Commercial Space Launches: FAA Should Update How It Assesses Federal Liability Risk

GAO-12-899 Published: Jul 30, 2012. Publicly Released: Jul 30, 2012.
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What GAO Found

According to studies, the United States provides less commercial space launch indemnification for third party losses than China, France, and Russia. These countries put no limit on the amount of government indemnification coverage, which in the United States is limited by the Commercial Space Launch Act Amendments of 1988 (CSLAA). Governments’ commitments to pay have never been tested because there has not been a third party claim that exceeded a private launch company’s insurance.

The potential cost to the federal government of indemnifying third party losses is currently unclear because it depends in part on the method used by the Federal Aviation Administration (FAA) to calculate the amount of insurance that launch companies must purchase, a calculation that may not be sound. FAA has used the same method since 1988 and has not updated crucial components, such as the cost of a casualty. Estimating probable losses from a rare catastrophic event is difficult, and insurance industry officials and risk modeling experts said that FAA’s method is outdated. FAA, however, has not had outside experts or risk modelers review the appropriateness of its method. An inaccurate calculation that understates the amount of insurance a launch provider must obtain would increase the likelihood of costs to the federal government; a calculation that overstates the amount of insurance needed would raise the cost of insurance for the launch provider. FAA officials said that their method was reasonable and conservative, but they agreed that a review could be beneficial and that involving outside experts might be helpful. Overall, they said use of more sophisticated methodologies would have to be balanced with the additional costs to both FAA and the launch companies that would result from generating and analyzing additional data.

The insurance market is generally willing and able to provide up to $500 million per launch as coverage for third party liability, according to industry representatives. Because the amount of insurance FAA requires launch providers to obtain averages about $99 million per launch, and coverage available through CSLAA is about $2.7 billion above that, insurers could provide some of the coverage currently available through CSLAA. However, the amount and price of insurance that could be provided could change quickly if a large loss were to occur, according to insurance industry representatives.

The effects on global competition from the United States eliminating CSLAA indemnification are unknown. However, launch companies and customers GAO contacted believe that ending federal indemnification could lead to higher launch prices for U.S.-based launch companies, making them less price competitive than foreign launch companies. Although the cost of third party liability insurance for launch companies has been about 1 percent of the dollar amount of coverage they purchased, how much this cost might increase in the absence of federal coverage is not clear. Launch customers said that price and vehicle reliability were key factors in their choice of a launch company. Launch companies reported that additional costs would be passed along to customers, but whether this increase alone would be sufficient reason for a launch customer to choose a foreign company over a U.S. company is unclear.

Why GAO Did This Study

A catastrophic commercial launch accident could result in injuries or property damage to the uninvolved public, or “third parties.” In anticipation of such an event, a launch company must purchase a fixed amount of insurance for each launch and reentry, per calculation by FAA; the federal government is potentially liable for claims above that amount up to an additional $1.5 billion, adjusted for inflation and subject to congressional appropriations. As of 2012, the inflation-adjusted amount is about $2.7 billion. CSLAA provides for this payment, called indemnification. The indemnification provision, unless reauthorized, expires this year.

GAO was asked to address, among other things, (1) the U.S. government’s indemnification policy compared to policies of other countries, (2) the federal government’s potential costs for indemnification, (3) the ability and willingness of the insurance market to provide additional coverage, and (4) the effects of ending indemnification on the competitiveness of U.S. launch companies. GAO reviewed FAA data and documents and relevant literature and conducted interviews with officials from FAA and the National Aeronautics and Space Administration, insurers, brokers, launch companies, launch customers, risk modelers, and experts.

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GAO recommends that FAA periodically review and update as appropriate its methodology for calculating launch providers’ insurance requirements. The Department of Transportation provided technical clarifications, which GAO incorporated.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Transportation To better ensure the accuracy of FAA's determination of the amount of insurance coverage required for an FAA commercial space launch license, the Secretary of Transportation should direct the Associate Administrator for Commercial Space Transportation to review and periodically reassess FAA's maximum probable loss methodology--including assessing the reasonableness of the assumptions used. For these reviews, the Associate Administrator should consider using external experts such as risk modelers, document the outcomes, and adjust the methodology, as appropriate, considering the costs.
Closed – Implemented
In 2012, GAO reported that given the growing and changing nature of the commercial space launch industry with the development of new launch vehicles and increased number of launches, it would be important to periodically assess federal liability indemnification policy to ensure that it protects both launch companies and the federal government. To this end, GAO raised questions about the methodology which FAA uses to calculate the maximum probable loss (MPL) for a commercial space launch or reentry which determines the amount of insurance coverage launch companies must buy and the amount above which government indemnification begins. FAA told GAO that it believed its current approach is conservative; however, given developments in risk profile modeling since the late 1980s when FAA began to use its method, we believe that the MPL method needs to be updated. For example, FAA uses a dollar amount for estimating space launch losses from casualties and fatalities but risk profile modeling allows for a range of estimated losses based on potential accident scenarios. In addition, FAA uses assumptions such as the cost of casualty of $3 million per person which is based on 2002 data and may be outdated and which could result in underestimating the cost of casualties. An inaccurate MPL value could increase the cost to launch companies by requiring them to purchase more coverage than is necessary, or result in greater federal government exposure to expenditures. FAA stated that the benefits of developing and implementing a potentially more comprehensive MPL methodology need to be balanced against the possible increased costs to the agency and launch companies with which GAO agreed. Therefore, GAO recommended that FAA review and periodically reassess its MPL methodology including assessing the reasonableness of the assumptions used and to consider using external experts such as risk modelers to assess whether the methodology as appropriate considering the costs. In a briefing to GAO on September 14, 2016, FAA stated that they conducted a review of their MPL methodology and tasked ACTA Inc.--a company which does risk modeling for the Department of Defense--to complete implementation of a risk profile method for computing MPLs for FAA-licensed commercial launches. The result is the Range Risk Analysis Tool which FAA has since used to calculate MPLs for its licensed launches at federal launch ranges. FAA also developed a tool to calculate MPLs for launches from non-federal ranges, called the Risk Estimator Sub-orbital and Orbital Launch Vehicle and Entry (RESOLVE) tool which FAA had NASA validate. This tool has also been used to calculate MPLs at licensed launches at non-federal ranges. In addition, FAA tasked the Science and Technology Policy Institute (STPI) to look at figure to see if it should be updated. Later, SPTI recommended that the cost of casualty be increased from $3 million to $5-6 million. As a result, using this more updated approach, FAA can better ensure the accuracy of its determination of the amount of insurance coverage required for a FAA-licensed commercial launch.

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