Academic journal article Journal of Risk and Insurance

Risk-Bearing Contracts for Space Enterprises

Academic journal article Journal of Risk and Insurance

Risk-Bearing Contracts for Space Enterprises

Article excerpt

Risk-Bearing Contracts for Space Enterprises

Introduction

Enterprises relying on the installation of hardware outside Earth's atmosphere face considerable risk. In the future, such enterprises might include research and manufacturing activities on an orbiting platform. For now, the main commercial exploitation of space lies in the use of satellites for communication, land or sea surveying, and for navigation. Apart from the usual commercial risks, these enterprises face the high probability that hardware will be destroyed on launch or will malfunction in the largely inaccessible environment of outer space. (1)

With some lag, the development of commercial space enterprises was accompanied by the emergency of an infant space insurance industry. Cover has been provided for ground, launch, "in orbit" and third party risks. The structure of the insurance market has been influenced by the prevailing contracting practices in the launch and satellite manufacturing sectors. For example, manufacturers typically deliver satellites to their customers on the ground, and launch contractors do not typically assume liability for damage to their cargoes. Thus, the owner or operator of the satellite is left bearing the risk for launch and equipment failure that not only removes space-based hardware, but leaves ground based facilities (e.g. receiving and transmitting stations) unused.

Cover for satellite owners and operators has been available, but a spate of losses in the early to mid 1980s led to skyrocketing rates and, eventually, to the virtual disappearance of this insurance market. Though there were signs of a revival in 1987 and 1988, the market is tentative and fragile. Failures in all Western launch systems in 1986 (especially Challenger which, in fact, did not have insured cargo) apparently has caused all major parties to revise their loss probability estimates upwards. Though there have been successfully launches of all major launch systems since then, the confused loss experience leaves room for considerable diversity in estimating loss distributions.

This article examines present risk-bearing arrangements in which satellite manufacture and launch contracts usually assign risk to operators/owners who then pool risks through conventional insurance contracts. It shows how such arrangements may have contributed to the space insurance "crisis." I then examine alternative risk-bearing arrangements to see whether they more appropriately match the risk-bearing capacities of the parties and whether they provide more appropriate incentives for loss prevention.

II. Insurability of Satellite Risks

Recently, Berliner (1982) described a set of conditions which lead to a well functioning insurance market. These are not preconditions, since the violation of one of these conditions does not preclude the existence of a market. The better the performance against these conditions, the more likely it is that markets will flourish. Some of Berliner's conditions do not pose unusual problems for satellite insurance. For example, Berliner suggests that the loss should be measurable [see Kleindorfer (1986) and Kunreuther (1987)]. An example of a major violation may arise in insuring liability for pollution where a spillage of hazardous materials may have environment and health consequences which are not understood and which may take tens, hundreds, or thousands of years to work themselves out. The determination of awards for such damasge by courts is a highly subjective process whigh might go through many appeals and reversals, taking many years for a final settlement. In contrast, the loss of a satellite is fairly simple to value. The loss is a distinct event and establishing a replacement value is not so daunting a prospect. It is not claimed that there is no problem measuring loss, but simply that the problem is unlikely to be a major stumbling block when negotiating insurance contracts. …

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