07 A space odyssey

In addition to its 125th anniversary, Munich Re is celebrating another milestone this year. 2005 also marks the 25th anniversary of our Space Department. Let us look back: how has space insurance evolved since the days of Sputnik 1?

The first space satellite

On 4 October 1957, a spherical object measuring 58 cm across and weighing 83 kg was launched into space. It encircled the earth at a speed of 29,000 kph: Sputnik 1, the first man-made satellite, was in orbit. The space flight era had begun. On 12 April 1961, Yuri Alekseyevich Gagarin became the first human being to orbit the earth in space. The USSR had taken the lead in the space race, and so the USA concentrated on achieving the first manned moon landing. On 20 July 1969, half a billion television viewers watched as Neil Armstrong set foot on the moon.

Commercialised space flights began in the mid-1960s when private operators began putting communication satellites into orbit, a venture in which millions have been invested over the years. However, what differentiates private-sector from state-subsidised projects is that they are not able to assume the cost of failure. They clearly require insurance cover.

The first space policy

In 1965 Comsat, an American company, issued the first ever satellite policy, which covered the "Early Bird" project. The policy consisted of third-party liability cover for damage occurring during the launch, and pre-launch own-damage cover for the satellite and launch vehicle. At the time, the insurers did not want to include own-damage launch risks, since they did not have the experience values necessary to make a proper underwriting assessment.

The first such policy was written in 1968 to cover a series of five Intelsat III launches, one launch failure being contained in the self-insured retention. Experience increased over the years, culminating in a highly specialised, independent space insurance market, offering comprehensive pre-launch, launch and in-orbit covers tailored to the individual projects.

The low launch frequency and consequent lack of representative figures meant that rating was initially a major problem. It was also a challenge to keep pace with the space industry's constant flow of innovations.

Low risk — Large losses

It was first thought that space flight was relatively low-risk, and space insurance quickly gained the reputation of being highly profitable business. The number of insurers increased, prices decreased, whilst sums insured rose. The turning point came in 1977 with the destruction of the OTS-1 communications satellite caused by the explosion of the launch vehicle. This resulted in a loss of some US$ 27m, wiping out the previous 12 years' combined international premium income at a stroke. In 1979, losses worldwide came to US$ 121m compared with premium income of US$ 60m — a loss ratio of 200%. The insurance supply fell whilst premiums reached new heights. This classic supply and demand cycle continues to this day, and sums insured have been steadily rising. Communications satellites currently cost around US$ 250m as a rule, and in some cases even more. The cover is very broad, the situation being totally unlike that of, for example, factory machinery. The prospects of repairing even the most minor malfunction in orbit are virtually nil. Even a small defect such as a faulty relay can result in a total loss costing millions. Consequently, the only exclusions relate to war, terrorism and nuclear risks.

Munich Re launches RATE

To meet the huge demand for underwriting capacity and provide the necessary concentration of expertise, Munich Re set up its own space risks pool in 1980 known as RATE, based on a combination of aviation, marine, and engineering insurance. Munich Re is the market leader in space risks, having since been involved in virtually every commercial space project.

The loss figures can be staggering. The largest so far involved six Boeing 702 satellites of similar design launched between December 1999 and May 2001. Just weeks after the final launch of the series, the solar power generators were found to be deteriorating more quickly than expected. This meant they had a considerably shorter lifespan than the estimated 15 years, and the resulting claims bill was expected to be in the order of US$ 830m.

Munich Re is the market leader

Both the Space Department and Munich Re have something special to celebrate this year. For the past 25 years, a team of specialists has focused entirely on space risks in order to provide the very best in fast, flexible and creative service. With a 15—20% share of global premium volume, Munich Re is by far the largest risk carrier and acknowledged market leader worldwide in this class of business, which we also write as primary insurers.