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The new frontier of aerospace risks.

EVERYTHING WAS running smoothly on that clear blue day in April 1991. Aboard the French Ariane IV rocket, Telesat Canada's Anik E2 satellite ascended i n to space. After divorcing itself from the rocket, the satellite was gracefully maneuvered by ground technicians to its designated orbit. Then, without warning, the satellite was struck by an in-orbit equipment failure. The Anik E2 satellite's two antennas had failed to deploy; without them, the operation would have been a total loss. After a couple of days, one antenna did eventually deploy on its own. However, it was not until some 90 days later that the second antenna was successfully deployed. With an insured value of $218 million, it looked as if Telesat Canada would have the dubious honor of helping establish a record for losses in space insurance. Welcome to the volatile world of space risk.

Perhaps more so than in any other industry, the stakes in this branch of aerospace are high indeed. With liability and potential losses averaging in the hundreds of millions of dollars, it is easy to see why managing space risk certainly is not for the faint of heart.

Those companies involved in space-related ventures range from satellite and launch vehicle manufacturers and operators to launch service providers and satellite end-users. At any one time, there are close to 7,000 man-made objects in space, with new ones constantly being launched while others decay from orbit. The space industry is so big that in the United States alone, the U.S. Department of Commerce projected that the commercial space sector, consisting mainly of satellite production and launch and remote sensing data services, had earnings of $5 billion for 1992 while employing hundreds of thousands of workers. As a result, an intricate web of design, manufacturing, transit, regulatory, insurance availability and bottom line financial considerations makes space risk management perhaps one of the most technically complex and demanding disciplines around.

UP, UP AND AWAY

The Fairfax, Virginia-based Orbital Sciences Corp. provides both ground-based and air launches for government clients, such as the U.S. Department of Defense, and for commercial ventures, launching communications satellites and scientific testing equipment into space. For government customers, Orbital Sciences Corp. has bund that the federal government will assume full liability. On the other hand, commercial launches the company conducts without National Aeronautics and Space Administration (NASA) oversight require a license from the U.S. Department of Transportation's Office of Commercial Space Transportation. Launch vehicle insurance is purchased on a per mission basis.

Under the Commercial Space Launch Act Amendments of 1988, private launchers also must secure $500 million in third-party liability insurance coverage and reciprocal waivers from launch parties, including all government employees, licensees, contractors, subcontractors and licensee customers. According to Robert Scoular, a partner with the Los Angeles law firm of Sonnenschein Nath & Rosenthal, these waivers eliminate "the necessity for insurance against claims by launch-associated parties," thus protecting space vehicle and satellite manufacturers. Component part manufacturers usually protect themselves by inserting exculpatory clauses, clearing them from alleged fault or guilt, as long as a defect did not result from an intentional wrongdoing, gross negligence, fraud or misrepresentation.

Orbital Sciences Corp. has been pioneering the use of air launches. These launches involve flying a large aircraft, such as a B-52 Bomber, with an attached rocket to an altitude of 40,000 feet, where a satellite is fired into low earth orbit. At present, the company utilizes NASA-owned aircraft flown by government pilots to launch its Pegasus rocket, but has recently acquired its own plane for use sometime later this year. On that aircraft the company maintains both property and liability insurance.

As yet, the Pegasus is just one of a number of new and largely unproven launch vehicles being tested and utilized. While these launchers should be more predictable and hence secure a lower premium rate, notes William Mayo, managing director of Inspace, a space broking division of Willis Corroon Aerospace in Bethesda, Maryland, they currently hold substantially higher risks due to lack of experience, as opposed to the older expendable launch vehicles such as the Atlas. There is, however, an effective reduction rebate on the policy in the form of "no claim" bonuses.

Over the past few years, Wayne Mielke, manager of risk and insurance for Telesat Canada in Gloucester, Ontario, has found that the launch risk has fallen to tolerable levels due to increased launch experience and greater reliability with the veteran expendable launchers. Insurance premiums of course vary depending upon recent experience. Today, launch insurance for operations involving the seasoned launch vehicles such as the Atlas Centaur generally fluctuates between 16 percent and 18 percent of the value of the equipment, Mr. Mayo reports. He adds that "this typically is split 50-50 between coverage of the launch vehicle and the satellite." Operators can add to that a roughly 1 percent of total cost premium rate for pre-launch insurance covering transit and another 2 percent for in-orbit coverage.

