Space Tourism

Forging into the Final Frontier

The space tourism industry presents substantial excitement and risk.
By: | May 1, 2014 • 8 min read

Imagine if a flight from London to Sydney took a mere two hours instead of 21. And imagine that on that flight, passengers could experience the same breathtaking views and feeling of weightlessness usually reserved for astronauts. 

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These are the possibilities presented by suborbital space flight, in which an aircraft gets outside of the Earth’s atmosphere, traveling at speeds up to 5,600 miles per hour. At this altitude and speed, an aircraft would follow a parabolic flight pattern, eventually falling back through the atmosphere. By comparison, an aircraft in orbital space would have to maintain speeds of about 17,500 miles per hour at an altitude of at least 190 miles above sea level.

Imagine if the destination were space itself. Or the International Space Station (ISS) or the Russian space station Mir, or even a hotel suspended hundreds of miles above Earth. Private space tourism companies have been working toward launching such flights since the 1980s.

American businessman Dennis Tito became the first private citizen to take a tour of space, doling out a reported $20 million for a ticket to ISS in 2001. Others followed. Space Adventures, a Virginia-based space tourism company, has already flown seven tourists — including Tito — to ISS on eight different occasions.

While frequency of manned spaceflights dropped off in the mid-2000s, research and development has rekindled demand. Paid commercial flights are expected to be launching around the globe beginning as soon as the end of this year.

A New York Times report on space tourism.

NASA and the Federal Aviation Administration (FAA) also have a stake in this industry, as commercial space flights can be used to deliver cargo to space stations. The California-based company SpaceX is contracted with NASA to make 12 cargo resupply trips to ISS through 2016. They completed the first successfully in 2012.

These endeavors could be stalled, though, if space flight providers cannot obtain the right coverage to insure against third-party liability risks and property damage.

Third-Party Liability

The role of insurance in allowing the space tourism industry to grow is “huge,” according to Bill Behan, CEO of AirSure Ltd., an insurance and risk management consulting company for the aviation industry.

“The financing, investment, stability and future of the commercial space industry will depend on a strong and enduring partnership with the insurance industry,” he said.

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The federal government forged that relationship and fostered industry growth with the passage of the Commercial Space Launch Act of 1984 (CSLA). The CSLA provides a framework for the FAA to regulate companies by granting launch licenses as well as indemnifying launch providers from third-party claims. The indemnification provision requires companies to buy insurance coverage for third-party liability claims at a level calculated by the FAA, called the “maximum probable loss.”

Should an accident occur, the government would be liable for losses exceeding that level up to a limit of roughly $2.7 billion, though that limit is adjusted every year for inflation.

The Government Accountability Office (GAO), however, thinks that the FAA’s methodology for calculating maximum probable loss is flawed. Currently, the administration estimates the cost of a single casualty at $3 million, a figure that has not been updated since 1988. In calculating total loss value, the FAA adds 50 percent of the total cost of casualties for a given flight to account for potential property damage.

It arrives at an estimated number of third-party casualties by identifying areas that could be impacted by lethal debris, and then multiplying the size of the area by the probability of damage occurring there and the population density.

Risk modelers consulted for the GAO report “stated that FAA’s method might significantly understate the number of potential casualties, noting that an event that has a less than 1 in 10 million chance of occurring is likely to involve significantly more casualties than predicted under FAA’s approach.”

The FAA’s equation does not always consider details like an aircraft’s flight dynamics or the characteristics of its materials. Nor does it specifically analyze how many properties could be damaged by an event or what the value of that property might be.

If the FAA underestimates maximum probable loss, it means commercial space companies will purchase inadequate levels of insurance, exposing the government to more liability. The GAO recommended that the FAA regularly review its methodology and make amendments to the CSLA to better prepare for potential catastrophe, but so far no changes have been made.

R5-14p32-34_03Space_RR.indd

That could spell big trouble for the space industry, especially with the number of FAA-licensed space launches expected to grow substantially over the next few years. NASA expects to launch at least two cargo resupply trips to ISS per year from 2017 to 2020, and that doesn’t include the stargazing adventures in the works from Virgin Galactic and its competitors. A tragedy not adequately insured could have the potential to wipe out the sector, or at least set it back many years.

Informed Consent

Flight operators also need to worry about the safety of passengers and crew on board.

Companies and state legislatures require passengers to sign informed consent waivers, relieving companies from liability if an accident causes injury or death. But are the waivers strong enough to stand up in court?

“Informed consent is about giving the space flight participant enough technical knowledge to understand and appreciate the risks involved,” said Clive Smith, business unit leader with Aon’s International Space Brokers.

However, given the likely volume of space flight participants in the coming years, it’s safe to say that the protection of informed consent waivers remains to be tested.

There’s also no escaping the fact that a participant willing to pay a for trip to space can afford top lawyers and high legal fees in the event of a serious injury in the course of a flight.

“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved.”

“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved,” said Behan.

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The laws could, however, make it easier for space tourism companies to attract insurers.

“Any laws that might protect space companies or manufacturers may facilitate broader terms and lower premiums for liability insurance,” said Esequiel Nathal, an analyst with Charles Taylor Risk Consulting.

Several states have adopted informed consent laws — including New Mexico, Virginia, Texas, Florida, Colorado and California — but they vary in their levels of protection. For instance, most statutes protect only the launch company and not their suppliers or manufacturers.

Esequiel Nathal

Esequiel Nathal, analyst, Charles Taylor Risk Consulting

The lack of loss history in human spaceflight makes it difficult to determine the usefulness of the waivers, a problem that extends to all areas of space tourism.

Insurance and Risk Management

Insuring human spaceflight means navigating through lots of gray area, with little data and lots of faith. For instance, would a hull policy covering a spacecraft be dependent on whether it is bound for orbital or suborbital flight? Does it matter where in airspace an accident occurs? Would coverage fall under the realm of aviation or space flight insurance?

The answer to most of these questions: to be determined. Too few manned spaceflights have been launched and too few accidents have occurred to reveal weak spots in coverage.

“The debate really is whether the risks are covered under the aviation market or the space market, because they’re two different kinds of market although there’s some crossover in terms of the insurers,” Smith said.

“There will be lots of challenges as to whether the space market can pick up the aviation style of cover or whether part of it is placed in the aviation market and part in the space market.”

“This is specialized insurance normally requiring a specialized insurer and broker,” Nathal said. Underwriters must mostly rely on alternate data “in the form of successful private launch of satellites and other forms of transportation and safe operation.”

Luckily, space tourism companies are generally well-funded and can handle the high premiums that intrepid insurers will charge.

“More importantly, it is essential to conduct thorough risk assessments to understand what the risks are, their size and nature, and the best ways to mitigate the risks,” Nathal said.

“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”

“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”

Risk management includes not only educating passengers on flight risks, but also training them properly. While training for private citizens is nowhere near as rigorous as what astronauts receive, it should still include some time in “g-force” and exposure to a weightless environment. Again, only time and experience will show what level of training is best to ensure safety of passengers and crew alike.

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Sending more manned missions to space opens up a wealth of opportunities for scientific advancement and the development of a brand new industry. But the risks involved are literally sky high.

Moving safely ahead demands innovation, flexibility and cooperation from all involved, from the FAA to launch companies to insurers willing to underwrite the unknowns of the final frontier.

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]