Third Party Liability and Insurance Innovation in the Smallsat Era

In the space industry, it has become mundane to alarm on potential issues of crowded orbits. A concrete translation of this factual evidence is the multiplication of Space Traffic Management (STM) initiatives in the past years, across continents, whether on the civilian or military sides.

Orbits are directly impacted by one of the most stringent revolutions in the space industry. The emergence of small satellites weighting below 500 kilograms, a trend facilitated by the emergence of the cubesat standard, is no stranger to the issue of crowded orbit. By lowering the weight and size of satellite systems, smallsats make access to space cheaper for companies, governments, and universities by lowering the number of kilograms to be sent into orbit. In parallel, cost of access to space has hit all-time lows thanks to new generations of launchers like SpaceX, and new orbit placement solutions like dispensers that facilitate ridesharing and piggybacking on heavier rockets. As an immediate consequence, we have witnessed the emergence of ever-growing numbers of smallsat constellation projects. According to the OECD Space Sustainability 2020 report, there could be up to several tens of thousands of operational objects in orbit by 2030.

This New Space trend holds consequences for satellite operators and governments. The Liability Convention in 1972 has states liable for damages dealt to third parties by satellite operators they have licensed. In-orbit collisions, an increasingly probable risk, might result in potentially high financial costs, and states now take into consideration potential future financial liabilities when licensing spacecrafts.

This has led to an increase in the number of states requiring the subscription, by operators of a space object, of Third Party Liability (TPL) insurances prior to authorizing the licensing of a space activity. There are a variety of applicable regimes with regards to TPL insurance requirements: some states mandate it for all space objects, like the United Arab Emirates, while others have requirements that can be waived in specific cases like the United Kingdom for smallsats. Others, like the United States don’t mandate any TPL insurance and make them a voluntary-based subscription.

For satellite operators, this has created additional costs of insurance subscription that translate into insurance premiums to be paid to insurers. TPL insurance premiums required typically vary based on risk exposure created by the licensed spacecrafts, the reliability of their operators, and risk mitigation measures put in place ex-ante and ex-post a spacecraft’s launch. Although this can be a relativity small financial amounts for smallsats, such costs can still impact the financials of New Space companies that often have cash constraints. This burden is even stronger for operators of individual smallsats that don’t have the possibility of pooling together the insurance of their entire fleet of smallsats as part of a constellation. These trends explain why TPL insurance requirements are still a debated issue for space industry regulators whose main concern is finding a balance between attractiveness of their regulatory environment, to nudge operators in setting up shop, and protection of the liability of their state for low-likelihood but potentially costly TPL-triggering events.

Regulatory hesitations directly impact the TPL insurance market. It is a small market that is seen as inefficient because premiums are disproportionately high compared to the level of risk — but still low enough that they could wipe out decades of insurance premiums in case of a single TPL triggering event. This situation discourages insurers.

A rapid overview of the insurance market hints at average premiums for in orbit TPL at less than one percent of the required coverage, translating low probabilities of incident occurrence estimated at about one in 1 million. Insurance specialists will be challenged by a premium of less than one percent for such a low-probability risk, an overprice by a factor in the hundreds. It is however precisely in this overprice that lies the inefficiency of the TPL insurance market for smallsats. The gap between the existing pure premium for insurers (the break-even financial risk value) and the premium smallsat operators can expect to pay is the translation of high underwriting costs related to the complexity of risk evaluation for in-orbit activities as well as the low volume of insurance policies written off, at least for now.

Despite required operator premiums that are disproportionately high compared to risks of occurrence, the low financial amounts at stake (about $100 annually for a smallsat, and a couple thousand dollars annually for larger satellites), as well as the low volume of insurance policies underwritten, lead to a premium accumulation considered insufficient in case of a TPL incident that might cause substantial and chained damages due to a Kessler effect that will ultimately be extremely expensive for liable governments, and wipe out decades of insurance premiums for insurers that might reconsider their decision to cover TPL risks in the future.

Innovative schemes could be developed in the future to circumvent these failures in TPL insurance coverage in order to both maintain insurers on-board as well as offer stable TPL insurance conditions for operators and governments.

One direction TPL insurance could take would aggregate all operators in a pooled financial structure that would cover for any TPL incident caused by a member of that specific pool, a practice already observed in the oil and gas offshore exploration industry. Operators would therefore join pools with players that share common risk exposure. This solution is highly dependent on the capacity of satellite operators to connect with each other, a role that could be taken over by space agencies. It is also dependent on the expected inflation in the number of space objects in the coming decades, as it would require the agglomeration of a sufficient number of space objects, and their corresponding secured financial amounts, to justify the existence of a pooled TPL insurance financial structure.

A more direct involvement of space agencies and regulators in helping structure the TPL insurance market could also provide important innovation. The idea would be for regulators to act as an intermediary that would purchase itself the TPL insurance it is expected to ask from licensed operators, therefore buying more volumes of TPL insurance coverage rendering the operation both more incentivizing for insurers, as well as leaner for satellite operators, especially startups and smaller players.

To that effect, one solution would be a “direct-link” insurance payment solution that would involve an initial set-up between the space agency and the underwriting department of a selected insurance or broker. The set-up would consist in a direct TPL insurance pricing instrument integrated to the licensing process that would automatically generate a TPL insurance coverage policy from the insurer. Costs of implementation would therefore be borne by the regulator, and only pure premiums would be left to be paid by operators, reducing the bottom-line fee.

Finally, a so-called “umbrella” policy solution could include the best of both solutions explored so far. In this configuration, the regulator would underwrite a fixed capacity of TPL insurance for a given year (for instance a $15 million TPL insurance coverage), and would fill its insured capacity by adding licensed operators throughout the year until its coverage capacity is full. In this option, the operational costs for the underwriting process would be settled once by the regulator that would then be responsible for internally dispatching coverage to operators by discretionary deciding of premiums charged internally as well as potential exemptions. All in all, smallsat operators would definitely benefit from such innovations in insurance practices. VS

Mathieu Luinaud is a senior associate within the PwC Space Practice and his past experience covers a wide range of space domains, from upstream to downstream. He has worked extensively with satellite manufacturers and satellite operators on complex issues such as business model development and market assessments.

Virgile Salmon is a senior actuarial associate in PwC Financial Services and works with the PwC Space Practice on diverse problematics related to insurance within the space sector. Virgile developed a TPL model for a public space agency based on market-oriented risk valuation and regulatory best practices.