Space Insurance – Lecture 2
26 January 2010
Neil StevensLegal Counsel – SpaceAtrium Space Insurance Consortium
2
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
4
Modern Lloyd’s Market
Lloyd’s 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 Lloyd’s
Is insurance regulated gambling?
There is an element of fortuity
Losses could be considered bad luck
Some premium rating could be considered a gamble
Greater regulation
Exposures tightly monitored
Solvency requirements are higher
Greater diversity
Smarter reinsurance structures
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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
INSURER INSURED
Cover
Premium + risk
INSURANCE
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Insurable Interest and Wager at Lloyd’s
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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
Indemnity
Recover the actual amount lost
Liability and Property Insurance
Non- indemnity
Recover a fixed sum
Life personal accident and critical illness
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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 company’s 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 InsuranceIN
DE
MN
ITY
NO
N- IN
DE
MN
ITY
HIGH
LOW
HIGH
LOW
Critical IllnessBuildings
Satellite
Car Hire Cover Business Interruption Cover
Mortgage Protection
Life
Contents
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Risks Typically Covered
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Risk Matrix
LAUNCH
L - 3 seconds
(Intentional Ignition)
L - 30 days
L - 2 years
L + 30 minutes
L + 90 days
L + 12 months
Timeline
Asset pre-launchAsset launch and in-orbit (operator)
Third party liability
Loss of Service
Launch phase
Post separation phase Post in-orbit testing phase
Satellite manufactureTransit / integration
Loss of revenueAstronaut / Passenger
personal accidentAstronaut / Passenger
No flight
Asset in-orbit (operator)
Asset launch and completion of IOT (manufacturer)
Manufacturers performance incentives
Terminated ignition
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Pre Launch Insurance
All risk of physical loss or damage
storage, transit and integration with launcher
Rated between 03% and 0.5%
Underwritten by marine cargo market
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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
Extra Expenses
Covers the riskiest part of the mission
Cover to reinstate cost of …
Satellite
Launch service costs
Insurance premium
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
LAUNCHSeparation
L + 90 days
L + 12 months
Timeline
Asset Life
IOT
In-Orbit InsuranceLaunch Insurance
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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 roof16th 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
Timeline
Asset launch and in-orbit (operator)
Third party liability
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
TPL is indemnity based insurance
• Settling claims
• Paying lawyers fees
• Unquantifiable in advance
Asset pre-launch
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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
Titan 4
Long March 3B
Sea Launch
Purpose of the cover is to fully reinstate the insured party
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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
Time
LaunchConstruction End of Life
Full Cover
Satellite only
Incentives
Depreciation based on revenues
Depreciation based on
asset value
Am
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of
Insu
ran
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