Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
The successful July 2021 suborbital and space flights of Virgin Galactic’s Richard Branson and Blue Origin’s Jeff Bezos have renewed interest in the potential and future of space tourism and travel following SpaceX’s own recent accomplishments by founder Elon Musk. While commercial space flights are currently reserved for the wealthy, with Virgin Galactic asking $250,000 per seat, there is a reported waiting list of approximately 600 people.1 If the price of a ticket can reach a more reasonable level for the average consumer, then demand could soar. This would expose a new area of risk that the insurance industry has never had to seriously contemplate before. Is it possible that space travel insurance will evolve similarly to auto insurance and even one day be just as common if space travel becomes mainstream? Let’s further explore the future of space travel insurance.
While some may initially say that space travel insurance could never be offered as it is too risky, one must step back to the beginnings of insurance. Many underwriters in the late 1600s got their start underwriting business ventures by insuring ships that were crossing the oceans in response to the demand for increased trade. One could even argue that it might have been more treacherous to embark on multiweek ocean voyages, while being exposed to weather conditions, sickness, and navigational errors, than to undertake an 11-minute space flight.2
There are key components to determine if a risk is insurable. They often include characteristics such as:
Insurance carriers cover pure risk, which includes any uncertain situation where the opportunity for loss is present and the opportunity for financial gain is absent. Hence, an insurable risk must have the prospect of accidental loss, meaning that the loss must be the result of an unintended action and must be unexpected in its exact timing and impact.
The idea of insuring exposures in space is not new to the insurance industry. Some carriers such as Allianz, AXA XL, and Munich Re have been insuring space equipment such as rockets and satellites for a while now and have a pretty solid understanding of underwriting such risks. This includes prelaunch insurance, launch insurance, and in-orbit insurance and covers loss of income as well as material damage. In addition, liability insurance is also often required in the event of causing damage to other property in space or on earth. The traditional space insurance market (excluding human cargo) has had average premium volumes around $500 million over the past decade3 but this could increase due to hardening market conditions and increased frequency of launches. NASA does not purchase liability insurance as it funded by the U.S. government and backed by taxpayers.
Richard Branson and Jeff Bezos, despite being two of the richest people in the world, did not have insurers jumping at the opportunity to cover their space travel endeavors. XINSURANCE did offer coverage to Jeff Bezos and the passengers of Blue Origin immediately before the launch but it is unknown whether Jeff Bezos took it. Virgin Galactic and Blue Origin are not legally required to offer insurance to their passengers. Virgin Galactic has even said that its passengers will eventually be required to sign a contract agreeing to be fully liable for their own safety. However, this may be hard to fully enforce, as some laws make it difficult to transfer all liability in the case of personal injury or loss of life.
In addition, space travel coverage via a life insurance policy isn’t necessarily clear. Historically, life insurance policies have excluded coverage or have charged a higher premium for risky hobbies such as personal aviation, skydiving, and hang-gliding. Life insurance companies may not have contemplated space travel to the public because it has not been typically available. Commercial aviation is not excluded in life insurance but that does not mean that commercial space travel will be covered. It would take changes to contract language to have this exclusion in the future but as with any contract, it is best practice to read all fine print. NASA astronauts are eligible for government life insurance programs while the life insurance market currently provides individual cover of $2 million to $5 million for private astronauts.4
In aviation, liability coverage is required on international flights.4 As of now, Virgin Galactic’s and Blue Origin’s crafts launch and land in the same place. Hence, they are technically considered domestic travel despite heading into sub-orbit and space. Virgin Galactic believes it might be able to offer flights in the future that will depart in one country and land in another, via suborbital or space flight paths. Travelers, who used to take a long flight from New York to Tokyo via traditional commercial aviation, might be able to complete the same trip in a shorter time by making use of suborbital paths and by traveling at hypersonic speeds through the vacuum of space. A heavily commercialized environment like this would most likely demand liability coverage for passengers similar to current aviation regulations.
Space travel insurance might mirror the history of aviation insurance. The first air travel policy was written in 1911 but it wasn’t long before pioneers such as Charles Lindbergh were completing a transatlantic flight that was insured for $18,000.4 Perhaps insurers will initially incorporate iron-clad waivers where they will bear no burden if someone dies but then gradually relax restrictions as more data is gathered regarding the risks, safety is proven, and frequency of flights increases. Over time, the aviation insurance industry has become a multibillion-dollar insurance market.5 The space travel industry, once it becomes large enough, could be assimilated into general commercial aviation as the risks might be very similar and any future regulation might be similar too. The policies and coverage might even be identical with the only difference being the type of vehicle used.
