Background

		U.S. Indemnification Policy

The 1988 amendments to CSLA established the current U.S. policy to  provide federal payment, subject to appropriations—known as  indemnification—for a portion of claims by third parties for injury, damage,  or loss that result from a commercial launch-related incident. All FAA- licensed commercial launches and reentries by U.S. companies, whether  unmanned or manned and from the United States or overseas, are  covered by federal indemnification for third party damages that result from  the launch or reentries. Parties involved in launches—for example,  passengers and crew—are not eligible for indemnification coverage.
U.S. indemnification policy has a three-tier approach for sharing liability  between the government and the private sector to cover third party  claims:
The first tier of coverage is the responsibility of the launch company  and is handled under an insurance policy purchased by the launch  company. As part of FAA’s process for issuing a license for a  commercial launch or landing, the agency determines the amount of  third party liability insurance a launch company is required to  purchase so the launch company can compensate third parties for  any claims for damages that occur as a result of activities carried out  under the license. FAA calculates the insurance amount to reflect the  maximum probable loss that is likely to occur because of an accident  that results in third party damages, including deaths and injuries on  the ground and damage to property from spacecraft debris.  FAA  uses a statistical approach to estimate expected losses based on  estimated probabilities that a catastrophic incident could occur and  the estimated costs of a catastrophic incident given the details of the  specific launch. This first tier of required insurance coverage is  capped at a maximum of $500 million for third party damages.
The second tier of coverage is provided by the U.S. government, and  it covers any third party claims in excess of the specific first tier  amount up to a limit of $1.5 billion adjusted for post-1988 inflation; in  2013, the inflation-adjusted amount was approximately $3 billion.   For the federal government to be liable for these claims, Congress  would need to appropriate funds. This second tier of coverage will  expire in December 2016 unless Congress extends this date.other two tiers have no expiration date.)
The third tier of coverage is for third party claims in excess of the  second tier—that is, the federal coverage of $1.5 billion above the first  tier, adjusted for inflation. Like the first tier, this third tier is the  responsibility of the launch company, which may seek insurance  above the required first tier amount for this coverage. Unlike the first  tier, no insurance is required under federal law.
Another component of U.S. indemnification policy for commercial space  launches and reentries is cross waivers. They provide that each party  involved in a launch (such as the launch company, the spacecraft  manufacturer, and the customer) agrees not to bring claims against the  other parties and assumes financial responsibility for damage to its own  property or loss or injury sustained by its own employees.also do not have an expiration date.
According to FAA, no FAA-licensed commercial space launch since 1989  has resulted in casualties or substantial property damage to third parties.  In the event of a third party claim that exceeded the launch provider’s  first-tier coverage, FAA would be involved in any negotiations, according  to FAA officials, and the Secretary of Transportation must approve any  settlement.

		Global Commercial Space Launch Industry

From 2002 through 2012, U.S. companies conducted approximately 16  percent of commercial space launches worldwide, while Russia  conducted 42 percent and France’s launch company conducted 25  percent. Figure 2 shows the trend in number of commercial space  launches over the last 11 years.
Over the past several years Russian and French launches have  generated the most revenues, followed by U.S. launches. In 9 of the last  11 years, U.S. commercial launch companies generated less revenue  than launches in either Russia or France. U.S. companies generated no  commercial launch revenue in 2011 because they conducted no  launches. (See fig. 3.)

	The United States Provides Less Liability Coverage Than Foreign Competitors Due to a Cap on Government Indemnification

