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VENICE, Italy-Satellite launch insurance rates are dropping and coverage is expanding now that the space insurance business has matured and is flush with capacity.
But underwriters at Assicurazioni Generali S.p.A.'s Ninth Biennial International Space Insurance Conference last month warned that overcapacity could in the future lead to excessive competition, prompting a massive crash in the space insurance market's results.
"We have to take heed and make sure that the high capacity existing today shouldn't be the cause in the future, if results worsen, of a shrinking market that is unable to cover the mounting insurance requirements of this sector," warned Benito Pagnanelli, deputy general manager of Trieste, Italy-based Generali.
"We must not forget what happened in 1985 and 1986, when capacity fell below $100 million and rates reached 33%" of the risk insured, he warned.
Satellite insurance capacity grew 43% between 1981 and 1983, and "when the proverbial hit the fan" about 60% of that capacity disappeared, added John S. Korda, senior consultant for Telesat Canada and president of JSK Associates Inc.
New "speculative" capacity in the market today "is no good, and unfortunately clients are sometimes attracted to this capacity," said Mr. Pagnanelli.
The insurance companies offering the new capacity may be financially secure, but "they are innocent" when it comes to having expertise in the market, he said, noting that newcomers are not using a technical approach to evaluate satellite risks.
Generali, one of the largest players in the space market, offers $110 million of capacity per satellite launch.
Capacity has grown to between $850 million and $883 million per satellite launch this year from about $685 million last year and $550 million in 1995, according to various satellite underwriters and brokers at the conference.
This is more than is needed on most commercial satellite launches, which require about $500 million of coverage per launch and no more than $300 million per satellite, according to Generali.
Next year, capacity per launch probably will reach $1 billion, said Per Englesson, department manager and space underwriter of Skandia International Insurance Corp. in Stockholm, Sweden.
Because of this increased capacity, satellite launch rates now vary from 11.5% to as high as 30% of the value of the spacecraft, depending on the type of satellite and launch vehicle used, conference delegates said.
This variation shows that "the commercial insurance market has come of age," said John W. Vinter, president and chief operating officer of International Space Brokers Inc. in Washington. The market now can discriminate among risks according to the satellite specifications and launch vehicle used, he said.
Rates are under pressure, however. On average, satellite launch rates have dropped to 12.85% this year from 13.02% last year and 14% in 1995, Mr. Vinter's charts showed.
Satellite launch coverage also has broadened in recent years. Underwriters now offer in-orbit coverage of up to 730 days as part of the satellite launch insurance package, whereas only a few years ago 180 days in orbit was standard.
"There are cases where it would be more appropriate to speak of an 'in-orbit insurance policy including launch,'" said Mr. Pagnanelli.
These long-term policies mean the satellite's health cannot be checked annually to re-evaluate the premium accordingly, he said. "I don't have any objection to the issuance of even a 10-year policy, but this should be made so that the terms and conditions can be evaluated annually."
Separate in-orbit insurance covers the satellite for its life, which can be up to 15 years. This coverage used to be unattractive to satellite owners, but times have changed.
A soft market and new in-orbit risks may have prompted them to buy the coverage.
In-orbit insurance rates are now significantly below 2% of the insured value, and the terms and conditions have improved, said Alden M. Richards, president and chief executive officer of broker Space Machine Advisors Inc. in Greenwich, Conn.
Mr. Richards will be placing PanAmSat's in-orbit coverage when it comes up for renewal in May, according to Frederick A. Landman, president and CEO of PanAmSat.
Overall, though, the space insurance market is making money.
Worldwide space insurance net premiums since 1984 to date total about $4.8 billion, according to Generali and Skandia International. Paid losses since then total only about $4 billion, said Mr. Englesson.
Just in the past eight years, launch and in-orbit premiums totaled nearly $4 billion against claims of $2.6 billion, Lloyd's space underwriter Simon Clapham said recently in London.
While some market observers warn of the risks of overcapacity, others say that more insurance capacity is needed in the space industry, as demand for satellites mushrooms.
More than 160 spacecraft are now in orbit, and an average of two new ones per month are launched, said Jack F. Juraco, senior vp and deputy leader of the commercial programs business unit of Hughes Space & Communications International Inc. in Long Beach, Calif. Of those in space, Hughes built 40%, he said.
Five satellites already have been launched this year into geostationary orbit more than 22,000 miles above the earth, and another 19 are to be launched. In addition, another 35 smaller satellites also are expected to be launched this year in a lower earth orbit, said Mr. Pagnanelli.
More satellites are necessary to meet demand for all types of new services, such as direct-to-home broadcasting; hand-held global mobile telephony; and interactive high-speed data transmission, said Mr. Juraco.
This might mean 500 TV channels instead of 200 today; online programming and Internet access; and digital telephones that include pagers, organizers and two-way access to personal computers anywhere in the world.
Insurance now comprises about 15% to 20% of a satellite's launch and in-orbit costs, so it is important to reduce this expense, said Mr. Juraco. "We at Hughes well understand that the only rationale for permanently lower rates is permanently lower loss rates. The insurance industry cannot be called upon to provide subsidies other than on a very short-term basis."
Therefore, satellites and launch vehicles must become increasingly reliable, he said.
Mr. Landman of PanAmSat agreed, saying he would prefer to pay insurers a premium than be paid by insurers for a claim. The three R's in his business are "reliability, reliability, reliability." Just one minute of broadcast time lost on a major television event such as a World Cup soccer match because of a satellite malfunction can cost more than what is insured, he noted.
When a satellite malfunctions, the loss of customer confidence "is immeasurable," added Peter E. Jackson, CEO of Asia Satellite Telecommunications Co. Ltd. in Hong Kong. "The only way we can sleep at night is reduce our risk."
AsiaSat is in the middle of negotiations to recover about $20 million from the insurance industry for the partial loss of AsiaSat 2 satellite launched in November 1995.
"Increased risk retention is an option that also merits serious consideration in the struggle to achieve lower rates," said Mr. Juraco of Hughes.
This can take many forms, such as constructing additional hardware in case some fails; self-insuring certain levels of coverage before insurance kicks in; or becoming a member of an excess loss pool.
"We anticipate a trend toward the increased use of more non-traditional forms of space insurance over the next several years," said Mr. Juraco.