Cyclicality or volatility? The satellite insurance market Piotr Manikowski a, * , Mary A. Weiss b a Pozna n University of Economics, Insurance Department, al. Niepodleglo sci 10, 61-875 Pozna n, Poland b Temple University, Risk, Ins.,& Healthcare Mgmt Dept,1801 Liacouras Walk, Philadelphia, PA 19122, USA article info Article history: Received 31 October 2011 Received in revised form 4 January 2012 Accepted 10 January 2012 Available online 7 July 2012 Keywords: Satellite insurance Underwriting cycle Volatility abstract The history of the satellite insurance market indicates that this market experiences crises and booms in profitability and prices that repeat in a manner suggestive of cycles. The purpose of this article is to rigorously investigate cyclicality of these and other features of the satellite insurance market and assess their volatility formally. Using data from 1968 to 2008, volatility and cyclicality are analyzed for satellite insurance market capacity, rates, and underwriting results, among other measures. The coefficient of variation for the various satellite insurance market metrics is used to assess volatility. Standard under- writing analysis is used to determine whether a cycle exists for various insurance metrics. The results indicate that some aspects of the satellite insurance market are volatile (e.g. claims) or cyclical (e.g. rates), while capacity is both volatile and cyclical. Ó 2012 Elsevier Ltd. All rights reserved. 1. Introduction Satellites fulfill a variety of functions, ranging from providing voice/data/video communications globally to providing meteoro- logical data for analysis and data for global positioning systems (GPS), as well as meeting military and scientific needs. In a report to the US president, the president’s National Security Telecommuni- cations Advisory Committee (NSTAC) stated that the commercial satellite industry is critical to national and economic interests and homeland security. In addition, the structure of the space industry, its financial health and its workforce retention and development are dependent on the volume of satellites ordered and launched. However, without satellite insurance, it would be difficult to obtain financing for purchases and launches of satellites. There are two basic types of space insurance: property insurance (including pre-launch, launch and in-orbit insurance) and third-party liability insurance. Property insurance is available to cover particular phases of the satellite project: manufacturing and pre-launch activities, launch into space, and in-orbit life [1]. 1 Third-party liability insurance covers the legal liability arising from damage to a third- party during the preparations for launch, the lift-off itself, in-orbit operations, and finally the re-entry. 2 The availability and price of satellite insurance can fluctuate dramatically over time. For example, in the mid-1980s coverage was difficult to find and very expensive when it was available. Meanwhile, over the period 2005e2007, availability of coverage was plentiful with good premium terms. Like many types of insurance the insurance market for satel- lites may be cyclical in terms of profitability and pricing. More specifically, underwriting profit (i.e. the difference between premiums and losses expressed as a ratio to premiums) and price in many lines of insurance both follow a cycle. This cycle is commonly termed the “underwriting cycle”. 3 The underwriting cycle does not necessarily synchronize with the general business cycle. In fact, it is much more regular than the general business cycle. In the operation of the underwriting cycle, the insurance market (either overall or by line) goes through alternating periods of “hard” and “soft” markets [4,5]. In a hard market, prices are high and coverage availability is low, while in a soft market premium prices are highly competitive (low) and coverage is more widely available. * Corresponding author. Tel.: þ48 503719120; fax: þ48 61 8543101. E-mail address: piotr.manikowski@ue.poznan.pl (P. Manikowski). 1 Pre-launch insurance covers transportation, temporary storage, integration with the launcher, as well as other preparations for launch, including the poten- tially dangerous loading of fuel. Launch insurance provides coverage from launch vehicle ignition to the confirmation of correct placement in orbit. In addition another 180 days from launch are covered to allow time for pre-operational tests and initialization of operations and to include at least one period of eclipse. In-orbit insurance covers the satellite during its operational lifetime, often in yearly renewable phases [2]. 2 This type of insurance will provide compensation in the event of personal injury and property damage to third parties, both on the ground and in space, caused by the launch vehicle sections or the satellite [3]. 3 The term “underwriting” refers to the process used by insurers to evaluate an insurance applicant, including whether the applicant is a desirable risk, and to determine the terms, conditions and pricing of any insurance that is offered. Contents lists available at SciVerse ScienceDirect Space Policy journal homepage: www.elsevier.com/locate/spacepol 0265-9646/$ e see front matter Ó 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.spacepol.2012.01.001 Space Policy 28 (2012) 192e198