As of July 2012, the United States provided less total third party liability  coverage than China, France, or Russia—the primary countries that have  conducted commercial space launches in the last 5 years—according to  published reports. These countries each had an indemnification regime  in which the government states that it will assume a greater share of the  risk compared to that of the United States because each country had a  two-tiered system with no limit on the amount of government  indemnification. By comparison, the United States caps government  indemnification at $1.5 billion adjusted for inflation beyond the first-tier  insurance amount. However, U.S. government coverage, in some cases,  begins at a lower level than that of the other countries because U.S.  coverage begins above the maximum probable loss, which averaged  about $82 million for active FAA launch and reentry licenses as of 2012,  and ranged from about $3 million to $267 million. The level at which  government coverage begins for the other three countries ranged from  $79 million to $300 million.
China, France, and Russia had a first tier of insurance coverage that a  commercial launch company must obtain, similar to the United States.  The second tier of government indemnification varied for these countries:
The Chinese government provided indemnification for third party  claims over $100 million.
The French government provided indemnification for third party claims  over 60 million euros (about $75 million as of May 2012).
The Russian government provided indemnification for third party  claims over $80 million for the smaller Start launch vehicles and $300  million for the larger Soyuz and Proton vehicles.
For all these countries, their commitments to pay have never been tested.  Globally, there has never been a third party claim for damages from a  commercial space launch failure that reached second-tier government  coverage.

	Potential Cost of Indemnification by the Federal Government Depends on a Variety of Factors

		Catastrophic Events and Congressional Appropriations

The federal government’s potential costs under CSLA depend on (1) the  occurrence of a catastrophic launch failure with third party claims that  exceed the first tier of coverage and (2) Congress appropriating funds to  cover the government’s liability under the second tier of coverage. FAA  officials stated that no FAA-licensed commercial space launches or  reentries have resulted in casualties or substantial property damage to  third parties. As a result, FAA believed that it is highly unlikely that there  will be any costs to the federal government under CSLA. In the event that  a catastrophic failure did occur, FAA’s maximum probable loss calculation  was intended to estimate the maximum losses likely to occur from a  commercial space launch and determine the amount of third party losses  against which launch companies must protect. In calculating maximum  probable loss, FAA aimed to include estimates of losses from events  having greater than a 1 in 10 million chance of occurring, meaning that  losses are very unlikely to exceed launch companies’ private insurance  and become potential costs for the government under CSLA.
Under CSLA, if a rare catastrophic event were to occur which resulted in  losses exceeding private insurance coverage, the government would be  responsible for paying claims that exceeded FAA’s maximum probable  loss only if Congress provided appropriations for this purpose. Under  CSLA, the federal government does not incur a legal liability unless an  appropriation is made for this purpose. Accordingly, an obligation would  not be recorded in the federal budget unless and until such an  appropriation is made. While an obligation is not incurred or recorded for  potential CSLA losses until an appropriation is provided, some insurance  companies told us that they expect the government to pay losses that  become eligible for coverage under CSLA.

