04 July 2024
Space Insurance Q&A with Beazley
Following the spate of recent losses, the Space insurance market has continued to respond by elevating rates and becoming much more cautious in deploying capacity. This trend has been fuelled by further losses reported in 2024, with total losses over the past 18 months now breaching the USD2 billion mark, according to the IUAI.
Losses of this roughly similar quantum have only previously been experienced in 2000/2001, but today set against a lower premium base due to a reduction in commercial Space activity. Delays to both next generation Satellites and new Launch Vehicle are compounding underwriter concerns, adding pressure from internal and external stakeholders.
The rising premium rates have been driven by underwriters' goal of a return to profit and show a credible chance of a positive return for their capacity providers. However, underwriters will need to maintain their participation in major programmes and engage with upcoming launch placements, to realise their targeted premium volumes. The current absence of a significant reduction in available or “working” capacity from 2023 means that competition is still being generated for non-distressed risks as underwriters bid for their preferred shares.
We approached Denis Bensoussan, Head of Space at Beazley, to get his views on the current market, the efforts being made to safeguard the Space insurance market and looking ahead to what the next 2 to 3 years has in store.
"We must get back to the fundamentals of space insurance and I think, for too long, there's been an erosion of market discipline due to overcapacity and competition"
Q) With the IUAI reporting space insurance losses over the last 18 months now circa. USD2 bn, how do you see the market returning to profitability, especially noting the reduction in GEO launch risks being offered to insurers?
Well, that's the million-dollar question. We must get back to the fundamentals of space insurance and I think, for too long, there's been an erosion of market discipline due to overcapacity and competition. It appears that the coverage provided by insurance policies has, in recent times, not been clearly understood by everybody in the same way, resulting in divergent interpretations, which has delivered some challenging claims which put the market in a tough spot. This needs to change to ensure full clarity to all parties. That essential work has already started, but that process will take time.
However, what is going to assist with profitability in the short term, is premium rate increases. It will not be immediate, at least for the launch where the business is placed 6, 12 or even 24 months before the premium is earned, and achieving profitability by only increasing In-Orbit rating is not realistic with the premium volume available – even with much larger rate increases. However, it is the only real methodology to put us on the right path with a direct effect.
On average the premium rates have doubled since Q3 2023, but that's not good enough. I think rates need to go up again after the latest claims. But we need a comprehensive approach combining explanations, the expected path forward with a step-based process, making sure that all the stakeholders understand what we are doing, why we are doing it and doing it in a more sustainable way, which is more workable for everyone involved.
We must be patient; we can't swiftly repair 10 or 12 years of market erosion overnight. We need to go back to the original intent of the policies and rebuild strong foundations, to prepare coverages for future technological disruptions and challenges to ensure moving forward the market will return to long-term profitability.
I also think we need to double our efforts to make space insurance more prominent and natural as a risk management solution. For practical reasons, the majority of this task was usually left to the brokers, but maybe we need to complement and help, especially for new clients and new products.
We need to grow the market, work together, and have a much more effective marketing process which represents more than a policy but a business-enabling solution.
Q) We note that premium rates are approximately doubling and that for many buyers it's not mandatory for them to buy asset insurance, in addition, they're facing significant financial pressures due to high levels of competition within their own business. How do you balance the need to return to profitability while ensuring that “blue chip” clients aren't dissuaded from buying insurance?
It is essential that we explain why we're reacting, and make sure that buyers understand our objective; which is not just an opportunistic approach to increase the premium rating. It's because we need to set the rate at the level where we have a reasonable expectation of making a profit at the end of each year.
But at the same time, we don’t want to kill the patient with the cure. You have to be considerate and ensure that what you do is individualised and workable for your clients. At the end of the day, you need to convince them as you can't just force them to buy.
It's a market and not everybody's on the same page, but we will act in a way where it's done in the less disruptive way for clients this year and next year.
Q) Whatever Beazley chooses to do has to sit within the framework of the broader space insurance market. We saw last time there was some significant disruption (back in 2019) that following a number of high-profile insurer exits, other opportunistic markets came in to fill that gap and take advantage of the elevated rates. Can you see this dynamic repeating in 2024?
Yes, and the more headlines focusing on sudden and sharp rate increases the more this is likely. It generates a lot of attention and it's misleading, because you're not going to get top rate for everything, and on those you do, the risk may have also doubled. These increases usually attract people who have a purely opportunistic perspective. It can also be counterproductive as it may give the impression to new or potential buyers that space insurance is becoming unaffordable.
In the long term, we don’t see a repeating cycle of peaks and troughs as opportunistic capacity comes and goes benefiting clients because, yes, it's good to have low rates sometimes, but, it's probably better to have a predictable and consistent insurance market. It makes risk management strategies and budgeting very volatile.
"I think New Space is exciting because of its vast diversity and its innovative and risk-taking ethos, and because it challenges us, forces us to re-think, and re-invent our traditional role of underwriter as well as our products."
Q) Due to the specialist nature of the space insurance class, it's seen as difficult for insurers to “grow the cake”. Do you think there's a possibility to increase insurance products being bought by New Space clients and maybe constellation risks as well? Do you feel that insurers need to engage more with those markets?
I think New Space is exciting because of its vast diversity and its innovative and risk-taking ethos, and because it challenges us, forces us to re-think, and re-invent our traditional role of underwriter as well as our products.
