The space insurance aspect of the Intelsat 708 launch failure focuses on the exchange of controlled technical information within the insurance community. Insurance underwriters and reinsurers for the Apstar 1A satellite program — the next scheduled satellite to be launched on the Long March 3B after the Intelsat 708 failure — were concerned about the reliability of the Long March rocket, and the fate of future launch insurance programs in the PRC.

Immediately after the Intelsat 708 launch failure, space insurance underwriters for the Apstar 1A insurance program pressured the PRC to create an international and Independent Review Committee (IRC). These underwriters and reinsurers insisted on this arrangement to ensure that an adequate assessment of the risks of future Long March rocket launches was made.

Representatives from J & H Marsh & McLennan, an international space insurance brokerage firm, were adamant about obtaining a report from the Independent Review Committee for the benefit of the reinsurers of the Apstar 1A satellite insurance program. Members of the space insurance community were invited to attend a meeting on April 15 and 16, 1996, in the PRC. The purpose of the meeting was to build confidence in the Long March rocket, and to discuss the status of the Apstar 1A insurance program.

The space insurance acquisition and underwriting process includes the dissemination of technical information, the consideration of market conditions, capacity, and participants, and the involvement of insurance brokers, underwriters, and reinsurers. This chapter identifies several issues relating to procedures for the disclosure and handling of sensitive information by the insurance community.

It is unclear whether, or to what extent, the transmission of controlled technical information to and from the space insurance industry is reviewed in advance or monitored by U.S. Government officials.

The Role of Commercial Space Insurance In Technology Transfer to the PRC

Aspects of the Long March 3B-Loral-Intelsat 708 Failure

The Intelsat 708 satellite was destroyed in a Long March 3B crash on February 15, 1996.1 It was the second in a series of nine Intelsat satellites for which International Space Brokers was the sole insurance broker.2

Intelsat had arranged for the People’s Republic of China (PRC) to launch three of the nine satellites (Intelsat 707-9, Intelsat 708, and Intelsat 801-6) on the PRC’s Long March 3B rocket.3

The Intelsat satellite 708 was insured for $204.7 million.4

Intelsat obtained space insurance for the launch phase only. The launch phase extended from intentional ignition of the rocket to separation of the satellite from the rocket.5 Under the terms of the policy, risk transferred from the pre-launch insurers for the manufacturer of the satellite, Space Systems/Loral (Loral), to Intelsat’s insurers at the intentional ignition of the Long March 3B rocket carrying Intelsat 708.6

There were approximately 15 to 20 insurance underwriters and many reinsurers for the package that included the Intelsat 708 satellite.7 The lead underwriters were Marham Space Consortium8 and Munich Re of Munich, Germany.

Other insurance underwriters who participated in the coverage of the Intelsat 708 satellite were:

• U.S. Aviation Insurance Group
• AXA Reinsurance Company
• La Reunion Spatiale
• AGF Reassurances
• Reliance Assurances
• The Sumitomo Marine & Fire Insurance Company, Ltd.
• Great Lakes9

The Intelsat 700 Series satellite insurance package was negotiated approximately six months prior to the first launch, when a data package including technical information on the Long March 3B was submitted to the underwriters.

After the launch of the Long March 3B rocket carrying the Intelsat 708, Intelsat reassigned the remaining two launches that had been slated for the PRC’s Long March 3B to French Ariane rockets.10

Intelsat documents indicate that the decision to procure launch services from the China Great Wall Industry Corporation was based on the size of the Intelsat 708 satellite and the fact that the price was significantly below that of an Ariane launch. Intelsat documents revealed:

A Loral program manager was on-site at Intelsat during the Intelsat 708 project, and an Intelsat program manager was on-site at Loral. Intelsat insurance issues with Loral were coordinated through a Loral office located at Intelsat.12

Prior to the first launch of an Intelsat satellite on a PRC rocket, Intelsat requested that its broker submit a data package on the Long March 3B to underwriters because it was a developmental rocket.

The data package for the Intelsat 708 launch included a relatively large quantity of data on the Long March 3B, because of the rocket’s then-recent developmental status.13

Michael Hewins, then Chairman of the Space and Telecom Group for J & H Marsh & McLennan,14 says that both his firm and Asia Pacific Telecommunications Satellite Co., Ltd. were interested in the reliability of the Long March after the Long March 3B-Intelsat 708 failure. Hewins says that Professor Bao Miaoqin, Chief Engineer at the PRC-controlled Asia Pacific Telecommunications Satellite Co., was told by his superiors to use the Long March, for the upcoming Apstar 1A launch, but but Hewins does not have any specific information about this request.15

China Great Wall Industry Corporation provided the requested data in order to demonstrate that the Long March 3B’s development was complete. Intelsat used China Great Wall Industry Corporation’s data in its presentation to underwriters. The data covered both the Long March 3B and the PRC launch facility.16

Terry Edwards, Manager of Intelsat’s Launch Vehicle Programs Office, supervised the Intelsat 708 assessment team, and interacted with Intelsat’s insurance brokers. For its part, Loral provided data directly to China Great Wall Industry Corporation on the satellite-rocket interface, while Intelsat instructed Loral to take all steps necessary to demonstrate a proper interface.

Intelsat officials say that Intelsat was aware of export control requirements and complied with them, and that the Defense Technology Security Administration monitored technical meetings among the satellite owners, rocket owners, satellite manufacturers, and insurance representatives.17

Intelsat’s business considerations were the basis for the cancellation of the two scheduled PRC launches following the February 15, 1996 Long March 3B crash.18 Intelsat documents stated that:

Intelsat has not used a PRC rocket since the failure of the Long March 3B

carrying Intelsat 708.

