MGAs need to adjust their income model to be more closely aligned to their carriers and also provide data transparency which enables carriers to review and analyse not only the risk they are bound on but also how the MGA selects and prices all risks.
Space is actually rocket science and space insurance can be seen as rather unusual and potentially difficult to understand. That could explain why space underwriters tend to be slightly different from the normal London market underwriters’ mould; mathematicians, astrophysicists, aeronautical engineers and various other boffin types abound.
Of course, the boffins of the space insurance market have developed rating models. These range from the simple to the complex but tend to look at some sort of historical dataset, whether collected in-house or externally subscribed to or a mix of both, together with individual assessments of each risk. This assessment is supported by the insureds who deliver detailed satellite presentations and health reports of the satellites in orbit. Furthermore, failures of satellites and launchers tend to lead to presentations to the market to improve the underwriters’ understanding of the risks. All of this is of course a good thing and space underwriters are generally very knowledgeable about their risks.
With all the specialty knowledge that is part of space underwriting, it is maybe not surprising that sometimes it may seem that management understanding of the class of business is lacking. Which can be a good thing as misunderstood management involvement may not assist the business production. But it may also be that as a result, underwriters may escape some of the more stringent overview and control which would be applied to other classes of business. The underwriting discipline in space may sometimes become more driven by the underwriters than by their management.
In early 2019, the space market was presented as having had a long spell of good years. Except for a minor hiccup in 2007, the market had delivered large profits since 2002.
Capacity available in the market increased, with both direct insurers and reinsurers deploying more capital either themselves, through treaties or through MGAs. This in turn lead to increased competition and a slide of rates which went unabated until 2019. During this period, space losses did not stop. In fact, they slowly but steadily increased. The market did continue to make a profit year on year, but margins were getting thinner. The confusion caused by recognising premium in years of inception or years of launch and the losses by inception, launch or occurrence date further allowed facts to be represented in different ways and may have contributed to lack of recognition of this development.
Early 2019 there was an in-orbit event which caused the loss of approximately 180 million USD to insurers offering long-term policies. This affected a limited number of insurers and so did not concern the majority of underwriters. There was possibly also a bit of schadenfreude as more prudent parts of the market had predicted that long-term policy underwriters were going to suffer disproportionate losses sooner or later. When the 2019 estimated market income was 400-500 million USD it may be surprising that such a loss would cause little more than a ripple, but a ripple was all that it caused.
Later in 2019, there was a launch failure of the Vega launcher (450 million USD to the market) as well as 2 other large failures (> 200 million USD to the market). As a result of these failures, rates increased substantially. Some of the largest and oldest global reinsurers either retracted from the market or issued notices of rate increases to apply. Other major players also rattled their sabres about how the market had to change. The market did change. Rating wise, rates doubled overnight and have continued to increase since, being now around 3 times higher than where they were in early 2019. We are very clearly in a different position today than we were 2 years ago … and yet, there are many similarities.
Again, the market has had an early loss, with a post-separation failure costing the market around 225 million USD and the impact of that remains to be seen. Whereas rates had increased since the losses in 2019, towards the end of 2020 some placements seemed to be completed at terms which should not have been achievable in a hardening market. The 2021 renewal season was completed without any major casualties although the overall capacity reduced somewhat.
A combination of the uncertainty imposed by COVID-19 and the perceived high rating environment has meant that launch clients have delayed placing their policies with a resulting delay in written launch premium.
But surely underwriters would not be desperate enough for top-line income to accept to write policies on undisciplined conditions?
The underlying causes which supported the space market through the long period of profitability but also the decline in rates are mostly still there: the same underwriters with the same capacity supporting them. Many underwriters, especially in the case of MGAs, have a remuneration structure heavily based on income rather than underwriting results.
Let us hope that 2021 does not need the large losses of 2019 to ensure that underwriters continue to show discipline and maintain the upwards pressure on terms and conditions which remain necessary for the market to recover.
Let us also hope that management will continue to improve their understanding of space and apply controls on their underwriters to make that upwards pressure real. Maybe supporters of MGAs might review the MGAs they support, and whether their remuneration and performance are aligned or not – sadly, even with the best will in the world, if the carriers’ and underwriters’ interests are not aligned, results can and do suffer. MGAs need to adjust their income model to be more closely aligned to their carriers and also provide data transparency which enables carriers to review and analyse not only the risk they are bound on but also how the MGA selects and prices all risks.
And finally, let us hope that underwriters bear in mind that losses will continue; even though the satellites and launchers which are built today are amazingly capable, we also demand much more of them – we are as close to the ‘bleeding edge’ today as we were 2, 10 or 20 years ago.
Written by Morten Pahle
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