Private companies that wish to put a payload into space normally sign a launch service agreement with the launch provider. "Additional parties are also involved in a launch service agreement," Mr. Scoular notes, "like banks who finance the project, and the U.S. government, which has a monopoly on launch sites. The typical launch service agreement is worth about $100 million to $200 million."

In a paper he presented to the American Bar Association last August, Mr. Scoular noted several provisions covered in a typical agreement, including the allocation of the risks of loss; safety and accident prevention; payment schedules; performance criteria; rescheduling arrangements in the event of delay; and termination and dispute settlement procedures. For Mr. Mielke, the major risk is still the "launch period during the first few minutes when the vehicle leaves the pad. It's a very nervous time."

BEFORE INSURANCE

Telesat, which manages satellite telecommunications systems, has had

satellites launched since 1972 while experiencing just one minor claim. For Mr. Mielke, "risk management is not simply the procurement of launch insurance and in-orbit insurance, but rather an overall approach that must address the technical risk element and emphasize the ongoing, overall management of its satellite infrastructure." At Telesat, the technical risk management program begins with the design of the satellites. Ensuring that there is sufficient redundancy (back-up systems) on board and that there are enough satellites in the system are key objectives to achieving uninterrupted service to customers.

According to Mr. Mielke, engineering personnel from Telesat's Satellite Systems Division are involved in the manufacturing process from beginning to end. They preapprove designs and set specifications, are on-site at the manufacturer's facility during satellite construction, check all equipment and have the final decision regarding its inclusion in the satellite. Moreover, "the company builds into its contract with the satellite manufacturer a clause stating that the reliability tests conducted at the manufacturer's plant must meet Telesat standards and/or be supervised by Telesat personnel," Mr. Mielke says.

The importance of such a rigorous quality assurance program cannot be overemphasized given the risks involved. For example, Mr. Mielke recalled how several years ago, Telesat engineers rejected what one manufacturer felt to be an acceptable apogee motor, which is critical for helping a satellite achieve proper orbit. Another company unfortunately incorporated that motor into its satellite, which eventually was rendered useless due to apogee motor failure.

Redundancy - so important to the design of the satellite - is a recurring theme throughout Telesat's risk management program. The company ensures that there exists at least a one-year overlap, or time cushion, between the end of an in-orbit satellite's life expectancy and the deployment date of a new satellite. Contractual arrangements with suppliers for a replacement satellite in the event of a failure are also important. Furthermore, the risk management department reviews both internal spare capacity and available capacity on U.S. domestic satellites for emergency back-up. "In fact, we have reciprocal agreements with a number of U.S. domestic satellite operators who are contracted to supply a predetermined number of channels for emergency restoral," Mr. Mielke says.

A launch insurance policy typically covers the first 180 days after launch, Mr. Mayo reports, allowing enough time to get the satellite in transfer orbit (separated from the launch vehicle), its orbit circularized, moved into place and its antennas deployed. This also affords enough time to test the satellite and verify that it is operationally ready.

Following a string of launch failures and the shuttle disaster in the mid-1980s, Telesat bund that insurers would be willing to fix rates only six months to a year in advance of the launch. Thus, the company turned to competitive launch risk guarantees, then being offered by Arianespace, which provide coverage for a replacement launch should a failure occur during the critical launch phase from clamps release to separation. Such guarantees helped the company fix its costs up to three years in advance, making budgeting and customer rate setting easier. The balance of exposures, such as pre-launch, transit and post-separation risks, was then covered via traditional insurance channels.

Once Telesat's satellites are launched and operational, attention is focussed on preventing and rectifying in-orbit failures. It should be noted that the company has never purchased in-orbit insurance for two main reasons: excess internal capacity (i.e., redundancy) and prohibitive impact on prices. "We make a very substantial investment in the many spare or back-up systems in our spacecraft. This investment is essentially our insurance against an operational failure." From the reliability data that the company has developed, it has become Telesat's view that "if the satellite meets the specifications in our contract with the supplier for a successfully operating spacecraft during the first six to nine months after launch, the risk of an operational failure after that time is extremely low." Mr. Mielke states that even if in-orbit insurance were purchased, "we would still insist on the numerous redundancies. The idea is to provide service so that we don't lose customers. We don't want to be paid insurance."