According to Mark Quinn, former Vice President at J & H Marsh & McLennan, there were no J & H employees on-site in the PRC for the Long March 3B-Intelsat 708 failure. Quinn says he does not recall any specific discussions, and says he did not have any conversations with underwriters or reinsurers regarding that failure. Nor did Quinn discuss specific issues regarding insurability for that program with anyone. Quinn says that he contacted his clients regarding the Long March 3B-Intelsat 708 failure and also called contacts at Loral. Quinn does not recall the content of the calls, other than to ask whether market conditions had changed.20

The Treasurer of Intelsat, Randall Bonney, has primary contact with Intelsat’s insurance brokers for insurance-related issues. Bonney is responsible for submitting the Notice of Loss to the insurance companies in the case of a failure, and he prepared the Summary Report of Loss for Intelsat 708. Intelsat’s Launch Vehicle Program Office is the insurer’s point of contact for technical information. Most launch service questions from insurance underwriters come through this office at Intelsat, but some may not have done so.21

J & H Marsh & McLennan’s Hewins, then Chairman of the firm’s Space and Telecom Group, recalls that Loral President Bernard Schwartz projected a broad intent to "get it right" regarding satellite launches in the PRC. However, Hewins says he had no specific discussions of the subject with Schwartz.22

The Formation of the Independent Review Committee

The launch failure of the Long March 3B rocket carrying the Loral-manufactured Intelsat 708 satellite occurred on February 15, 1996. Immediately, the French space insurance underwriters for the upcoming Apstar-1A launch pressured the launch service provider, China Great Wall Industry Corporation, through their insurance broker, J & H Marsh & McLennan, to create an Independent Review Committee. China Great Wall Industry Corporation was about to launch the Hughes-made Apstar-1A satellite for the PRC-controlled Asia Pacific Telecommunications Satellite Co. aboard a Long March rocket.

On February 21, 1996, Paul O’Connor, then Vice President of the Space and Telecom Group of J & H Marsh & McLennan in Washington, D.C., wrote China Great Wall Industry Corporation recommending that "CGWIC should implement an immediate and aggressive public relations (PR) campaign with space insurance underwriters" by way of a technical briefing on the Intelsat 708 mission failure.23

O’Connor’s letter stressed the importance of quick and decisive action by China Great Wall Industry Corporation. Lost confidence on the part of the PRC’s customers, he said, could cost tens of millions of dollars in business. "The space insurance underwriters should see that China Great Wall Industry Corporation is serious about getting its message out to the international community and is prepared to act quickly and with determination, rather than react to customer requests." 24

Jacques Masson, then Manager of J & H Marsh & McLennan’s Paris office, discussed the Intelsat 708 failure with the French insurance industry, specifically the underwriter La Reunion Spatiale. As Masson explained in a February 22, 1996, e-mail:

The underwriters for the Apstar-1A program became disappointed that the PRC’s failure review committees did not have foreign or Intelsat representatives.26 The French launch vehicle provider Arianespace, for example, typically creates an independent review committee after a launch failure to ensure international credibility and distance Arianespace from the review process. "This is interpreted by Westerners as CALT [the China Academy of Launch Vehicle Technology] wanting to ‘hide’ the results of the failure review and avoid independent international scrutiny," the underwriters said.27

J & H Marsh McLennan’s O’Connor advised the PRC representatives that a typical schedule of an independent review committee for an Ariane failure would entail assessing the mission and setting up the review committee within the first week. Approximately two weeks later, a report of the committee’s findings would be provided to Arianespace and the European Space Agency. Lastly, the committee would provide a briefing to customers and insurance underwriters regarding the failure investigation. Detailed information releases to relevant parties would follow.28

O’Connor praised China Great Wall Industry Corporation for its general dissemination of information relating to the failure to its customers and other parties. He also stressed, however, the importance of allowing J & H Marsh & McLennan to distribute information releases to the insurance underwriters on behalf of China Great Wall Industry Corporation. This step would, he urged, ensure that there is no delay in the release of information.29

O’Connor outlined specific items that must be satisfied for reinsurers to continue to underwrite the Apstar-1A program. The reinsurers must:

• "Receive fully detailed information concerning the very root cause(s) of the [Intelsat 708] mission failure and the solutions"
• "Receive the advice of an independent organization concerning the analysis of the failure, and the solutions set forth by China Great Wall Industry Corporation "

The reinsurers, O’Connor explained, believed that Intelsat should be considered to fill the role of an independent organization. China Great Wall Industry Corporation and the China Academy of Launch Vehicle Technology continued to receive, O’Connor noted, "strong international criticism . . . for failing to have an international, independent failure review team." 30

O’Connor advised China Great Wall Industry Corporation that reinsurers had stated that the Apstar-1A program would not proceed until these concerns were satisfied.31 On March 8, 1996, European underwriter Reliance Assurances stated to O’Connor: "We firmly believe that such a determination, together with an explanation of and concurrence with the appropriate corrective measures, is necessary to undertake an objective analysis of the insurance risk as it exists at this point in time." 32

On March 11, 1996, Henry Stackpole, III, of Loral in Tokyo wrote that "SS/L [Loral] has . . . offered ‘in house’ assistance if desired in the investigation but doubt seriously it would be accepted. We appear to be clear of any Chinese thought that the satellite was a causal factor." 33

A presentation at the Apstar-1A program insurance meeting was scheduled for March 14 and 15, 1996, in Beijing and included insurance market requirements. Attendees included:

• Representatives from 11 reinsurers
• J & H Marsh & McLennan
• China Great Wall Industry Corporation

