Despite the risks, insuring satellites is a lively business

Suddenly it just wasn't there. Satcom 3, RCA's communications satellite, had been successfully maneuvered between altitudes of 100 miles and 22,300 miles for a three-day trial orbit. Then, just when RCA flight controllers radioed a command to fire the satellite's apogee kick motor, the screen went black. And, a year and a half later, the bird still hasn't been seen.

Fortunately the satellite was insured, by Lloyd's of London, for $77 million.

Despite its risks, the satellite business has taken off, carrying the space-insurance business with it. The demand for access to satellite space has doubled every three to four years, says Gavin Trevitt of Intelsat, a communications satellite consortium of 105 member countries. About 50 satellites have been insured since 1968. Between 75 and 80 will be launched in the next three years, and close to 200 this decade, according to forecasts by the United States Aviation Underwriters Inc.

Satellites are already widely used for communication, such as telephone service, cable television, and high-speed data transmission for business and government. A study done for the National Aeronautics and Space Administration by the International Telephone & Telegraph Corporation and WEstern Union projects that satellites will link about 25 percent of all long-distance telephone calls and 50 percent of all data transmissions by the year 2000.

But satellite technology has left space-insurance practices light-years behind. Since underwriters first began insuring satellites, their loss ration has exceeded 200 percent: Worldwide premium volume ended up to between $55 million and $60 million, while losses surpassed $120 million, according to Harmut Heese of Munich Reinsurance Inc.

Why are underwriters being beaten at their own game?

"The insurance mechanism hasn't been able to keep up with the technological advance," says Brian Hughes, vice- president of Inspace, a space insurance broker. "Underwriters have tried to standardize satellite insurance like life insurance, but in an embryonic industry each policy differs from the last."

When space insurance was just getting off the ground, underwriters moved cautiously. The first insured lauchings in 1968 had a premium rate equal to 20 percent of the amount of coverage and a one-failure deductible clause, which protected the underwriters from the first loss.

As more and more satellites were launched, however, premiums steadily decreased. Underwriters dropped the one- failure deductible. And no-claims bonuses -- the amount underwriters returned to the insureds if the flight was successful -- reduced the actual premium to a low of 6 percent by 1977. When a huge loss finally occurred, underwriters were badly burned.

"After the RCA disappearance in 1979, initial indications from the market showed launch insurance rates at 30 percent," Mr. Hughes recalls. "Everyone realized that the lead names [underwriters] were the blind leading the blind."

The temperamental nature of space vehicles makes it difficult to assess risk and assign an appropriate premium. Thousands of potential failurs haunt a satellite during every moment of flight.

In the first stage of the launching, NASA fires an expendable rocket, such as the Atlas Centaur, which lifts the satellite to "parking orbit," an altitude 104 miles above the equator. This takes about 12 minutes.

At this point the satellite company takes over the navigation. For the next three days the spacecraft flies in its "transfer orbit." It travels five or six times between 200 miles and 22,300 miles above the Earth while controllers track its performance.

When the spaceship reaches its final geosynchronous orbit (moving at the same speed as Earth so that it appears to hang over one spot), the apogee kick motor sends the satellite in the right direction. And, if you happen to be RCA or Comsat or Satellite Business Systems, you are in business.

A lot can go wrong in those first three days, which is the reason for launch insurance.

"There are over 900,000 parts that must work to reach parking orbit," observes Joseph Mahon of NASA. "We've had a good record for electronic equipment, because we can test it on the ground. But you can't test the explosive devices, like the apogee kick motor, and those are usually the troublemakers."

The space shuttle, which NASA plans to have in commercial operation by the end of this year, should reduce the burning cost (failure) rate, because it will be manned and safer. An expendable rocket such as the Atlas Centaur works on a "single string" system, in which no reserve components back up a part if it fails.

In a manned shuttle, redundant parts will better ensure that the spacecraft can land intact. Furthermore, the shuttle can be relaunched every 30 days, giving NASA more opportunities to work out the chinks.

Because of its size and weight, the shuttle can lift a satellite to only a few hundred miles, far below geosynchronous orbit. Initially, then, it would reduce the failure rate of only the first launch stage, into transfer orbit.

Launch insurance covers the first 180 days. Life insurance covers the next eight years. During this time, random failures and wear and tear on solar cells , batteries, and other components can shorten the life of the satellite

How can an underwriter possibly assess these risks in order to set his rates?

In part, rates depend on the failure rate, which has averaged 15 percent. Also, as the amount of insurance purchased increases, so does the rate. According to Inspace, at $50 million, the rate is about 8 percent; at $70 million (the average amount), the rate hovers around 12 percent.

Past loss experience influences rates, but it cuts both ways. If "cash flow" underwriters incur a loss, they will lower their rates to obtain more premiums for investment. After a huge loss, however (such as Satcom 3), many of these underwriters leave the market, which dries up insurance funds and boosts premiums.

Each launching adds a new statistic to underwriters' records and makes the business more familiar. But with a process so intricate and temperamental, can space insurance ever become a science?

"It's hard to say," comments Hughes. "After all, a rocket is nothing more than a controlled bomb."