		Maximum Probable Loss Soundness

While it is very difficult to assess catastrophic failures that have low  probabilities but potentially high losses, FAA’s use of an appropriate  process for determining the maximum probable loss is important because  the maximum probable loss sets the point at which losses become  potential costs to the government under CSLA. For our July 2012 report,  we identified several issues that raised questions about the soundness of  FAA’s maximum probable loss methodology:
FAA used a figure of $3 million when estimating the cost of a single  potential casualty—that includes either injury or death—which FAA  officials said had not been updated since they began using it in 1988.  Two insurers, as well as representatives of two companies that  specialize in estimating damages from catastrophic events (modeling  companies), said that this figure is likely understated. Because this  number had not been adjusted for inflation or updated in other ways, it  may not adequately represent the current cost of injury or death  caused by commercial space launch failures. Having a reasonable  casualty estimate can affect FAA’s maximum probable loss  calculation and could affect the potential cost to the government from  third party claims.
FAA’s methodology for determining potential property damage from a  commercial space launch started with the total cost of casualties and  added a flat 50 percent to that cost as the estimate of property  damage, rather than specifically analyzing the number and value of  properties that could be affected in the event of a launch failure. One  insurer and two risk modelers said that FAA’s approach is unusual  and generally not used to estimate potential losses from catastrophic  events. For example, officials from both modeling companies noted  that the more common approach is to model the property losses first  and derive the casualty estimates from the estimated property losses.  For example, if a property loss scenario involves the collapse of a  building, that scenario would have a different casualty expectation  than a scenario that did not involve such a collapse. One modeler  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. Moreover, a 2007  FAA review conducted with outside consultants said that this  approach is not recommended because of observed instances where casualties were low yet forecasted property losses were very large.
More broadly, FAA’s method did not incorporate what is known in the  insurance industry as “catastrophe modeling.” One modeler told us  that catastrophe modeling has matured over the last 25 years—as a  result of better data, more scientific research, and advances in  computing—and has become standard practice in the insurance and  reinsurance industries. Catastrophe models consist of two  components: a computer program that mathematically simulates the  type of event being insured against and a highly detailed database of  properties that could potentially be exposed to loss. Tens of  thousands or more computer simulations are generated to create a  distribution of potential losses and the simulated probability of  different levels of loss. In contrast, FAA’s method involves  estimating a single loss scenario.
FAA officials told us that they had considered the possibility of using a  catastrophe model. However, they expressed concern about whether the  more sophisticated approach would be more accurate, given the great  uncertainty about the assumptions, such as the probability and size of  potential damages that must be made with any model. Also, industry  experts told us that a significant cost factor in catastrophe modeling is  creating and maintaining a detailed database of exposed properties. One  expert told us that in order for FAA to do such modeling, it would need to  purchase a property exposure database, which could cost hundreds of  thousands of dollars. Experts also disagreed on how feasible it would be  to mathematically model the potential damages associated with space  launches. One expert thought such modeling would not be credible  because the necessary knowledge of the factors that can influence a  space launch is not at the same level as the more developed research for  modeling hurricanes, for example. Another expert thought that it would be  possible to develop credible space launch simulation models. Another  expert stated that such models have not been developed to date because  of the government-provided indemnity coverage; this expert believed that  if such coverage were the responsibility of the private sector, the  necessary models might be developed.
FAA officials also said that they believed the maximum probable loss  methodology is reasonable and produces conservative results for several  reasons. First, FAA officials described a 2002 study on aviation casualty  costs to support its use of a $3 million casualty figure for its calculation.  Use of a casualty estimate that is based on 2002 data, however, still  raises questions about whether this figure is outdated, which could result  in underestimating the cost of casualties. Second, to support basing the  potential cost of property damage on the potential cost of casualties, FAA  officials said that they have conducted internal analyses using alternative  methodologies—including some that assessed property values in the  vicinity of launches—and compared them to their current methodology. In  each case, officials said that the current methodology produced higher, or  more conservative, maximum probable losses. We were unable to review  or verify these analyses, however, because FAA officials said that these  analyses were done informally and were not documented.
FAA officials acknowledged that updating the $3 million casualty figure  and conducting analyses of potential property damage (rather than using  a casualty cost adjustment factor of 50 percent) might produce more  precise estimates of maximum probable losses. However, they said that  because the probabilities assigned to such losses are still rough  estimates, whether taking these actions would increase the accuracy of  their maximum probable loss calculations is uncertain. 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 requiring and analyzing additional data. For example, a new  methodology might require either FAA or the launch company to gather  current property information, and might necessitate that FAA construct a  statistical model for analyzing potential losses.
The same officials noted that they periodically evaluated their current  maximum probable loss methodology, but acknowledged that they have  not used outside experts or risk modelers for this purpose. They agreed  that such a review could be beneficial, and that involvement of outside  experts might be helpful for improving their maximum probable loss  methodology. FAA’s 2007 review of potential alternatives identified a  number of criteria for a sound maximum probable loss methodology that  could be useful in such a review. These included, among other things,  that the process use a valid risk analysis, be logical and lead to a rational  conclusion, and avoid being overly conservative or under conservative. A  sound maximum probable loss calculation can be beneficial to both the  government and launch companies because it can help ensure that the  government is not exposed to greater costs than intended (such as might  occur through an understated maximum probable loss) and help ensure  that launch companies are not required to purchase more insurance  coverage than necessary (such as might occur through an overstated  maximum probable loss).
In our July 2012 report, we recommended that FAA take steps to better  ensure the accuracy of the process it uses to determine amount of  insurance coverage required for an FAA launch license by reviewing and  periodically reassessing its maximum probable loss methodology— including the reasonableness of the assumptions used. For these  reviews, we recommended that FAA consider using external experts such  as risk modelers, document the outcomes, and adjust the methodology,  as appropriate, considering the costs. In January 2014, FAA officials told  us about their recent efforts to reassess the methodology. First, officials  have begun to implement an internal effort to develop an improved  methodology for determining maximum probable loss. While budget  constraints limited progress in 2013 to work with a contractor on the new  methodology, the passage of the Consolidated Appropriations Act of 2014  in January 2014 provides FAA with resources to fund the effort which they  say they intend to do beginning in March 2014. Second, FAA solicited  input from FAA’s Commercial Space Transportation Advisory Committee  on how to best conduct an external review of their methodology. In  January 2014, FAA officials said they held an initial meeting in January  2013 to begin this process, but as of January 2014, they still did not have  funds available to solicit an outside review.