According to J & H Marsh & McLennan presentation materials, requirements included an open and thorough investigation and an independent committee consisting of well-recognized industrial people.34

The French underwriting community identified three specific issues as the minimum necessary to raise the level of confidence sufficiently to insure future launches of the Long March 3B. The requirements were to reassess China Great Wall Industry Corporation’s qualification, acceptance, and quality assurance programs, and to conduct a demonstration flight of the Long March 3B. "It seems obvious to the underwriters that the next Long March 3B launch is not insurable." 35

On March 20, 1996, J & H Marsh & McLennan’s Masson wrote Professor Bao Miaoqin, chief engineer of the PRC-controlled Asia Pacific Telecommunications Satellite Co. whose Hughes-manufactured Apstar 1A satellite was the next scheduled launch of a Long March rocket (the Long March 3):

On March 20, 1996, and in a subsequent message dated March 21, 1996, to the PRC-controlled Asia Pacific Telecommunications Satellite Co., Masson identified three potential members of the Independent Review Committee: one each from Aerospatiale, Matra Marconi, and Arianespace. Each was an expert in rocket operations and in conducting in-depth failure reviews, and was retired from the private space industry.

None of the individuals had been contacted, however, pending the proper authorization from China Great Wall Industry Corporation and the China Academy of Launch Vehicle Technology. Messr. Bignier, a leading figure in the French and European space industry and a consultant to La Reunion Spatiale who had visited the PRC twice and was familiar with the PRC space industry and "the difficult position where are CGWIC and CALT today," had also been contacted and asked to support the creation of the Independent Review Committee.37

On March 21, 1996, Chuck Rudd, Senior Vice President of ACE Limited, a Bermuda-based underwriter, wrote Sheila Nicoll at J & H March & McLennan that ACE had been informed (by an unidentified source) that Intelsat would provide technical expertise and familiarity with China Great Wall Industry Corporation to the Independent Review Committee. Intelsat, he said, "provides a level of comfort that the failure investigation will be complete and unbiased." 38

On the same day, ACE Limited officially advised J & H Marsh & McLennan that "the launch failure of the Long March 3B [constitutes] a material increase in the risk of loss under the Apstar 1A launch policy." ACE Limited stated that it found the actions of both the customer for the planned Apstar 1A launch, the PRC-controlled Asia Pacific Telecommunications Satellite Co., and the launch services provider, China Great Wall Industry Corporation, to be unacceptable:

Toward the end of March 1996, Intelsat declined to participate in the failure review. One J & H Marsh & McLennan official thought the decision was consistent with Intelsat’s cancellation, after the Long March 3B-Intelsat 708 failure, of future Intelsat launches on PRC rockets until 2000.40

J & H Marsh & McLennan’s O’Connor wrote Professor Bao Miaoqin of the PRC-controlled Asia Pacific Telecommunications Satellite Co. that:

The following day, April 2, 1996, O’Connor again wrote Professor Bao Miaoqin:

On the same day, April 2, 1996, Professor Bao Miaoqin wrote J & H Marsh & McLennan and China Great Wall Industry Corporation asking for a list of the Apstar-1A reinsurers and Independent Review Committee members by April 9, 1996.44

According to J & H Marsh & McLennan’s Masson, who wrote his colleague O’Connor on April 3, the underwriting community wanted "minimum conditions to be satisfied" in order to confirm insurance commitments with respect to the

upcoming Apstar-1A. Masson wrote to O’Connor:

On April 4, 1996, J & H Marsh & McLennan stated that it had "not received any official advice" from China Great Wall Industry Corporation that the Independent Review Committee would be formed, "and if and when it’s formed, as to who will be invited." The J & H Marsh & McLennan Beijing office was instructed to act as a liaison for continuing communication with China Great Wall Industry Corporation officials in this regard.

O’Connor wrote on April 4, 1996, that "[i]t is difficult for us to prompt China Great Wall Industry Corporation any more than we have (which has been on a daily basis)." J & H Marsh & McLennan was "awaiting the decision of China Great Wall Industry Corporation on the final list of the space industry experts who will participate in the International Oversight Committee (IOC)."

In an issues paper for the April 15 and 16 meetings prepared by J & H Marsh & McLennan, Masson and O’Connor noted that "[r]einsurers have insisted that an IOC [Independent Oversight Committee, i.e., the IRC] be formed by the China Academy of Launch Vehicle Technology to oversee the failure review for the [Intelsat] 708 mission failure. It is standard practice for Western launch service providers to establish an IOC immediately after a mission failure." 46

Reinsurers made the formation of an Independent Review Committee an "absolute requirement" prior to approval of the Apstar-1A launch campaign, since the China Academy of Launch Vehicle Technology had previously failed to use an Independent Review Committee for failure reviews: "[t]he [Long March 3B-Intelsat 708] failure review must be reviewed and endorsed by an IOC." Reinsurers would interpret a refusal as a sign of the China Academy of Launch Vehicle Technology’s reluctance to be open about its failure review.47 Furthermore, J & H Marsh & McLennan believed that the minimum requirements regarding the Independent Review Committee were:

• That it be created with a defined mission prior to the April 15 and 16, 1996, insurance meeting
• That its membership be independent and international, with unrestricted review authority
• That the final report be published and reviewed by reinsurers prior to the launch of Apstar-1A48

On April 4, 1996, O’Connor wrote Professor Bao Miaoqin:

As of April 4, 1996, China Great Wall Industry Corporation said it was trying its best to establish an Independent Review Committee according to the minimum conditions set by the PRC-controlled Asia Pacific Telecommunications Satellite Co. and J & H Marsh & McLennan, and had developed a working schedule for such a group.50

