Insurance in the Next Frontier
by G.B. Leatherwood


“Policy costs will be extremely high until companies fly without incident at least three times. And a string of early failures may well doom startups to business failure,” according to one of three insurance experts about the subject during a panel discussion at the Federal Aviation Administration’s 11th annual Commercial Space Transportation Conference. (“Space Tourism Insurance To Be Expensive,” Space News, Monday, February 11, 2008, by Colin Clark, Space News Staff Writer.)


There have been dozens of articles, books even, written about the risks and costs of space tourism ranging from construction costs to launch facilities to health issues, and of course, government red tape and caution. Little, however, has been written about insurance: financial compensation for loss of life or serious injury as a result of the space flight experience.

Passenger space flight offers risks, starting with the crash of a tourist vessel, killing all aboard—crew and passengers. Next is a injury during an abort of a mission, when an escape pod is ejected. Injuries may also occur during a normal splashdown. Then comes damage to the vessel itself, even if no death or injury to passengers and crew occurs.

Bottom line: No matter what the circumstances or consequences, any such incident would cost someone millions of dollars, euros, pounds, yen, or whatever currency comes into play. So who pays?

Broadly defined, insurance is indemnity against financial loss. We have insurance on our houses, vehicles, and our personal belongings, as protection against a variety of calamities that might befall us, from a traffic accident to our house catching fire. And we expect that the policy we’ve been paying on for years will cover the cost of a hospital bills or a new home.

For a price, called the “premium,” a company will risk its own financial resources to cover the cost of repairs, replacement, or medical expenses. Insurance has been around for almost 5,000 years and is a standard part of the cost of doing business.

But how is any company able to cover the immense cost of a multimillion dollar loss to one of its policy holders? Certainly not from the premiums collected: few, if any, companies make enough from the difference between the premiums we pay and the cost of the damages incurred (called “underwriting profit”) to make a profit or even stay in business. How do companies do it? Through investments.

To be in the insurance business, a company must maintain a certain level of financial reserves to cover losses that may occur years in the future. We hear much discussion about how insurance companies are making huge profits even when our economy is not doing well. But if they are, it is because of wise and wide-ranging investments. (This is not intended as an apology for high premiums, or seemingly astronomical executive compensation packages, just a simple fact.)

The word “astronomical” crept in here to bring us back to the subject of the potential high cost of insurance for space tourism. People with money to invest in risky adventures expect to make a profit from their investment, and the only way that can happen is if there are no losses, or if there are, that their insurance will compensate for the loss. The greater the risk, the higher the cost of the insurance. Simple, isn’t it?

There is yet another factor. It’s called “spreading the risk,” Naturally, if there is only one person to be insured, and only one person with the money to cover the possible loss, the “premium” would have to equal the possible loss, with a profit left over. In other words, the premium to cover a potential million dollar loss plus making a reasonable profit would have to be over a million dollars. If nothing bad happens, no losses are paid, the policy expires…and the investor keeps the premium paid as the profit.

But there are dozens, perhaps hundreds of people interested in buying the coverage, and as many investors willing to pony up some fraction of the potential loss for a piece of the profit; spreading the risk, and incidentally spreading the reward, leads to affordable insurance coverage. (The famous firm “Lloyds of London” isn’t a firm at all, but is actually a group of wealthy investors who have been in the business of covering potential losses since the days of sailing ships. Their exploits and research techniques are legendary, resulting in very few losses. )

Then there is the “Law of Large Numbers.” This is a statistical technique that says in its simplest form, “the more items there are in the group, the more accurate any prediction of the behavior of the group will be.” For example, in the home insurance business, it is well understood that insurers can say with a high degree of precision and accuracy how many homes will be damaged in a given area within a given time frame.

However, while Company X may know that Y houses will burn to the ground this year, the Law of Large Numbers isn’t a bit of help in determining which ones.

Insurance companies employ folks usually called “underwriters” to examine any application for coverage and determine what risk factors apply to that specific piece of property and either choose not to cover it or to charge a proper premium—once again, the higher the risk, the higher the premium.

It is almost inevitable, and probably unavoidable, that tragedy will strike at some point in the early development of the space tourism business. The United States has lost two space shuttles and fourteen astronauts. But although the Shuttle program was delayed after both tragedies, it didn’t stop. The causes were minutely examined and further precautions taken, and Mission 122 is now at the International Space Station installing one more huge piece of the structure. This should be the same if disaster strikes a tourist ship.

Back to the next frontier. Somewhere people in the insurance business are looking carefully at the space tourism business to see what the risks are, what the potential losses are, what the tourism operator is doing to make sure things go right, and of course, where the profit might be.

In the worst case, a startup operator with big dreams and bigger risk may not be able to get insurance at all, and thus will never get off the ground. In the best case, insurance on the first few flights will be very expensive, but for a company with a solid reputation, rigid flight development and testing, and sound management, the cost will be manageable.

Then, as more successful flights occur, more investors will see the possibility of reasonable profit. Space companies will be able to afford the insurance premiums associated with their adventures, resulting in other entrants into the tourism field. The risk will be spread, the law of large numbers will begin to take effect, and the next frontier will be reachable.

Lloyds of London should be taking calls and quoting prices any day now.