	Current Private Market Capacity for Coverage Is Generally $500 Million per Launch, but a Large Loss Could Decrease Capacity

		Private Capacity

In our prior review, some insurers and brokers suggested that the  maximum amount of private sector third party liability coverage the  industry is currently willing to provide was generally around $500 million  per launch. This amount, or capacity, is determined by the amount of their  own capital that individual insurers are willing to risk by selling this type of  coverage. According to some insurers and brokers with whom we spoke,  commercial space launch third party liability coverage is a specialized  market involving a relatively small number of insurers that each assumes  a portion of the risk for each launch. One broker said that no launch  company thus far had pursued private sector insurance protection above  $500 million. Two insurers said that there might be slightly more coverage  available beyond $500 million, and one said that up to $1 billion per  launch in liability coverage might be possible in the private insurance  market. For this statement, we contacted one of those insurers, who  indicated that current capacity is still approximately $500 million.
The cost to launch companies for purchasing third party liability  insurance, according to some brokers and one insurer, was  approximately 1 percent or less of the total coverage amount. According  to FAA data on commercial launches, the average maximum probable  loss is about $82 million. As a result, in the absence of CSLA  indemnification, insurers could still provide some of the coverage  currently available through the government under CSLA. For example, if  the maximum probable loss for a launch is $100 million and the insurance  industry is willing to offer up to $500 million in coverage, the private  market could potentially provide $400 million in additional coverage.
According to some insurers, brokers, and insurance experts with whom  we spoke, there were a number of reasons why private sector insurers  were generally unwilling to offer more third party liability coverage than  $500 million per launch.
First, these brokers and insurers said that worldwide capacity for third  party liability coverage was generally limited to $500 million per  launch, which some considered a significant amount of coverage and  a challenging amount to put together—particularly given that the  number of insurers in the space launch market was relatively small.
Second, according to these same officials, insurers were unwilling to  expose their capital above certain amounts for coverage that at least  currently brings in small amounts of premium relative to the potential  payouts for losses. For example, they said that losses from a  catastrophic launch accident could exceed many years of third party  liability policy premiums and jeopardize insurers’ solvency.
Third, according to some insurers and brokers with whom we spoke,  to have sufficient capital to pay for losses above $500 million per  launch would require insurers to charge policy premiums that would  likely be unaffordable for space launch companies.

		Changes to Market Capacity

The current amount of private market capacity could change due to loss  events and changing market conditions, according to some insurance  industry participants. Some insurers and brokers said that a launch failure  could affect the level and cost of coverage offered, and that a launch  failure with significant losses could quickly raise insurance prices and  reduce capacity, potentially below levels required by FAA’s maximum  probable loss calculation. However, one risk expert suggested that a  space launch failure would likely cause liability insurance rates to rise and  that this might encourage insurers and capital to enter the space launch  market and cause liability insurance capacity to increase. According to  FAA, insurers have paid no claims for U.S. commercial launches to date,  but they have paid some relatively small third party claims for U.S. military  and NASA launch failures. For example, according to an insurance  broker, a U.S. Air Force launch failure in 2006 resulted in property  damage of approximately $30 million. According to NASA, the Space  Shuttle Columbia accident in 2003 resulted in property damage of  approximately $1.2 million. Two brokers said that given the low number of  launches and low probability of catastrophic events, total worldwide  premiums for space liability coverage are approximately $25 million  annually, amounts insurers believe are adequate to cover expected  losses. However, if a large loss occurs, according to two insurers, they  would likely increase their estimates of the potential losses associated  with all launches.
Under CSLA, launch companies must purchase coverage to meet FAA’s  maximum probable loss amount or purchase the maximum amount of  coverage available in the world market at reasonable cost, as determined  by FAA. The potential cost to the government could increase if losses  caused insurance prices to rise and insurance amounts available at  reasonable cost to decrease. Some insurers and brokers also said that  the amount of insurance the private market is willing to sell for third party  liability coverage for space launches can also be affected by changes in  other insurance markets. For example, large losses in aviation insurance  or in reinsurance markets could decrease the amount of capital insurers  would be willing to commit to launch events because losses in the other  markets would decrease the total pools of capital available.

