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Risk Management Is a Necessary Tool for Protecting Satellite Owners-Users.

The optimal result for a communications satellite is to maximize its service or revenue potential by meeting or exceeding its design performance specifications for its entire design life. Risk-management methods must be employed to protect the organization against the failure or inability of the spacecraft to achieve those objectives.

In order to assure that the organization is adequately protected against potential economic loss, the person responsible for the organization's risk-management function (the risk manager) must become knowledgeable about almost every aspect of the satellite program, from the specifications for the various subsystems of the spacecraft and launch vehicle (launcher) to the various contracts for services and transponder sales and leases. Further, it is important for the risk manager to commence the risk-management process at the earliest possible time.

The objective of risk management is to protect an organization's assets and profits against the adverse effects of exposure sto risk of loss, at the most economic cost, through their identification, measurement and control. The risk-management process involves the use of four basic techniques or steps: risk identification, risk evalaution, risk control and risk financing.

The first step, risk identification, involves identifying the potential causes of loss faced by the organization in its satellite program. In commencing this process, the risk manager must first be aware of the organization's planned interest in the satellite because there are important distinctions among the types of satellite user and the exposures faced by each.

It is also critical for the risk manager to not only determine what risk his organization faces, but when they begin and end. To do this, the risk manager should review all related contracts, business plans and technical information that are available within his organization and from outside sources, discuss them with appropriate technical, legal and marketing personnel, and prepare an outline of the project. A flow chart can be a most useful tool in summarizing loss exposures, which can be placed into three general categories: asset; income; and liability.

The asset category involves the physical loss or damage to an asset from any cause whatever. With respect to a communications satellite, it also includes the failure of the spacecraft to operate as intended; that is, its failure to meet or exceeded its performance specifications. It is important to note that a communicatons satellite can sustain a partial or total failure without suffering physical loss or damage. The term failure is more broadly interpreted than physical loss or damage because it also encompasses degradation, malfunction, improper design and/or operation, which can likewise cause components of the satellite not to function as intended by the owner-operator.

Thus, the risk manager must determine what, if any, physical assets are exposed to loss that will result in some directly adverse impact on his organization by not limiting his study to obvious physical causes. The owner-operator, with responsibility for the satellite project, is at risk in one form or another for the entire satellite during all phases of the project; whereas, a transponder buyer generally does not assume title and risk of loss on its share of the asset until the satellite has been placed on-station in geosynchronous orbit and successfully tested. Further, a transponder buyer would generally be entitled to some form orof purchase price refund if title did not transfer. A transponder lessee has no direct interest in the asset. However, failure of its transponder would result in the lessee or buyer having to replace its capacity. Finally, depending on each type of user's business plans, each could be affected by a service dealy or failure. The risk manager must not only consider the consequences resulting from loss of the asset itself, but also the effect that such a loss would have either before or during its intended service period.

The income category involves the loss of revenue, and/or the extra expenses incurred, as a result of an asset that has been damaged, destroyed or fails to operate as intended, or a service interruption resulting therefrom. The same general rules of user interest in the satellite apply to income loss exposures as are found in the asset category.

It is important to note that revenues from a commercial communications satellite are generated through its transponders, and that transponder buyers and lessees usually generate more revenue from individual transponders than do owner-operators. As an illustration, one might consider the owner-operator as a building owner and the transponder buyers/lessees as tenants, with each anticipating a particul ar rate of return on its investment or expenses. If the building owner can make a profit by charging a rental of $1 per room, then logically, a tenant must charge more than $1 in order to earn a profit for itself. Thus, the risk manager must become familiar with his organization's intended use of its interest in the satellite, and the sources of revenues that it anticipates, so that he can properly evaluate and measure the financial impact from the loss exposures to which the organization is exposed.

The liability category involves claims for damages by third parties that arise out of the organization's ownership (in whole or in part), operation, maintenance or use of the asset, or the liability of others assumed under contract by the organization. The risk manager must carefully review all operations and contracts relating to his organization's satellite project to determine where and how they may present liability loss exposures to his organization.

Generally, transponder buyers/lessees have little or no liability exposure from the operation of a satellite, other than, perhaps, for radio-frequency interference that might be caused by their transmissions. However, in the US, for example, when any significant loss occurs, a claimant would commonly name anyone remotely associated with the loss in his legal action. Thus, it is possible for a transponder buyer/lessee to incur legal defense costs, even though it would have had no influence on the loss.

Conversely, owner-operators are subject to all types of liability loss exposures during all phases of its satellite program. In fact, an owner-operator is even exposed to liability loss following retirement of its satellite, particularly if it should collide with another entity's satellite (even though the possbility of such an event is extremely remote). Owner-operators also have many more contracts and other satellite project responsibilities from which liability loss exposures can arise. There are contracts for satellite construction and shipment to be launch site, launch service agreements, transponder sale agreements and transponder leases (generally under a tariff in the US). Most such contracts are unique and must be examined carefully.