According to Timothy Rush, former Intelsat program manager, the PRC set up the Independent Review Committee in order to remain in the launch services business. The parties with the most incentive to urge the creation of the Independent Review Committee were customers who needed launch services, and China Great Wall Industry Corporation. China Great Wall Industry Corporation feared that additional customers would cancel contracts unless it provided more reporting on the Long March 3B-Intelsat 708 failure.51

Donald Bridwell, manager of Intelsat’s Major Programs Office, advised the Select Committee that "the next insurer would want to know about the failure." The next insurance broker for a PRC launch was J & H Marsh & McLennan, acting for the Hughes-built Apstar-1A.52

J & H Marsh & McLennan’s Hewins, then Chairman of the firm’s Space and Telecom Group, says he does not recall how the Independent Review Committee was formed. He does remember that he contacted the PRC-controlled Asia Pacific Telecommunications Satellite Co., the satellite customer for the next launch of a Long March rocket, and the underwriters for that next launch of a Long March rocket, following the Long March 3B-Intelsat 708 failure. Hewins does not recall any specific information being shared with the insurance industry after the failure.53

J & H Marsh & McLennan’s Quinn, then a Vice President in the Space and Telecom Group, states that there may have been discussions regarding improving the reliability of China Great Wall Industry Corporation’s rockets in a general sense.

Quinn says he was not aware that anyone at J & H Marsh & McLennan communicated to Loral or the Independent Review Committee regarding the PRC improving its launch capabilities. The first time that Quinn recalls hearing of the Independent Review Committee was in his office with Paul O’Connor, another J & H Marsh & McLennan Vice President on the Space and Telecom Group; he recalls that "Paul [O’Connor] was involved in it."

Quinn says he does not know, however, who requested the Independent Review Committee. He speculated that it may have been Asia Pacific Telecommunications Satellite Co., Hughes, the PRC, or the insurers.54

The April 15-16, 1996 Insurance Meeting in Beijing

J & H Marsh & McLennan’s Quinn recalls that an insurance meeting was held in Beijing on April 15 and 16, 1996 for the Apstar-1A satellite launch insurers.55

The China Academy of Launch Vehicle Technology and China Great Wall Industry Corporation launch service representatives presented possible causes of the failure of the Long March 3B carrying the Intelsat 708. The PRC representatives reported what they had done to date, and that work was ongoing. They summarized telemetry and tracking data.56 According to Quinn, the meeting constituted the first time that the underwriters received any information about the Long March 3B-Intelsat 708 failure.57

Quinn says that representatives from Loral, Hughes, the PRC-controlled Asia Pacific Telecommunications Satellite Co., China Great Wall Industry Corporation,

J & H Marsh & McLennan, and other insurance companies attended the meeting.

Quinn says that he does not recall Nick Yen, Secretary of the Independent Review Committee and a Loral employee, being present at the meeting. Loral’s Dr. Wah Lim, Chairman of the Independent Review Committee, Dr. John Smay, Independent Review Committee member and employee of Hughes’ Chief Technologist and another unidentified Hughes representative were present, but Quinn does not recall whether any of them made any presentations.58

Quinn says that PRC representatives interacted with underwriters at the meeting through presentations in a controlled environment. He recalls that a Defense Department monitor was present. Quinn says that Asia Pacific Telecommunications Satellite Co. and China Great Wall Industry Corporation made presentations to approximately 10 to 15 insurance company representatives, describing what happened in the Long March 3B-Intelsat 708 failure, and why it would not happen in the Apstar-1A satellite launch.

J & H Marsh & McLennan’s Quinn says he does not recall whether the Independent Review Committee gave a presentation.59 Quinn says that his role at the meeting was to "make sure things ran smoothly." In his view, members of the Independent Review Committee attended the meeting to "try to provide some comfort" to the insurers, but he does not know whether PRC representatives provided information or produced a report.60

Quinn recalls that his colleague, Paul O’Connor, played a liaison role for the meeting because he was the J & H Marsh & McLennan account manager for the Apstar-1A insurance program.61 O’Connor assisted in inviting the attendees, and the PRC-controlled Asia Pacific Telecommunications Satellite Co. may have provided some assistance.

Intelsat’s Edwards says he and two or three technical managers from Intelsat attended the meeting. Although Edwards does not recall specifically who went, all of the Intelsat attendees were from the Intelsat Launch Vehicle Programs Office. Edwards says that he does not recall whether Lim or Yen were present at any technical meetings or briefings he attended.

Two to three representatives from the China Academy of Launch Vehicle Technology were present. Six to eight representatives from China Launch and Tracking Control, the PRC organization which tracks the status of satellites, also were present, along with two to three representatives from the Xichang launch site. Intelsat’s Edwards says he did not see any sub-contractors from China Great Wall Industry Corporation at the meeting, but that there might have been a representative from Loral present.62

Quinn says that copies of the PRC’s presentation were distributed to the underwriters, Independent Review Committee members, and J & H Marsh & McLennan staff.63 Quinn does not know the terms on which the presentation was distributed.64 Edwards says he does not recall a written report from the PRC at the meeting in Beijing.65

At issue at the conclusion of the meeting was Asia Pacific Telecommunications Satellite Co.’s desire to authorize Hughes to ship a satellite to the PRC for launch, provided insurance coverage was maintained. The underwriters agreed that Asia Pacific Telecommunications Satellite Co. could so authorize Hughes, but that this action did not obligate them to offer insurance.66

