimensions of risk and how to handle them effectively without jeopardizing their operations or by an incorrect assessment, apportionment or division of risks associated with their programs.

More importantly, a lot of governmental contracts (‘GCs’) mandate that the contract bidders procure sufficient insurance before being considered eligible for the award of such GCs. While the ambit and the total coverage of such insurance might vary depending on the GC, the requirement nevertheless persists as an industry-wide practice of sorts, which necessitates those startups and MSMEs in the NewSpace sector at least develop a nuanced understanding of adequate action points. For instance, for GCs floated by the US Government – which despite recent interest in space ventures remain the leading consumer / demand-driver for space GCs – mandates, as a prerequisite before the awarding of a launch license to any applicant, that the SpaceCo seek sufficient insurance coverage for the GC sought.

The process of understanding the risks and exposures that a SpaceCo might face, and deciding what can be managed, forms a fundamental process of the space business. In this sector, it is also complementary to mission assurance and can provide the right safeguard in case an extrinsic factor makes things haywire. In addition to space launch vehicle operators and satellite manufacturers, depending on what stage the project is at, the availability of insurance as and when needed can also aid the financier’s decision-making process. It is indeed recommended that working with insurers from the earliest phases of the project can be most beneficial, and this action is predicated on understanding what the high-risk items are (depending on one’s role as a stakeholder in the sector), whether the purported project is insurable and can allow the allocation of funds appropriately for the project’s insurance needs.

Since a major chunk of space programs / space launches are centered around the Satellite Industry – wherein the launch activity actually plays a pivotal, value-add role, most depictions, examples or assertions being made during the article will be made from the standpoint of a NewSpace venture seeking to launch a satellite into space through their space launch vehicle (referred to hereinafter as “SLV”).

A. Space Insurance and Underwriting Cycles

A NewSpace insurance package would ideally provide cover for the risk to the rocket, the satellite, and related equipment. Several factors such as market conditions, the type of rocket, orbital deployment conditions, and satellite characteristics tend to determine the insurance terms and conditions. While all underwriters use similar terms and conditions in the form of boilerplate clauses (as is the general practice for the insurance industry as a whole), commercial space insurance policies are individually crafted, principally based on the specifications of the satellite and the SLV. Amongst the terms outlining the commercial understanding between the insurer and the policyholder, elements such as coverage period, premium rates, and other T&C are negotiated amongst the stakeholders, i.e. the client, the satellite owner / manufacturers, and the underwriters. Given the special nature of space programs, from a financial standpoint, the insurance market tends to be extremely cyclical and volatile in nature. Generally, insurers are called upon by policyholders in syndicates or consortiums so that the risks are divided based on the financial ability of each insurer to absorb the associated risk.

For a plethora of reasons, the space insurance industry still remains in a nascent stage, with insurers grappling with the challenges posed by the uniqueness of the NewSpace market. Some of the problems that the larger space insurance market has grappled with can be encapsulated below, which have hampered the creation of a stable industry standard and the analysis of any foundational data that may be leveraged to offer better solutions to the concerned stakeholders:

(i) The extremely small number of insurable events has meant that the recorded events have high chance variations if analyzed from a quantitative perspective;

(ii) The continued technological developments have translated into a lack of technological homogeny and a substantial risk of technological change occurring at a rapid pace;

(iii) The Space Insurance market has also experienced an extremely high relative loss occurrence;

(iv) The market is still grappling with the consequences and ramifications of these insurable events having very large limits along with a large spread of limits in connection with a high risk of total loss upon the occurrence of an event;

(v) Given the advent of high cadence launches and a shift towards the ‘satellite constellation’ model, the challenge of a risk of accumulation of total losses resulting from the launch of several satellites at a time still remains unaddressed.

Given the cyclical nature of the space insurance marketplace, assessing the ‘phase’ of an underwriting cycle is of vital importance to any decision-maker, whether as a SpaceCo or an investor or an insurer.

Generally, it varies between one of two states – either a ‘soft’ market or a ‘hard’ market.6 As may be discernable, a soft market would translate into more favourable premium rates (often below 10%) largely due to an increased availability of capital with the insurers, an increased propensity for risk taking and a slew of successful launches being undertaken (perhaps in part due to the technological advancements enabling better efficiency for launches). On the other hand, a ‘hard’ market could be triggered either due to financial downturns in a macro-economic sense, a decreased propensity for risk, higher losses having occurred due to launch failures and lesser availability of capital that the insurers and underwriters may be willing to part with. In a hard market, premium rates are a lot more stringent, with figures in the vicinity of 20 to 30 percent being the norm.

B. Formulating an Approach / Framework to Insure NewSpace Programs

The Insurance approach for NewSpace Programs can be delineated into 4 (four) distinct phases that each merit a different approach to insurance. It must also be mentioned that most assets involved in a NewSpace venture can be demarcated into one of two classifications – either as a ‘ground asset’ (wherein a more traditional, infrastructure-centric approach to insurance, such as in the case of a complex factory or industrial unit, would merit application) or as a ‘space asset’ (mainly a launcher or a satellite which would mandate a different approach to insurance owing to the rather unique nature of such space assets largely due to the impossibility / improbability of any modifications or repairs being carried out post the launch of the SLV).