The most severe liability loss exposures for an owner-operator occur during and after the launch process; that is, from the time its employees or satellite arrive at the launch site, until after retirement of the satellite from service (which extends almost forever). Depending on the launching authority (such as NASA or Arianespace) and the type of launch vehicle (expendable versus re-usable) being used to launch the satellie, launch service agreements will vary greatly in terms of the liability loss exposure imposed on the customer, the owner-operator. The risk manager, therefore, must be familiar with all insurance, indemnification and other risk-of-loss provisions contained in the Launch Service Agreement (LSA) being used.

Once the organization's exposures to risk of loss have been identified, they must be evaluated and quantified to measure their potential effect on the organization. The flow chart illustrates the general phases in a satellite project, each of which pose distinctly different loss exposures. If the risk manager has thoroughly identified the types of potential losses that can occur, only then can values be placed on them. The overriding question for risk evaluation in the asset and income loss exposure categories is: what is the economic impact on the organization if the satellite suffers a partial loss or becomes a total loss?

A total loss of a satellite at any phase of the project would result in a decision by the owner-operator to either replace or not replace the asset. The value of that asset (satellite) is generally based on the owner-operator's project cost, including all direct and indirect costs. The risk manager must confer with appropriate advisors within his organization, particularly its accounting, marketing, tax and technical experts, when evaluating the potential impact of any loss. He should also determine whether the satellite would be replaced and, if so, what the project's replacement value might be.

Transponder buyers are in basically the same position as the owner-operator relative to a decision regarding a total loss, although the buyer of a single transponder would suffer a total loss if its transponder were the only one on that satellite to fail. The transponder buyer's value would be based on its purchase price, with consideration of whether a replacement would be purchased or leased and, if so, at what cost. It should be noted that, depending on the terms of its transponder purchased agreement, if the loss were to occur prior to the transfer of title, the buyer might be entitled to a full refund of its purchase price. Further, as noted in an earlier example, the value of the buyer's transponder is generally greater than its purchase price. Thus, it must consider the potential loss of revenues and extra expenses when valuing its transponder.

For transponder lessees, the effect of a total loss is mainly contingent on the type of service. Those leasing protected service would receive a replacement transponder and not suffer an economic loss, unless the protection (backup) transponder is not available at the time of loss because, for example, it had also failed. Those leasing unprotected service would suffer an immediate loss because they would not be entitled to a replacement transponder. Transponder lessees must consider both the potential loss of revenues and extra expenses in valuing their transponders. Asset value is of no consequence.

Partial loss or damage to a satellite is more difficult to quantify than total loss because it is more highly dependent on when it occurs relative to the project phase. Before launch, a satellite is subject to the same loss exposures as any other sophisticated equipment. That is, if it is damaged, it would be repaired and tested at some cost, although a launch delay would likely ensue. The partial loss value would be the actual repair cost plus the value of any launch delay. After Launch, repairs are improbable and the users must live with the partial loss for the balance of the satellite's mission life. For the latter situation, careful analysis must be done to develop some values for partial loss to the satellite that would result in economic loss.

There are generally only three types of measurable partial losses that affect a satellite after launch: transponder failures(s); insufficient stationkeeping fuel, which results in a reduction in mission life; and insufficient power, which results in either an immediate or future quantifiable reduction in the satellite's transponder or mission life.

Although there are many other types of partial losses after launch, they generally would not produce a measurable economic loss. For example, if one of a redundant pair of receivers were to fail, there would be no economic loss unless or until the second one fails.

The evaluation of liability loss exposures, as with the other loss exposure categories, requires extensive risk identification. However, liability loss exposures cannot be specifically quantified until after they occur, because they are contingent upon the nature, degree and type of damages sustained by third parties and the settlements or court judgments that may result therefrom.

Fortunately, launching authorities, such as NASA and Arianespace, provide some limitation on the owner-operator's loss exposure during the launch phase.

Although the likelihood of a satellite-related liability loss occurring during any phase of a satellite program is remote, if one were to occur, if could result in an enormous (almost unmeasurable) loss, particularly in the launch and in-orbit phases. It should again be noted that the owner-operator, the launching authority and their contractors and sub-contractors are the organizations that are primarily exposed to liability losses.

The pre-launch phase of the satellite program does not normally have anywhere near the degree of liability loss exposure that is associated with its launch and in-orbit phases. The latter two phases generally require the owner-operator to maintain very high liability insurance limits. The organization's risk manager must endeavor to have liability loss exposures transferred to other parties in contracts, wherever possible, and recommend that appropriate liability insurance limits be purchased to protect his organization.

