Optimal Capital Allocation Between Earth and Space Insurance: A Standard Portfolio Theory Approach

Over the past decade, the number of operational satellites in lower-earth orbit (LEO) has experienced exponential growth. This has led to levels of traffic congestion in the LEO environment that are making it increasingly risky. Satellites can collide with each other, and they can also be destroyed or damaged by orbital debris. While satellite insurance for such risks is not new, it does not seem to have grown at the rate one might expect given the increased number of insurable assets, and the increased risks they face. In fact, some insurers that once offered to underwrite orbital satellites now prefer to stay out of that particular market, citing excessive risk. This article uses standard financial economics modelling to explore whether this is indeed optimal. We find that in fact an expected utility maximizing insurer should always dedicate some of their underwriting capacity to orbital satellites. We also carry out a simulation to show that including orbital satellite insurance within an optimally structured insurance portfolio has the effect of enhancing long-run profitability.