(i) Pre-Launch Insurance (PLI): PLI, sometimes referred to as ‘Pre-Ignition Insurance’ covers most activities undertaken prior to the launch of the space system, with a bulk of it being centered around property and cargo insurance8. It is aimed at functioning as an all-risk coverage for any property losses that may result due to events occurring during the storage in the launch area, the configuration of the satellite launch measures, the deployment of the launch missile, inspection, pre-lift-off activities as well as during the whole launch preparation stage. As a standard, it would conclude with the ignition or the lift-off of the rocket.9 Pre-launch insurance often covers the full risk of launch missile failure, although only for a relatively short period of time, though the point at which the coverage ceases is dependent on what kind of launch vehicle is being used. Given the potentially large cumulative risk associated with the entirety of the pre-launch process, it is not unusual for insurers to gravitate towards more restrictive underwriting policies.

In this regard, risk management must be focused on foreseeing losses or damages that result from external causes (shocks, collisions, fires, explosions etc) of an accidental or human nature.

(ii) Launch Phase Insurance (LPI): LPI generally comes into effect once the engines of the launch vehicle start their ignition/burn propellant and concludes when the satellite is physically released into orbit post the separation from the upper stage of the SLV. Therefore, essentially, coverage commences where pre-launch insurance ends and terminates when an initial operational phase of functionality testing is done. It may extend for a period of six months to a year after launch, though the launch period itself may last approximately 20 to 30 minutes. When assessing LPI, computing the maximum limit of insurance which should be provided, several factors must be taken into consideration such as replacement value of the satellite, the missile and critical components / accessories, but above that the costs incurred for relaunch. In this regard, it must be outlined that the launch is only regarded as a success if the pre-set parameters have been met across three different timelines of the launch period, i.e. (a) the transition period where the pre-launch coverage ends and the launch coverage begins; (b) the stationing period wherein the apogee engines kick into action; and (c) early-in-orbit / commissioning test period.

Therefore, in the case of a LPI, it is vital that any losses of the payload due to the destruction of the SLV in flight or in the case of the failure of an SLV in releasing the payload into the specified orbit are taken into account. In addition, it must also factor the possibility and ramifications of an incorrect insertion into orbit of the SLV, which would require additional resources to rectify such an incorrect insertion thereby reducing the operational lifetime of the payload.

(iii) ‘Exploitation Phase’ or ‘In-orbit Phase’ Insurance (EPI): EPI is an all-risk policy with pre-set total loss limits that seeks to cover the ‘life’ of a space program. It begins at the end of the launch phase and includes low earth orbit operations (‘LEOP’) for reaching the final orbit in nominal position, generally concluding when the satellite exhausts its own operational life. The value to be insured is initially correlated with the replacement value, i.e., the limit would be determined by the costs for a replacement space system including the costs for a relaunch. It is pertinent to note that in certain cases – due to the lack of a standardized rule or market practice for insurers - the risks related the exploitation phase can only be covered partly and not for the entire lifespan of the propulsion or satellite that has been launched into orbit. Additionally, the kind of coverage sought or provided (as the case may be) would be highly dependent on the in-orbit life that a certain propulsion system can provide. It is only a logical conclusion that as a space system / propulsion system / satellite ages, it would become more prone to any failures, and as a result the insurance limits are generally lowered with the age of such a system in order to ensure that no unrealistic parameters are retained.

In such instances, the risk management for EP must be able to identify and foresee the potential for any total loss following accidental events such as the failure of a critical subsystem or collision with space debris, or the partial loss of the space system owing to the failure of a device or subsystem in such a way that although not critical, it limits or reduces the ability of the space system to function effectively either due to a decreased timespan, quality, quantity or provision of the service sought.

(iv) Insuring against third-party liability: In the case of NewSpace Programs, it is also important to understand the kind of liabilities that can arise due to damage caused to third parties during the process. This can include damage to property, or to persons, a loss of revenue streams, interruptions to service etc. It is also important to factor in the risk of ‘human mortality’, i.e., any unfortunate deaths or injuries caused by the SLV’s crash. It is impossible to rule out such a catastrophe entirely, though SpaceCos may be able to explore any possible avenues with the launch governments / competent authorities in order to have them take on the responsibility of such events by assuming the role of a guarantor of such risk. However, dealing with such risks also must vary on a case-to-case basis with careful consideration being given to all such elements. For instance, loss of revenue insurance or a business revenue insurance must adequately cover the lost business income and operational expense incurred for the NewSpace Program, and not just merely be restricted to the economic loss of property.

Given the above-mentioned factors that come into play, it is vital to ensure that the insurance policy undertaken by the SpaceCos covers a sufficient range of, and the right kind of risks, with insurance agreements generally not staying cognizant of the total or partial losses as a result of ascertained defects of design or manufacturing, or for issues resulting out of inaccurate commissioning. It must also be mentioned that the current insurance practices that we see have been shaped by the fact that most space launch activities are centered around the launch of satellites into different orbits (LEO, GEO, SSO and the like). It is, therefore, not a very unreasonable assumption to make that as space launch ventures into different paradigms, for instance commercial space travel, such practices may begin to adopt a different shape. An extension of such a prediction could be that as we move towards more frequent commercial space launches – with humans onboard – it may be highly possible that the practices in the space insurance market begin to resemble those of aviation insurance.