Many New Space clients are new to space insurance, so you are not just selling a policy, but you also become an educator in risk management, a marketer and an adviser. It’s a very good opportunity to think outside the box, and to drive product innovation. It's a market which is growing rapidly now, and that's good, but this is a little misleading because most of that growth is outside of the space insurance sphere.
So again, if you just look at the headlines, you're probably in for some sort of frustration. We haven’t yet succeeded at capturing the bulk of this business and therefore we can’t rely on New Space clients as a key driver in our market, due to its limited premium contribution. However, this is a great opportunity to evolve and grow along with the sector. Things may be slowly going in the right direction as this sector is maturing and to support its development it is increasingly requiring more sophisticated risk management strategies where space insurance plays a vital enabling and promoting role.
What is growing massively is the demand and end users of satellite data, applications and technologies. Companies using space data today such as imagery or “Internet of Things” services are growing far faster than satellite operators - these companies are numbering in the thousands and new companies are created daily. So, I think maybe that's something we need to focus on - to develop new products that protect the use of what is a critical element of their operations and to ensure that those businesses are resilient if they lose access to satellite-derived data.
Finally, while it may not come this year or next, but key growth areas such as commercial space stations, moon and asteroids missions, in-space manufacturing and space servicing could really help to grow our premium base. Also, the launch of very-large satellites, for example via Starship, provides satellite operators with new possibilities which we will have to address and support.
Q) Can you think of any learnings from other lines of insurance that space insurance markets could adopt to give a more stable environment, both for underwriters and clients?
There are things to learn from other markets that have gone through difficult periods, and I think the cyber class can be one of these. Five years ago, everybody talked about cyber being the largest growing segment of insurance, capacity was piling in and the premium and client base was growing.
But then, in 2022, ransomware claims came through with a high frequency and insurers started to lose money. So, the leading markets adjusted and clarified the coverage as a reaction to this, as well as increasing rates, and in 2023 the sector became profitable once again, with the demand and volume of business continuing to grow despite these changes.
I think aviation might not be a useful example at this time because, in terms of the market cycle, they're facing lots of the same issues as we are. But one element to take from aviation is the way their market is segmented, with different insurers targeting specific risks: airlines, general aviation and aerospace.
With the emergence of novel space activities and unconventional risk profiles, we may have an opportunity to create a wider, more diverse and sectorised marketplace with new classes such as space products liability, war risks, satellite users' loss of revenue and business interruption, resulting in not concentrating all the capacity solely on the geostationary satellite business.
Q) The space insurance market is unusual with the number of leaders we have on placements both during the placement process and during the claims process. Do you think this is an efficient practice or should we be looking at other structures to help drive stability and overall better products for our clients?
Again, it's a great question and we need to be open minded here. I think we cannot go back exactly to the time where space insurance had a limited number of leaders with the majority of the market following. The industry and the market are simply not in the same disposition. I think there were benefits and challenges with this approach, even if the reason we went to vertical marketing was mostly driven by price.
This transition contributed massively to the erosion of market discipline, coverage clarity and certainty.
So, I can see benefits in bringing back some features, but we've got to be very cautious. I think brokers and clients have also seen the benefits of vertical marketing as this pushed down pricing and increased competition. However, for example, having some form of coordination and consistency on claims could bring more efficiency, stability and predictability, without limiting the competition.
I think we need to take a balanced approach. Some placements and claims are very, very complex and people have a very different appreciation of the risk for these situations and some level of coordination may help. It may come to a question of the trade-off on being a leader, and who is going to be able to position themselves as a relevant lead market. It will be especially acute on the claims side. I think there is definitely room for improvement, efficiency and more rationality and flexibility. We should be open-minded about it and prepare for the possibility of an evolution of the market structure.
Q) As technology continues to evolve ever more quickly and, as you noted before, we're starting to see in-orbit servicing and in-orbit manufacturing products as well as private individuals going into space. This is expected to spread to private space stations, the Moon or even Mars bases. How can the space market help handle that element of risk?
Yes, I think that's another exciting challenge and another coming evolution of the market and our products. I think again here, we could probably take inspiration from the aviation market where there is relevant and valuable experience with human transportation risks. The commercial aviation market evolved from sending mail bags to being used for passengers as the technology matured and safety records improved.
We have done some of this when the market was ensuring the Soyuz launch vehicle to the ISS with humans aboard, but those were relatively rare events and there was no specific coverage for risks to human life.
Space insurers may need to gain experience on how to assess and price physical injuries, psychological injuries and passenger liability in the course of space activities. We could effectively take a page from aviation and the personal accident markets and look at their key metrics.
I think, in the future, when we're looking at flights of private astronauts and Starship, the issue of significant aggregation will arise and will need to be addressed. We need to make sure we can manage and support this.
Final thoughts
In conclusion, for buyers of Space insurance in the current market, having to deal with sizeable increases in the premium rating is a significant stress factor, but competition between insurers remains a counterbalance, driving some realism over the level of pricing that is achievable and sustainable.
Gallagher remains highly confident and demonstrates to our clients that viable products, capacity and pricing are available to support them through the current turbulent market conditions.
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Author
Martin Jackson
Class Leader, Aviation
Apollo Syndicate Management Limited
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