Commercial Space Launches:

FAA Should Update How It Assesses Federal Liability Risk

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

Additional Materials:

Contact:

Alicia P. Cackley
(202) 512-4803
cackleya@gao.gov

 

Gerald Dillingham, Ph.D.
(202) 512-2834
dillinghamg@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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catastrophic event is difficult, and insurance industry officials and risk modeling experts said that FAA’s method is outdated.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.

What GAO Recommends

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.

For more information, contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov or Gerald L. Dillingham, Ph.D. at (202) 512-2834 or dillinghamg@gao.gov.

Recommendation for Executive Action

  1. Status: Open

    Comments: In February 2014, FAA officials told us that they had begun to implement an internal effort to look at the methodology but that budget constraints limited their ability to work with an outside contractor which they and their advisory committee thought important to do. In February 2014, we reported that they were provided appropriations in January 2014 to fund the effort and they said they intended to do so beginning in March 2014. In 2015, in our latest commercial space report (GAO-15-706), we found that FAA was in process of addressing our recommendation and that it hired a firm to review the methodology. The latest commercial space legislation became law on November 25, 2015 and mandated that FAA complete the study within 6 months of enactment. Thus, study is required to be completed by May 25, 2016.

    Recommendation: 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.

    Agency Affected: Department of Transportation

 

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