Thus, the insurance issue was still outstanding after the April 15 and 16, 1996, meeting. The underwriters agreed to discuss the insurance aspects in greater detail and request more information from China Great Wall Industry Corporation. Asia Pacific Telecommunications Satellite Co. representatives were hopeful that the insurance issue would be resolved prior to the launch.67

On April 17, 1996, O’Connor wrote to Diane Dwyer, a colleague at J & H Marsh & McLennan:

On April 23, 1996, an information release by China Great Wall Industry Corporation noted:

Prior to the meeting, an Independent Review Committee (IRC) constituted by specialists from international space industry had already been set up by CGWIC. Independent review of the [Long March 3B] launch failure investigation will be performed by the IRC. IRC members were invited and some were able to [be] present [at] the 2-day meeting.69

The Space Insurance Industry’s Involvement In the Release of the Independent Review Committee’s Interim Report

J & H Marsh & McLennan’s Vice President Timothy Rush says that his firm’s office in Washington, D.C. did not receive the Independent Review Committee report, nor had anyone at that office reviewed it. Insured parties are required to provide underwriters with claim-related information, but Rush says that underwriters were not provided with the Independent Review Committee report in the Intelsat 708 case.70

Richard Hewins, then Chairman of J & H Marsh & McLennan’s Space and Telecom Group, says he does not recall reviewing the Independent Review Committee report of the Long March 3B-Intelsat 708 failure, although he recalls seeing it come across his desk in the spring of 1996. Hewins says he does not know what happened to the report and does not recall the process by which he obtained it.

Furthermore, Hewins does not recall whether the report was distributed to other J & H Marsh & McLennan offices, although he says that it may have been sent to Jacques Masson in the J & H Marsh & McLennan office in Paris, and to the firm’s London office. Hewins does not recall any discussions with underwriters or re-insurers after the Intelsat 708 failure.71

On May 7, 1996, J & H Marsh & McLennan’s Vice President Paul O’Connor advised Professor Bao Miaoqin of the PRC-controlled Asia Pacific Telecommunications Satellite Co.: "It is in APT’s best interests that the interim IRC report be released by J & H Marsh & McLennan to Asia Pacific Telecommunications Satellite Co.’s reinsurers first, before China Great Wall Industry Corporation releases it to other customers and underwriters." 72

On May 13, 1996, O’Connor wrote to his colleague at J & H Marsh & McLennan, Diane Dwyer, that: "Lim has approved release of the IRC interim report to J & H Marsh & McLennan so we can release this to all non-PRC reinsurers. Asia Pacific Telecommunications Satellite Co. has agreed with this as well. The report will be delivered to our office today. Nick [Yen] will be faxing a copy of the 30 page key part today . . . ." 73

On May 13, 1996, O’Connor advised Yen:

On May 13, 1996, Loral’s Dr. Lim contacted O’Connor:

Prior to obtaining the proper export license, the IRC was advised that this report can be used strictly only by the U.S. companies and European companies as long as they are registered within the ITAR member countries.

This report will not be delivered to [China Great Wall Industry Corporation] and its launch service agencies until the export license or an equivalent authorization is obtained.75

On May 14, 1996, Franceska O. Schroeder, an attorney for J & H Marsh & McLennan, advised Loral’s Lim:

On May 14, 1996, J & H Marsh & McLennan’s attorney Schroeder communicated to her clients O’Connor and Dwyer:

On May 14, 1996, Loral’s Yen reported to J & H Marsh & McLennan’s O’Connor: "The IRC may require a technical export license for the subject matter which may result in an [sic] revised version in wording. However, the technical contents and assessment in the report as faxed in this package remain valid." 78

On May 31, 1996, O’Connor advised China Great Wall Industry Corporation:

In June 1996, Masson of J & H Marsh & McLennan’s Paris office wrote his firm’s O’Connor:

On June 5, 1996, Masson, on behalf of the French insurance community, proposed a way in which to circumvent U.S. export policy regarding the release of the Independent Review Committee:

On June 6, 1996, Lim advised O’Connor:

On June 19, 1996, Dwyer reported to Lim:

Included in the package were 22 copies of the Report, copies of all correspondence relating to the release of the Report and the decision not to release the Report, and copies of all correspondence relating to the need to return all copies.

Chronology of KEY Events

1996

______________________________________________________________________

February 15 The Loral-built Intelsat 708 launch fails.

______________________________________________________________________

February 21 A confidential agreement for risk management advisory services is reached between J & H Marsh & McLennan, insurance broker for the Apstar 1A program, and China Great Wall Industry Corporation.

Paul O’Connor, J & H Marsh & McLennan Vice President, suggests that China Great Wall Industry Corporation implement an aggressive public relations campaign for underwriters. "Quick and decisive action is required."

______________________________________________________________________

February 22 Jacques Masson, Manager of J & H Marsh & McLennan’s Paris office, reports discussions with French insurance community regarding the Intelsat 708 failure’s impact on future insurance programs.

Masson first mentions the necessity to create an "independent inquiry board."

______________________________________________________________________

February 26 Underwriters for the Apstar 1A program become increasingly disappointed regarding the lack of an independent and international failure review committee.

O’Connor provides China Great Wall Industry Corporation with a failure review committee schedule modeled after an Ariane failure review plan, and urges China Great Wall Industry Corporation to allow J & H Marsh & McLennan to obtain failure review conclusions.

______________________________________________________________________

February 28 J & H Marsh McLennan’s O’Connor outlines for China Great Wall Industry Corporation minimum requirements for the Apstar 1A reinsurance program to continue.

______________________________________________________________________

March 11 Loral offers to provide technical assistance to the Intelsat 708 failure investigation.

