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When a commercial rocket blows up, who pays?

Bloomberg logoBloomberg 3/09/2016 Sonali Basak

The latest SpaceX disaster shows how insurers take a big risk covering pricey payloads perched on top of a bomb.

When the SpaceX rocket exploded on a Florida launchpad Thursday, the first thought that probably came to mind was thank heavens there weren’t any astronauts on board. The second may have been: Who’s going to pay for all this?

The concept of insuring a hugely expensive payload situated atop a big bomb wasn’t the foremost concern when Mercury, Gemini, and Apollo astronauts were hurtled into space in the heyday of America’s space adventure. Even during the years of the lumbering space shuttle and the subsequent tragedies that befell the Challenger and Columbia, it was lives lost rather than the cost to taxpayers that occupied the public consciousness.

But now that the U.S. has taken a backseat to commercial interests and flashy entrepreneurs on its forays into the final frontier, the more mundane matter of insurance has become a central issue when disaster strikes.

As it turns out, there is a way to get a policy. Some of the largest firms, including American International Group Inc., Munich Re, Swiss Re, and Allianz SE, have units that offer space insurance. AIG says it's one of the few insurers able to offer a policy spanning as long as five years, as well as one that begins two years prior to launch. The New York-based firm took part in a policy for Richard Branson’s Virgin Galactic spaceship, which crashed in 2014.

Space risks present “a new generation of challenges,” according to an Allianz presentation in December. In 2012, the German insurer cited data showing that insurance premiums on space shots were close to $800 million, with total losses at about $600 million the previous year. The company said that a “future challenge for insurers includes rising launch values, a decreasing premium pool and increasing risk exposures.” This means it takes just a few botched launches to hurt an insurer that’s taking in premiums for only a handful of missions every year.

Policy worth almost $300 million

SpaceX (or Space Exploration Technologies Corp.) co-founder Elon Musk, of Tesla Motors fame, didn’t buy an insurance policy for the Falcon 9 rocket that exploded at Cape Canaveral, according to a person familiar with the matter. The billionaire sought to launch a satellite named Amos 6, built by Israel Aerospace Industries, a privately held defense company, and operated by Israeli firm Space Communications Ltd.

The satellite was backed by a policy worth almost $300 million, said the person, who requested anonymity because they weren’t authorized to speak publicly. SpaceX declined to comment, while an IAI spokeswoman said her company “holds an all-risks prelaunch policy, which covers events during transit and whilst at the launch site and will file a claim accordingly.”

The insurance policy for Space Communication may not have been triggered because it would have required a true launch, rather than a prelaunch, said Peter Elson, chief operating officer for the aerospace team at insurance broker Jardine Lloyd Thompson Group Plc.

“SpaceX is continuing to determine the cause of this anomaly and Spacecom will report this news as we can,” a representative of the Tel Aviv-based company said. Its stock fell the most since November amid a proposed acquisition by a Chinese conglomerate. A successful launch of Amos 6 was a condition of the $285 million sale to a unit of Beijing Xinwei Group, according to an Aug. 24 filing.

“In terms of the shareholders, they lose out because any damage done to the satellites means a loss of customers,” said Meir Slater, head of research at Bank of Jerusalem.

The blast, which occurred shortly after 9 a.m. local time before a test firing of the Falcon 9’s engines, left a plume of thick black smoke and triggered a shock wave felt for miles around. The failure occurred as fuel was loaded onto the rocket, Musk said in a tweet, adding that the problem “originated around upper stage oxygen tank.” The Federal Aviation Administration’s Office of Commercial Space Transportation, which licenses launches, will oversee the company’s investigation into the mishap, the agency said in an email.

Elson said the market will be looking for an “efficient and transparent” investigation. “To have a loss like this during routine preparations for launch will be a major irritation for them,” Elson said of SpaceX. “Before they can launch their next mission, they’re going to have to figure out what went wrong with this mission.” Elson’s company was the broker for coverage obtained by Branson’s Virgin Galatic. Brokers advise companies on the best ways to cover risks.

The SpaceX accident is a blow to Musk’s company because of immediate financial costs and also since it may delay future launches, said Elson. “This was an unusual loss that we’ve seen for SpaceX,” he said. “Launches over the last 50 years have frequently gone wrong, but we’ve seen very few rockets blow up during routine prelaunch operations.”

An explosion occurring prelaunch is an extremely rare event, agreed Teal Group’s Marco Caceres, an analyst of space studies.

The failure is also a setback for insurers that rose to the occasion to provide coverage, said Elson. A handful of specialized firms offer prelaunch policies, with a firm named Pembroke leading the market, according to Elson. Pembroke is affiliated with Ironshore Inc., a firm founded by ex-AIG executives that filed for an initial public offering in the U.S.

Aon Plc, the second-largest insurance broker by market value, counts SpaceX as a client and said in June that insurers have given Falcon 9 a “tremendous amount of support.” A representative of the London-based firm declined to comment on Thursday’s explosion.

Mark Zuckerberg is not amused

It’s the second loss of a spacecraft by Musk’s firm in a little more than a year. The satellite was meant to beam Internet service to sub-Saharan Africa, in conjunction with Facebook Inc. and Eutelsat to connect people in remote parts of the world.

Facebook Chief Executive Officer Mark Zuckerberg said in an online post that he’s “deeply disappointed to hear that SpaceX’s launch failure destroyed our satellite that would [have] provided connectivity to so many entrepreneurs and everyone else across the continent.”

Musk’s company, in Hawthorne, Calif., has shaken up the space industry by introducing cost competition and successfully landing rocket boosters to be reused. It has won contracts with NASA to ferry cargo and crew to the International Space Station and agreements with commercial satellite companies to send satellites into orbit.

SpaceX has scheduled more than 70 launches, representing $10 billion in contracts. Saturday’s launch was to be the ninth of the year for the company, which had settled into a steady tempo of flights following a June 2015 accident that grounded its rockets for six months. That failure was linked to a two-foot-long, inch-thick strut that snapped in a liquid oxygen tank.

The latest “anomaly occurred during propellant loading of the first and second stages,” SpaceX said in a statement, adding that no one was injured. “We are continuing to review the data to identify the root cause.”

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