After the organization's exposurs to risk of loss have been identified and evaluated, alternative methods for reducing or eliminating each loss exposure must be developed. The following are examples of risk control methods:

Risk Avoidance is a technique designed to eliminate entirely any possibility of loss from an asset or activity by totally avoiding or abandoning it. This method is not generally used for a satellite project because the very nature of the project involves considerable risk that must be undertaken in order to produce the desired results. The following methods are more appropriate.

Loss Prevention consists of techniques that aim to reduce from occurring. Examples include the owner-operator's selection of a particular spacecraft design and launch vehicle, flight readiness review committee meetings and quality-control meetings.

With respect to satellite projects, the risk manager generally has no authority or responsibility over the above methods. They are virtually always handled by the organization's highly qualified and specialized technical staff.

Loss Reduction consists of techniques that aim to reduce the severity of an organization's losses, by minimizing their impact after they occur. Examples include spare satellite, transponder and other redundancies, and protected service, which are under the purview of the organization's technical staff. The risk manager can and should work directly with his organization's technical staff, where feasible, to develop and review contingency plans that provide for continuity of operations and services following a loss.

Ordinarily, the owner-operator will have a transponder-allocation plan developed by its technical and marketing staffs that would apply in the event of a loss. If a catastrophic loss were to occur, an owner-operator would have to be prepared to possibly lose some customers and to replace its own satellite transmission services with either terrestial capacity or by leasing transponders from another owner-operator, if available. Unless the first owner-operator had spare satellite capacity, its transponder buyer/lessee customers would have to find alternate suppliers.

It is important for transponder buyers and lessees to maintain formal contingency plans that would include the rapid ability to repoint and/or change the frequency of their own antennas and those of their customers. If this post-loss activity cannot be accomplished with its own staff, the organization must be aware of, and possibly have an understanding with, outside vendors or contractors who are capable of responding quickly in an emergency. The last thing that an organization wants is a reduction in its customer/revenue base, especially if it is preventable.

Non-Insurance Risk Transfer includes techniques used in the negotiation of contracts that are designed to prevent the organization from having to assume the liability of other parties to a contract. Generally, the assumption or allocation of risk via indemnification is negotiated based on the relative bargaining strength of the parties to a contract. When one entity is the sole source of supply, its customer is almost forced to accept its contractual terms.

Risk financing includes techniques designed to obtain funds at the least possible cost to restor losses that strike the organization which could not have been prevented or reduced through risk control. There are two principal types of Risk Financing techniques: risk retention adn risk transfer.

Risk retention involves using the organization's internal funds to pay for losses when they occur through any one of the following four methods or a combination thereof: self-assumption (treating losses as current expenses); self-insurance (using funded or unfunded reserves); captive insurer (using a wholly-owned insurance company subsidiary); or borrowing (using borrowed money to fund a loss).

Self-assumption is the most common form of risk retention applicable to satellites. It involves using deductibles in conjunction with certain loss exposures that are to be covered by insurance, in order to keep the cost of such insurance at a minimum. It should be noted that, although certain deductibles are often required by insurers, the risk manager must weigh the economic alternatives of using various types and amounts of deductibles versus trying to insure loss exposures on a first-dollar (no deductible) basis. Much of his decision will rest on his organization's ability to absorb a deductible of a given size.

Risk transfer involves the use of external sources of funds to pay for losses that strike th organization. The principal type of risk transfer is through insurance which is generally the last risk-financing technique considered. With respect to satellite-related risks, however, insurance is actually one of the primary considerations for an owner-opertor and many users. For without it, few organizations could afford to assume the financial risks associated with a satellite project. In fact, the importance of insurance to space risks today is analagous to the importance that Lloyd's of London origially had to shipping and commerce in the 17th century. Interestingly, Llody's (and certain British insurance companies) took and retains the leadership position in the underwriting of space risk. Other insurance markets, however, are beginning to have a major impact on space risk underwriting.

It should be noted that many different names are applied to virtually identical types of satellite insurance coverages or policies. This tends to confuse inexperienced satellite insurance buyers. The reason for the variety of names is that almost all satellite insurance policies are "manuscript" policy forms; that is, they are specifically written for each insured's risk rather than being "boiler-plate" or standard policy language forms. Obviously, the key is not the name applied to a particular policy, but the coverage that it contains.

When particular loss exposures cannot be avoided, eliminated or transferred through risk control, or self-assumed or self-insured, insurance coverage becomes the most important protection against the organization's exposures to loss. Thus, it is imperative for the risk manager to thoroughly understand his organization's exposures to loss and to make certain that any insurance purchased to cover them will respond exactly as intended. The drafting of policy language is usually performed by an insurance broker. However, the risk manager must participate in drafting policy language, because he is in a better position to understand the loss exposures that may be peculiar to his organization and to assure that the coverage sought will meet his organization's needs. Further, he should confer with his organization's technical, marketing and legal experts for their advice on this subject. Risk management, when applied effectively, will provide the optimal protection for the organization at the most economic cost.