______________________________________________________________________

March 20 French underwriters state minimum requirements for the Apstar 1A insurance program to continue.

Discussions regarding Loral participation in the Independent Review Committee continue among China Great Wall Industry Corporation, J & H Marsh & McLennan, and the underwriters.

J & H Marsh & McLennan’s Masson identifies potential Independent Review Committee participants.

______________________________________________________________________

March 21 Bermuda-based underwriter, ACE Limited, advises J & H Marsh & McLennan that China Great Wall Industry Corporation’s actions regarding the Intelsat 708 failure investigation are unacceptable and that the Apstar 1A insurance contract is in jeopardy.

______________________________________________________________________

April 1 J & H Marsh McLennan’s O’Connor reports that Intelsat declined to participate in the Independent Review Committee.

______________________________________________________________________

April 5 China Great Wall Industry Corporation reports to J & H Marsh & McLennan that an Independent Review Committee is being established to meet the insurance community’s minimum requirements to insure the upcoming Apstar 1A launch.

The Commercial Space Insurance Industry

Introduction: The Market

Emerging commercial space technologies, along with complex and substantial financial investments, presented a new type of high-risk exposure. Thus, the space insurance underwriting community was developed, and the niche for specialized insurance was filled. The space insurance market is highly competitive, dynamic, and volatile with a relatively small group of U.S. and European insurance companies in the forefront.84

According to one industry representative, Dowa Fire, Marine & Space Insurance:

Again, according to Dowa Fire, Marine & Space Insurance:

This upward trend has been driven by expansion in the communications satellite industry and by growing demand for cheaper, more reliable, and more capable launch systems.

The launch services and space insurance markets generated $8 billion in revenue in 1997 and approximately $10 billion in revenue for 1998.86 Over the last 30 years, space insurance companies have collected approximately $4.2 billion in premiums and paid nearly $3.4 billion in claims. As outer space is being increasingly used for communications, broadcasting, and remote sensing, the demand for space-based activities is expected to grow, helping risks stabilize. Insurance premiums will thus decrease, and market capacity will in turn increase.87

Space insurance is syndicated, meaning that each individual underwriter assumes a percentage of the risk.88 Approximately 10 to 15 large companies, and 20 to 30 smaller companies, may participate in a given insurance package. Typically, multiple insurance underwriters cover each risk for a fractional share, thereby spreading the risk throughout the global markets.89

An insurance package covers risk to the rocket, the satellite, and related equipment.90 Factors such as market conditions, the type of rocket, orbital deployment conditions, and satellite characteristics determine insurance terms and conditions. While all underwriters use similar terms and conditions, commercial space insurance policies are individually crafted, principally based on the specifications of the satellite and the rocket.91 The coverage period, premium rates, and other terms and conditions are negotiated among the client, the satellite owner or manufacturers, and the underwriters.92

Competition determines which insurers will participate in a specific placement, and the marketplace sets pricing for each policy. Price and availability of space insurance depends primarily on the lead underwriter’s ability to understand and assess the intricacies of each risk.93

The estimated space insurance market capacity is between $850 million and $1 billion for each satellite program, with an estimated range of $250 to $300 million per launch.94 Approximately seven to ten underwriters play a significant role in the market, and Europeans ordinarily account for $500-600 million out of the $1 billion available for a single satellite project.95 Typically, an insurance underwriter will commit only 80-85 percent of its available financial resources to one program.96

Space insurance market conditions are cyclical in nature. Currently, the market is "soft," producing more capacity to meet risk needs, and is a buyer’s market with many qualified insurers.97 Launch service providers are more willing to introduce new launch vehicles in this type of market. In contrast, in a "hard" market, or seller’s market, underwriters have the greatest influence. Successful market participants must respond to and implement changes within the dynamic satellite launch equipment, launch services, and space insurance markets.

The four primary U.S. insurance brokers are J & H Marsh & McLennan, with about 60 percent of the market, Willis Corroon Inspace, International Space Brokers, and AON, Inc.98 Currently, there are 10 to 12 lead underwriters, including one Australian, two French, one U.S., and two British.99 The U.S. underwriters account for 20 to 30 percent of current space insurance syndication.100

Each individual U.S. underwriter has a detailed technical understanding of space risks — based on its own spacecraft engineers — and a sophisticated space industry database.101 Some European underwriters employ consultants with expertise in the technical assessment of space risks, including experienced former NASA satellite engineers.102

Any underwriter may spread the risk to any other insurance company or reinsurer by selling participation in a particular insurance program.103 Reinsurers receive no technical information but rely on representations by lead underwriters as to risk.104 Reinsurers occupy numerous layers in the insurance industry, sharing the risk of a particular contract.105 The reinsurers depend on their relationship with the underwriters and "follow the fortunes" of the underwriters, referred to as "following-on." 106

There are four essential types of space insurance:

• Pre-launch insurance, specifically property and cargo insurance,107 covers satellites and rockets prior to launch. Pre-launch insurance usually covers risks associated with transportation of the satellite from the manufacturing facility to the launch site, assembly on the launch pad, inspection, and pre-lift-off activities. The period of coverage ends with the intentional ignition or lift-off of the rocket.108
• Launch insurance is the most common type of space insurance. It may extend from six months to one year after launch. Coverage commences where pre-launch insurance ends. Launch insurance terminates when the satellite separates from the rocket and completes an initial operational phase of functionality testing. The launch period may last approximately 20 to 30 minutes.109
• In-orbit insurance commences after the satellite has completed its initial operational phase of functionality testing, and normal operations in space begin. The life expectancy of a satellite is approximately 10 years and ends when the satellite’s fuel cell depletes. In-orbit insurance usually consists of one-year renewable policies. "[I]n order for the insurance companies to renew the In-Orbit insurance, they require ‘health reports’ from the insured regarding the condition of the satellites. Based on these reports they accept renewed coverage." 110
• Third-party liability space insurance covers legal liability arising from damage to a third party during the launch or the in-orbit operations of a satellite program. A variety of coverage options are available: personal injury, property damage, damage to U.S. Government launch facilities, loss of revenue, service interruption, and material changes to ground stations.111

