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Operators go uninsured due to cost and in-orbit coverage limitations

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Despite a soft space-launch insurance market, several satellite operators are choosing to self-insure their in-orbit risks because they believe the exclusions in related insurance policies are too onerous.

And the question of whether to self-insure or continue to use commercial insurance markets was one of the topics under discussion at a recent space insurance conference held in Milan, Italy.

In-orbit insurers are excluding certain components of satellites—such as high power solar arrays which provide the solar panels that produce electrical power for spacecraft—because they have tended to malfunction, thus shortening the life of the spacecraft and triggering billions of dollars in claims, sources said.

As a result, several satellite operators have stopped insuring their satellites in-orbit, according to the latest accounts filed to the U.S. Securities and Exchange Commission. These operators include El Segundo, California-based DIRECTV Group Inc., Bethesda, Maryland-based Intelsat General Corp. and Englewood, Colorado-based EchoStar Communications Corp:

To go boldly uninsured

  • DIRECTV Group Inc., a provider of digital television in the United States and Latin America. The company owns nine satellites and leases another one which are all in geosynchronous orbit, and has another three satellites under construction. Although the company has purchased in-orbit insurance in the past, some anomalies are not covered by the policies and may not be in the future, according to DIRECTV's 10K filed with the SEC for the year ended Dec. 31, 2006 which was filed in March. The company added: "We do not expect to purchase in-orbit insurance for [our] satellites scheduled for launch in 2007 and 2008."
  • Intelsat General Corp., which has one of the world's largest satellite fleets with a total of 24 satellites in orbit, said it may elect to reduce or eliminate insurance coverage related to certain satellites if permitted by its debt agreements. Cancelling such insurance would be done "if, in our view, exclusions make such policies ineffective or the costs of coverage make such insurance impractical and if we believe that we can more reasonably protect our business through the use of in-orbit space satellites, backup transponders and self-insurance," said Intelsat's 10K for the year ending Dec. 31, 2006.

  • EchoStar Communications Corp., which has 11 satellites in orbit that it owns and another three that it leases, currently has no commercial insurance coverage on any of its satellites for launch or in-orbit risks, according to its 10K filed with the SEC for the year ending Dec. 31, 2006. "We do not use commercial insurance to mitigate the potential financial impact of in-orbit failures because we believe that the premium costs are uneconomical relative to the risk of satellite failure," the company stated. EchoStar believes that it can use its own and other satellites that are already in orbit to recover from such a loss, although recovery may not be possible in certain local or international markets, EchoStar said in its 10K statement.
  • "We believe we generally have in-orbit satellite capacity sufficient to recover, in a relatively short time frame, transmission of most of our critical programming in the event one of our in-orbit satellites fails," according to the 10K. "Further, programming continuity cannot be assured in the event of multiple satellite losses," it added.

    EchoStar had a long-running dispute with insurers of its EchoStar IV satellite, which was settled in March 2005 for the net amount of $240 million (€178.85 million). EchoStar IV gradually lost its use after one of its solar arrays failed to open after arriving in orbit after its launch in 1998.

    Whether to insure or self-insure satellites while they are in orbit was one of the topics discussed by the 300 delegates from 27 countries throughout the two-day 14th International Space Insurance Conference in Milan which was organized by Pagnanelli Risk Solutions Ltd. last month.

    There are now 262 satellites in geostationary orbit, which is more than 22,400 miles above the equator. Of these, about half are operated by the five largest companies in the business with the other half being operated by 41 other companies, according to Chris Kunstadter, vice president of XL Insurance, a unit of XL Capital Ltd., in New York.

    However, there are only about 140 satellites in geostationary orbit and between 10 and 12 satellites in lower earth orbit-between 200 kilometers and 2,000 kilometers above the earth—that are insured, said Mr. Kunstadter.

    XL statistics show that there is now a total insured exposure of about $14 billion (€10.43 billion) for insured satellites if all satellites failed at once. This has dropped from a high of about $25 billion in 2002 (€18.63 billion) Mr. Kunstadter said.

    On average, 7% of all satellites fail in the first year in orbit, but this can vary between satellite manufacturers, said Mr. Kunstadter. Include the launch phase, and about 15% of all satellites are lost during launch plus the first year in orbit, which insurers typically cover under a launch insurance program today.

    Rule of thumb

    The second and subsequent years are covered in a separate in-orbit insurance policy, and on average about 2% of all satellites fail during this time, said Mr. Kunstadter.

    Satellite failures in orbit during the first and subsequent years have been caused by a number of things, particularly 12 wing failures in high power solar arrays in six years, plus dozens of string/circuit failures, said Mr. Kunstadter.

    "Ten or 15 years ago, we had a rule of thumb that three quarters of the losses were due to launch vehicles and one quarter due to the satellites," he said. "We saw that change quite dramatically in the late 1990s and early 2000s so that if we take the whole period of 12 years from 1995 to the present, we see that virtually two-thirds of the losses are caused by satellites and one-third by the launch vehicle in any given year." That trend, however, may be changing, he added.

    For a satellite operator with a good track record, self-insurance is an increasingly attractive option, said Padraig McCarthy, chief financial officer of SES Astra, which has a global fleet of 44 satellites. SES now assumes part of its in-orbit insurance risk with a self-insured retention of 35% of the net book value on average across the fleet, with a maximum retention that is capped at e50 million per satellite.

    However, some satellite operators believe that it is vital to purchase in-orbit insurance regardless of the exclusions that are imposed.

    Limitations

    "In a fleet like ours with high capacity utilization, in-orbit insurance is important," said Ted Ignacy, chief financial officer of Telesat Canada in Ottawa. The company is about to combine with Loral Skynet to become the fourth-largest satellite operator worldwide with a fleet of 11 satellites under the "Telesat" name.

    Though the satellite launch insurance market is now in a soft phase, the in-orbit part of the coverage is still limited to only 12 months when it used to be up to five years, said Mr. Ignacy. In-orbit insurance capacity for a high-valued satellite also is still limited, he said.

    "I do think [satellite operators] ought to have in-orbit insurance because as a company you are protecting your balance sheet," added Peter Jackson, chief executive of satellite operator Asia Satellite Telecommunications Co. Ltd. in Hong Kong.