The following are brief descriptions of various coverages available for satellite-related loss exposures. They are listed in the order of the loss exposure phases shown in the flow chart.

Liability Insurance (sometimes referred to as launch liability or satellite liability) covers the owner-operator and, when required, the launch supplier against third-party claims arising out of the launch process and the post-launch operation of the satellite. This insurance is usually written for a three-year term with no deductbile. Since a transponder buyer has no control over the liability exposures arising out of the launch process or operation of the satellite, it should negotiate in the transponder purchase agreement for the owner-operator to add it as an "additional insured" under any satellite-related liability insurance maintained by the owner-operator. Further, it should also be specified that such liability insurance maintained by the owner-operator would be primary to and non-contributory with any insurance maintained by the transponder buyer. These actions would protect the transponder buyer and its insurance program. Transponder lessees have no exposure to claims resulting from the launch or operation of the satellite. It is crucial for the organization to have its risk manager review all contracts, prior to execution, so that proper risk-control techniques can be used.

Pre-Launch Insurance (sometimes referred to as "preignition," transit and ground property) is generally maintained by the owner-operator to cover the satellite and related equipment against all risks of physical loss or damage occurring at any time or place prior to launch, including while in the transit, storage, "preignition (while at the launch site)," mating to the launcher and other phases. This insurance is also designed to cover any business interruption, extra expense and delay penalty resulting from a covered loss to the satellite or related equipment. Coverage can also be extended to include business interruption arising out of any pre-launch physical loss or damange to the launcher or its related equipment. This is important because a significant launch delay could result. There is generally no deductible applied to physical damage exposures under this coverage; however, any business interruption or other delay loss might be subject to a deductible based on a fixed number of days of delay.

Launch Insurance is commonly maintained by owner-operators and frequently, on a contingent basis, by transponder buyers. It can also be obtained on a contingent basis by transponder lessees. The purpose of launch insurance is to protect the organization agaisnt failure of the satellite to achieve a "successful launch," a term that must be broadly, yet carefully, defined in the policy. For example, successful launch of a communications satellite might be defined to mean that "within 120 (or 180) days after launch attempt ("coverage period") the spacecraft (1) is placed on-station in geosynchronous orbit at the longitudinal position assigned by the appropriate regulatory authority; (2) functions so as to meet all spacecraft performance specifications; and (3) is found to be capable of performing its intended commercial operations for its entire design life.

Transponder buyers (which are not normally at risk for the purchase price of transponders prior to their successful operation) and lessees would generally purchase contingent launch insurance on an actual-loss-sustained basis that would cover any loss of revenue, and/or extra expenses incurred, resulting from their inability to use such transponders due to a satellite or transponder failure during the launch process. They must use the same care in drafting a manuscript policy as would an owner-operator, particularly by broadly defining the scope of coverage.

both parties can keep the premium cost to a minimum by suing effective risk-control measures, such as having the ability to use alternate sources of satellite or terrestial communications capacity.

Satellite Life Insurance (sometimes referred to as in-orbit coverage) is commonly purchased by the owner-operator on an agreed-value basis to cover the asset value of its satellite project, similar to its valuation for launch insurance, but excluding the value of any non-owned (sold) transponders. This coverage (which should commence at the moment the owner-operator's launch insurance expires to prevent any gap in coverage) is generally subject to a deductible of one or more transponders.

Transponder buyers may also purchase this insurance on an agreed-value basis to cover the asset value of their transponders, which is usually based on the purchase price. This coverage is normally written without any deductible because it is an all-or-nothing proposition. Another form of this coverage, called contingent life insurance (sometimes referred to as transponder failure, service interruption), is also available to transponder buyers and lessees on an actual-loss-sustained basis. It is simply a form of business interruption/extra expense insurance that indemnifies the transponder buyer or lessee for income losses incurred as a result of their inability to use the transponder because of its failure. It is important to note that transponder lessees with protected service and transponder buyers with an available back-up transponder should pay less for insurance than other users who have no available, alternate means to continue service in the event of transponder failure. The importance of emergency plans cannot be stressed enough.

Owners and users of communications satellites face many types of exposures to risk of loss that, if not adequately handled, can result in a severely adverse financial impact in the organization involved. It is important to recognize that insurance is not a panacea for those exposures. Risk-management methods, properly employed, will enable an organization to protect itself against the financial impact from them at the most economic cost. Thus, it is important for the risk manager to identify and evaluate all such loss exposures, in order to control and/or finance them at the most economic cost. Further, any insurance policy that is purchased must be very carefully worded to make sure that it covers exactly what the organization is intending to cover.
COPYRIGHT 1984 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Christel, K.
Publication:Communications News
Date:Mar 1, 1984
Words:4094
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