Self-insuring for the launch phase is not a common practice. PRC-owned and manufactured commercial satellite launches in the PRC, however, usually are self-insured by the PRC.112

Broker Selection and the Underwriting Process

Broker Selection

The following summarizes the space insurance acquisition process and the parties involved. First, a satellite owner contracts with a satellite manufacturer to build a satellite.113 Next, the insured client, a satellite owner or satellite manufacturer, obtains a list of brokers from the manufacturer.114

Then, the broker is appointed following a competitive process.

The broker may negotiate insurance, manage transactions, and, if necessary, settle claims that may arise on behalf of the client.115 The broker acts as a conduit for all documentation and information.116 Its primary task is to obtain technical questions from underwriters and answers from the satellite owner and manufacturer.117 The broker may assist the satellite owner and manufacturer in developing a presentation and pricing plan for the underwriters.118 Brokers do not suffer monetary risk in the event of launch accidents; they are paid on a commission basis.119 Traditionally, commission size depends on the final premium negotiated for the insurance program. The higher the insurance premium, the higher the broker’s commission.120

Insurance Acquisition

The underwriting process begins with a technical assessment of the satellite and rocket.121 The client prepares technical reports and presentations regarding the satellite and rocket for the brokers.122 Usually, the satellite manufacturer prepares the initial project package containing detailed technical information and launch service procedures.123

This package is presented to the underwriters by the broker.124 The technical information consists of the specifics of the launch and satellite operations, coverage for partial or full loss, associated costs, and launch service availability.125 Also, it includes the program risks, history of the rocket, modifications, and reasons for using new technology, if any.126

The presentation is designed to build the confidence of the underwriters in the insured client.127 Technical questions regarding the following are often raised by the underwriters:

• Communication systems
• Payload
• Electrical power system
• Attitude control system
• Mechanical systems, including appendage and solar arrays128

Normally, two rounds of questions and answers by the satellite manufacturer and launch service provider to underwriters are sufficient to complete the bidding phase.129 Additionally, underwriters rely on databases and their own technical staff or other experts for information.130

Typically, non-disclosure agreements binding underwriters accompany technical materials for the presentations.131 Underwriting information is part of the insurance contract, and the insured is obligated to use its best efforts to provide insurers with information relating to risk of loss.132 The insured has an obligation to notify the underwriters if any characteristic of the satellite or the launch service changes.133

A second briefing to the underwriters may be necessary if such a "material change" occurs affecting the terms and conditions of the policy. In the case of Intelsat 708, for example, Loral had to make such a presentation after changing the material that was used for the satellite’s solar arrays to galium arsenide.134

The underwriters submit bids for the insurance package, including a decision to insure the satellite program, the amount of the premium, and the terms and conditions of the policy. Various risk assessment factors, including the history and reliability of the hardware to be used, are discussed. Also, previous failure and success rates, disposition of previous failures, experience of operations and operators, testing and product assurance provisions, and monitoring conditions by the satellite manufacturers or the insured are factors taken into account.135

Lastly, the policy is negotiated and written prior to launch.136 The insured client, acting through the brokers, answers any outstanding questions from the underwriters.137 Post-launch reporting advises the underwriters of the mission’s progress.138

The entire insurance acquisition process takes about one year to complete.139 Typically, insurance contracts are finalized from six months to three years prior to launch.140

Space Insurance Premiums

A space insurance deposit between 10 and 20 percent of the premium is required when the policy period commences. The balance of the premium is usually due to the underwriters no later than 30 days prior to the launch.141

Typically, insurance premiums range from eight to 15 percent of the total costs associated with a launch.142 Premium rates have declined over the last few years.143 Even though there have been a large number of substantial claims in the last few years, premiums decreased by 50 percent in 1997.144 Claims incurred will surpass premiums collected in 1998, a disappointing year for underwriters.145

Launch insurance premiums depend on such factors as:

• Reliability of the rocket
• Reliability of the satellite
• Level of complexity of the satellite
• Scope of coverage
• Amount of insurance146
• Rocket history
• Overall design of the satellite
• Product assurance plan
• Satellite’s operational lifetime
• Insurance capacity
• Commercial versus government launched
• Regulatory standards for rockets147

According to a September 1998 article: "[C]ustomers can pay less than 10 percent [of the total costs] with an emphasis on launch-plus-3-year or even launch-plus-5-year coverage plan . . . In-orbit policies are generally negotiated separately from launch plus 3 or 5 year policies. Rates tend to be 1.2 to 1.5 percent per year at present." 148

Space Insurance Claims of Loss

Despite the availability of insurance, the satellite owner has every incentive to place the satellite in orbit and make it operational because obtaining an insurance settlement in the event of loss does not help the owner continue to operate its telecommunications business in the future. To increase the client’s motivation to complete the project successfully, underwriters will also ask the client to retain a percentage of the risk.149

Insurers are advised of any occurrence likely to result in a claim. The insured is obligated to disclose any relevant issues, including the results of any failure investigations.150 The insurers must have this information—and a substantiated theory of the failure—from the parties that were involved in the launch.151