Space travel is expected to have large growth from now to 2030, with some estimating space travel becoming up to a $10 billion to $15 billion industry annually,6 and the broader global space economy is expected to triple over the next two decades, growing to $1 trillion.7 With demand, regulation will likely increase, which will likely result in an increased need for insurance. In the event that insurers are not willing to write the risk but the public demands it, space companies may consider alternative insurance markets. Specialty writers may have an interest in the risk but captives and risk pools may be feasible too, especially if structured to take on risk the insurance markets won’t cover. Perhaps initial insurance policies will have high deductibles, exclusions, or smaller limits to keep insurance premiums reasonable and yet provide some coverage. Private equity investors are increasingly taking stake in insurance products. As the profitability of these coverages increases, it may attract more capital and risk takers.
Space travel companies might be able to increase demand for future flights by offering this insurance themselves. Celebrity Ashton Kutcher is known to have had a ticket for an early space flight but decided to postpone the trip and even sell his ticket after his wife, Mila Kunis, convinced him not to go into space. These same reservations and concerns about space travel are not uncommon. It is possible that, by offering space travel insurance, companies could alleviate some of these concerns and hence sell more flights. Is there a magic premium price point at which people would be willing to assume the risk of early commercial space flights and maybe even limited coverage amounts? Perhaps, if this coverage could be embedded and offered as an add-on when the space flight itself is purchased. It wasn’t long ago pre-travel life insurance could be purchased when taking a commercial airline flight and passengers could accept or decline the product.8 Insurers like Allianz began to develop commercial space tourism policies back in 2012 but it is unknown whether anyone bought any.3 As space travel changes from high net worth individuals to the regular public, insurers may be more willing to write policies. There is inherent risk in traveling into space, even ignoring all the space junk that is reported to be orbiting around, but technology will evolve over time and safety will always be a priority when the public is involved and space travel is commercialized. Space travel insurance may be mandated through regulations and hence purchased by companies or simply desired by travelers with a range of net worths and purchased by passengers directly.
As space flights become more routine, the insurance industry will gather data needed to complete reasonable underwriting and pricing. Space travel will evolve and may meet the characteristics of an insurable risk. Auto insurance was once new and innovative when the automobile was first introduced and became more affordable over time and even legally required as the automobile became commonplace. Scientists and technologists believe that commuting into space is well within the future and may become widespread. Even further in the future, there has been long-time talk about building colonies in space. If this does happen, there would need to be transportation between Earth and these colonies. If cars in the future do fly, is it possible that they could reach space too? Or will rockets and spaceships simply replace cars? The insurance industry would be sure to cover any changes in mainstream transportation, especially if there is a need and there is potential profit to be earned.
This all raises the question of whether space travel insurance can evolve and become as common as auto insurance.
1The New York Times (July 11, 2021). What will it cost to fly Virgin Galactic to space? Retrieved July 21, 2021, from https://www.nytimes.com/2021/07/11/science/cost-to-fly-virgin-galactic-space.html (subscription required).
2Business Wire (June 29, 2021). ADDING MULTIMEDIA XINSURANCE Offers Space Insurance to Jeff Bezos and Blue Origin Passengers. Retrieved July 21, 2021, from https://www.businesswire.com/news/home/20210629005911/en/ADDING-MULTIMEDIA-XINSURANCE-Offers-Space-Insurance-to-Jeff-Bezos-and-Blue-Origin-Passengers.
3The New York Times (July 9, 2021). Spaceflights for Richard Branson and Jeff Bezos spur a race for insurers, too. Retrieved July 21, 2021, from https://www.nytimes.com/2021/07/09/business/richard-branson-jeff-bezos-spaceflight-insurance.html (subscription required).
4Reuters (June 24, 2021). Bezos' 2021 Space Odyssey a risk too far for insurers. Retrieved July 21, 2021, from https://www.reuters.com/technology/bezos-2021-space-odyssey-risk-too-far-insurers-2021-06-24/.
5Willis Towers Watson (April 21, 2021). Insurance Marketplace Realities 2021 Spring Update – Aerospace. Retrieved July 21, 2021, from https://www.willistowerswatson.com/en-US/Insights/2021/04/insurance-marketplace-realities-2021-spring-update-aerospace
6Barron's (July 19, 2021). Travelers’ Insurance for Space Travel Could Be on the Way. Retrieved July 21, 2021, from https://www.barrons.com/articles/space-tourism-insurance-blue-origin-virgin-galactic-51626553505.
7CNN Business (September 15, 2018). Why on Earth would a company offer insurance for space travel? Retrieved July 21, 2021, from https://money.cnn.com/2018/09/15/technology/business/space-insurance-industry/index.html.
8Insurance Business (May 27, 2015). A look back: Whatever happened to airport insurance vending machines? Retrieved July 21, 2021, from https://www.insurancebusinessmag.com/us/news/breaking-news/a-look-back-whatever-happened-to-airport-insurance-vending-machines-22593.aspx