But what happens if the redundancies fail? When the antennas of the Anik E2 satellite failed to deploy, and battery power was dwindling, Telesat ground technicians had to react quickly. In order to bring the insurers on-board to support the technicians' radical maneuvering efforts that could have jeopardized the entire mission, Telesat hosted two technical briefings in Ottawa for their insurers. According to Richards, Melling Inc. (now Willis Corroon Melling) and Leslie & Godwin, Telesat's Canadian and London brokers respectively, the briefings "allowed the insurers the fullest information with which to assess the risks involved in the deployment plan in so far as they related to the remainder of the satellite."

As part of its overall risk management program, Telesat had established an emergency committee charged with decision-making capability and the management of service restoral to customers in the event of a satellite or ground equipment failure. Should problems similar to those that befell the Anik E2 satellite have arisen after the satellite had become operational, then this committee would have taken over.

CONTINGENCY PLANS

Foreign government embargoes of shipments of essential hi-tech components, withdrawal of requisite regulatory approvals or other changes in government policy can have a devastating impact on a company involved in the space business. How does a risk manager protect against such fortuitous events? One option is the purchase of contingency risk insurance, which covers the possibility of losses that arise should some event occur over which the insured has no control. Stephen Tucker, a partner with the law firm of Mendes & Mount in New York, adds that these contracts do not cover physical property or persons. The party wishing to put a payload into space usually purchases the insurance via a specialty broker that is hired by the space broker. "Being such a small and esoteric market, premiums generally run very high." Historically, contingency risk insurance has been used by promoters of special events, such as the Olympics, in case of the event's cancellation.

But there are space-related examples where contingency risk insurance could have provided invaluable coverage. According to Mr. Scoular, 24 of 44 NASA-planned commercial payload launches were canceled following the 1986 crash of the Space Shuttle Challenger and President Reagan's subsequent decision to pull the U.S. government out of the commercial launch business. When Hughes Communication Galaxy Inc. took the United States to court to hold NASA contractually bound to launch its payload, the U.S. Claims Court found that the president's act insulated the government from contractual liability under the sovereign act doctrine,

The Spacehab project provides further illustration of the necessity for contingency planning. Spacehab is a consortium of companies endeavoring to design and manufacture modules containing approximately 60 to 70 lockers to fit into the cargo bay of a NASA space shuttle. The lockers will be rented out to experimenters seeking access to conduct tests in a weightless environment.

At the urging of its bankers, Spacehab purchased contingency risk insurance to protect against risks associated with the Space Shuttle program. According to Mr. Tucker, these risks are quite varied: NASA could discontinue shuttle flights or fail to honor commitments to furnish launch services; the flight reservation scheduled for the modules could be canceled or postponed by the government; or the manufacturers could fail to deliver the modules. Should this happen, "Spacehab would have no way to protect its investments, repay its bank loans and launch the specially tailored modules into space," Mr. Tucker says.

STAR GAZING

Many businesses rely on space-based systems to provide a service, such as the transaction of financial data, television broadcasting or environmental data collection. New uses continue to be developed all the time energy and utility companies now utilize once-classified high resolution military satellite images to study geological features to help locate oil, gas or mineral deposits.

In general, suitable service relies heavily upon the smooth operation of communication receivers, or transponders, aboard an orbiting satellite, and the receiving and transmitting earth-based stations below. A risk manager for one communications company noted that risk is often contractually transferred to the satellite operator in the case of a transponder failure; in such an event, the operator would be bound to make available either the use of another transponder on the same satellite or on another satellite altogether. Various amounts of risk can also be transferred via insurance contracts covering business interruption costs, extra expenses and lost sales revenue..

But when contracts are involved, satellite users need to proceed with caution. In Mr. Tucker's experience, "the vast majority of [space-related contract] disputes are over the performance of in-orbit satellites and who is liable." To avoid such disputes, Mr. Tucker stresses that "it is important that there is a meeting of the minds beforehand on every conceivable issue regarding risk" because the subject matter is exceedingly technical and difficult for most to grasp. MINOR FAILURE

MAJOR LOSS

Perhaps one of the best ways to judge just how risky space ventures can be is to look at the industry that insures them. According to a report by Munich Reinsurance Co.'s Space Insurance Department, "owing to the small number of risks on the one hand and the huge sums insured combined with the high exposure to total losses on the other, the law of large numbers works only to a limited degree." Rudolf Ficker, the management board member responsible for space insurance at Munich Re, explains the industry's position this way: "The susceptibility of this hi-tech business to fluctuation forces space insurers to accept substantial losses in individual years, which they have to compensate for with profits made over six years."