The claims settlement process continues until agreement is reached on the loss sustained.152

In the event of a launch or satellite failure, the insurance representative of the insured client is responsible for drafting the Proof of Loss and Notice of Loss:153

• The Proof of Loss is a statement issued to the insurers and is signed and notarized by the insured client. It includes the time the loss occurred, details as to what happened, and technical information such as telemetry data, frequencies, and power levels at the time of the failure.154
• The Notice of Loss is a one-page statement that places the insurers on notice of a possible claim.155

Both statements are provided to the insurers by the insured client through the broker.156

The Applicability of Export Controls To the Space Insurance Industry

Security Clearances and the Transfer of Controlled Technical Information

The broker reviews drafts of the Proof of Loss and Notice of Loss and makes sure that all relevant information is contained therein. The broker does not alter them, but offers suggestions as to changes.157 The broker is the last party to sign the statements prior to release of a claim payment.158

Security clearance requirements for space insurance industry personnel handling sensitive data are not clear.159

Timothy Rush, Vice President of J & H Marsh & McLennan’s Space and Telecom Group and a former Intelsat employee, testified that underwriter employees do not usually have security clearances.160

In the case of Intelsat, data requiring protection is kept in a secure facility.161 Intelsat authorizes insurance-related technical information to be forwarded to the Defense Department for review.162 The Defense Department’s responsibility is to monitor technical data reviews and transfers that take place in the course of the insurance process for space projects.163

The amount of technical data that is required to be disclosed in the space insurance process depends on the maturity of both the satellite and the rocket.164 Mark Quinn, former Vice President for J & H Marsh & McLennan’s Space and Telecom Group, states that the information provided at space insurance presentations is "not very technical in nature." 165 Newer satellites and rockets, however, present greater risks since they are not technically and operationally known quantities, and the insurers thus want additional information about them.166

Intelsat officials state that the PRC launch service provider receives only satellite interface information. Interface information consists of satellite dimensions and critical point locations of satellite components such as antennas. A user’s handbook contains most of the information on rockets.167

Nevertheless, as Donald Cromer, President of Hughes Space and Communications, who had attended insurance industry briefings, testified, technical information subject to export controls "could" be communicated in such briefings.168

Export Licenses

According to insurance industry personnel, the obligation to obtain an export license rests with the owner of the technology. Thus, prior to Intelsat’s taking title to the Loral-built Intelsat 708 satellite, Loral had the responsibility to obtain export licenses for all related exports of controlled technology.169

The burden is on the insured client, agrees J & H Marsh & McLennan’s Michael Hewins, former Chairman of that firm’s Space and Telecom Group, to obtain all appropriate export licenses, and no special licenses are required by the space insurance industry.170 In light of the destinations of the data, insured clients must determine whether the data is sensitive and export licenses are required.171

Hewins, a broker with substantial space insurance experience, says he believes that no export licenses are required for the space insurance presentations that contain technical information. Further, Hewins believes that no export licenses are required for the questions and answers that are passed between the underwriters, brokers and insured clients.

Hewins says that he assumes that all information shared in the insurance process is given to all entities, foreign or domestic, unless covered by non-disclosure agreements.172

Another experienced broker, Timothy Rush of J & H Marsh & McLennan, says that the broker requires the originators of any technical data to certify that proper licenses have been obtained for technology transfers, or to certify that the data in question does not require such licenses for transfer.

According to Rush, brokers do not enforce licensing requirements. But, he says, brokers do help protect against technology transfers prohibited by U.S. law, by informing their insured clients of where they send any data the client submits to them under the insurance contract.173

Yet another J & H Marsh & McLennan broker, Mark Quinn, says that the insured client is supposed to indicate whether an export license is in place for the satellite program. However, Quinn reports that he has not seen a technology transfer license, although he assumes one exists for each project.174

According to Terry Edwards, Manager of Intelsat’s Launch Vehicle Program Office, and Donald Bridwell, Manager of Intelsat’s Major Programs in the Procurement Division: "Intelsat Headquarters Agreement does not exempt Intelsat from U.S. laws in respect to export licenses. U.S. spacecraft manufacturers are subject to U.S. export control laws." The export license, they say, covers the entire scope of the satellite project.175

Intelsat’s Edwards also states that Defense Department monitors have a very difficult assignment.176 Quinn adds that the Defense Department monitor who worked on his project several years ago did a very good job and knew the details of the project well.177 However, Quinn states that he has not been present at any meeting where a Defense Department monitor has interceded to stop the transfer of technical information. He states that the briefer usually has a rehearsal briefing with a Defense Department monitor present, prior to the meeting.178

Space Insurance and Export Controls for PRC Launches

The space insurance process does not differ for projects that include PRC rockets and satellites.179

Insurance for PRC clients must comply with local regulations and is provided by re-insuring an indigenous insurer.180 The PRC, however, does not have a developed insurance market. Therefore, a broker such as J & H Marsh & McLennan acts as an intermediary company since the PRC is not financially stable.181

J & H Marsh & McLennan’s Hewins states that the PRC insurance companies, China Pacific Insurance Company (CPIC) and the People’s Insurance Company of China (PICC), are difficult to deal with from a business standpoint. Further, CPIC and PICC are not lead underwriters in the international market, do not possess satellite insurance expertise, and tend to work on multiple projects.182

The J & H Marsh & McLennan Beijing office handles property and casualty insurance for the PRC, and for U.S. companies conducting business there. The J & H Marsh & McLennan London office also issues third-party liability insurance for China Great Wall Industry Corporation.183

Endnotes