Prior to several Ariane rocket and U.S. expendable launch vehicle failures in the mid-1980s, the launch insurance market was characterized by relatively high capacity and very attractive rates, dipping at times down to the single digits. Following those failures - when insurers such as Munich Re reported loss ratios of 263 percent in 1984 - and climaxing with the 1986 Space Shuttle Challenger disaster, the insurance market saw capacity decrease while rates soared to over 25 percent. Before NASA pulled out of the commercial launch business in 1986, it was willing to take on much of the liability in order to gain launch experience and generate additional revenue.

Today, the "total spectrum of space insurance underwriters is quite small, consisting of about 25 major players located in nine countries," Mr. Mayo reports, adding that the global satellite insurance capacity currently hovers around $360 million. The growth of the market is important, considering that in early 1992 the insurance industry witnessed its highest placement ever of launch insurance - $311 million - to cover the dual launch of the Superbird and Arabsat satellites by Arianesp ace.

The space insurance market has evolved along with the risks associated with space-related ventures. There are technically knowledgeable brokers able to locate space underwriters to write tailor-made coverage for their risks. The brokers and underwriters have increasingly sought personnel with science and engineering backgrounds who have the ability to evaluate risks. "This is a major change in the industry that is well under way. I suppose space risk is unique in that its assessment requires a deeper technical involvement than many other [risk areas] ," Mr. Mayo condudes.

In the final analysis, it should be noted that there is one ultimate risk management solution, though perhaps not a realistic one depending upon the nature of the business: avoid space altogether. Newer earth-based technology, such as fiber optic cable, has been successfully utilized by telecommunications companies to supplant the use of satellites, bringing risks back down to earth.

Orin M. Kurland is an associate editor of Risk Management.

MANAGING RISK AT NASA

When Ben Buchbinder, program manager of risk management at the National Aeronautics and Space Administration (NASA) headquarters in Washington, D.C., arrived six years ago, he found that the space agency did not pay much attention to assessing and expressing risks in quantitative terms. But since that time, he has gradually introduced the use of probabilistic risk assessment (PRA) - the application of mathematical models to calculate the likelihood of failure and reliability and demonstrated its potential benefits.

According to Mr. Buchbinder, "PRA identifies the risk drivers and assesses the effectiveness of alternatives for risk mitigation." He adds that PRA supports decision making through a series of steps. The first step is to determine if the risk is unacceptable. It is then important to estimate the risk mitigation effectiveness of available alternatives. Finally, the effectiveness of the chosen alternative must be carefully tracked via data collection and modeling. NASA had once utilized this method of analysis until its successful Apollo missions in the 1960s proved earlier reliability assessments to have been inordinately pessimistic.

At NASA, Mr. Buchbinder has successfully applied these quantitative models to smaller projects. On one particular wind tunnel project, PRAwas able to identify single point failures that the standard assessments did not. As a result, the project's design was simplified and costs reduced. Regarding the use of risk control techniques! he sees "the impact on project design as the next major breakthrough at NASA, The whole emphasis on risk management is broadening." The fruits of Mr. Buchbinder's labor to make risk management more accepted at the space agency seem to bepaying off- the Space Shuttle Program recently requested him to conduct a PRA.

Though his background is in statistics, Mr. Buchbinder feels that risk management at NASA is an engineering process and readily admits that he needs the active participation of program engineering personnel. He also works with risk assessment experts from private contractors and oftentimes must wear a different hat as an independent auditor for safety.

The practice of risk management at NASA requires sophisticated modeling techniques given the "one-of-a-kind" nature of the projects and the relatively few missions from which experience can be obtained- According to Mr. Buchbinder, classical statistical methods are inadequate without large data bases such as those available in commercial aviation safety.

But more so than number crunching, Mr. Buchbinder believes that prioritizing risk is essential for effective risk management. Furthermore, to reach truly informed decisions based upon his analyses, management must understand the estimate's degree of uncertainty due to random error, imperfect knowledge of complex systems and inadequacies of the models. For Mr. Buchbinder, it is incumbent upon the risk manager to "enhance the capability of management to make decisions with a known level of confidence."
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Title Annotation:includes related article on risk management at NASA
Author:Kurland, Orin M.
Publication:Risk Management
Date:Jan 1, 1993
Words:3393
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