		Alternatives for Addressing Space Launch Risk

While we had not conducted specific work to analyze the feasibility of  alternative approaches for providing coverage currently available through  CSLA, FAA and others had looked at possible alternatives to CSLA  indemnification and we have examined different methods for addressing  the risk of catastrophic losses associated with natural disasters and acts  of terrorism.probability of occurrence but potentially high losses. Some methods  involve the private sector, including going beyond the traditional  insurance industry, in providing coverage, and include the use of  catastrophe bonds or tax incentives to insurers to develop catastrophe  surplus funds. Other methods aid those at risk in setting aside funds to  cover their own and possibly others’ losses, such as through self-  These events, like space launch failures, have a low  insurance or risk pools. Still other methods, such as those used for flood  and terrorism insurance, involve the government in either providing  subsidized coverage or acting as a backstop to private insurers.
Use of any such alternatives could be complex and would require a  systematic consideration of their feasibility and appropriateness for third  party liability insurance for space launches. For example, according to a  broker and a risk expert, a lack of loss experience complicates possible  ways of addressing commercial space launch third party liability risk, and  according to another risk expert, any alternative approaches for managing  this risk would need to consider key factors, including the number of commercial space launch companies and insurers and  annual launches among which to spread risk and other associated  costs; lack of launch and loss experience and its impact on predicting and  measuring risk, particularly for catastrophic losses; and potential cost to private insurers, launch companies and their  customers, and the federal government.
As such, alternatives could potentially require a significant amount of time  to implement.

	Forecasted Increase in Manned Launches and Reentries Could Increase the Potential Costs for the Federal Government, and Current Coverage Has a Gap

		Issues and Implications Relating to Commercial Manned Launches and Reentries

Planned increases in manned commercial launches raises a number of  issues that have implications for the federal government’s indemnification  policy for third party liability, according to insurance officials and experts  with whom we spoke. NASA expects to begin procuring manned  commercial launches to transport astronauts to the ISS in 2017. In  addition, private companies are also developing space launch vehicles  that could carry passengers for space tourism flights.
First, the number of launches and reentries covered by federal  indemnification will increase with NASA’s planned manned launches   NASA expected to  which will be FAA-licensed commercial launches. procure from private launch companies 2 manned launches per year to  the ISS from 2017 to 2020. In addition, the development of a space  tourism industry may also increase the number of launches and reentries  covered by federal indemnification, but the timing of tourism launches and  reentries is uncertain.
According to insurance company officials with whom we spoke, the  potential volume of manned launches and reentries for NASA and for  space tourism could increase the overall amount of insurance coverage  needed by launch companies, which could raise insurance costs,  including those for third party liability. By increasing the volume of  launches and reentries, the probability of a catastrophe occurring is also  increased and any accident that occurs could also increase future  insurance costs, according to insurance company officials with whom we  spoke. A catastrophic accident could also result in third party losses over  the maximum probable loss, which would invoke federal indemnification.
Second, because newly developed manned launch vehicles have less  launch history they are viewed by the insurance industry as more risky  than “legacy” launch vehicles. Insurance company officials told us that  launch vehicles such as United Launch Alliance’s Atlas V, which launches  satellites and may be used for future manned missions, is seen as less  risky than newer launch vehicles, such as SpaceX’s Falcon 9, which  could also be used for manned missions. According to insurance  company officials with whom we spoke, they expect to charge higher  insurance premiums for newly developed launch vehicles than legacy  launch vehicles given their different risk profiles. Insurance company  officials’ opinions varied as to when a launch vehicle is deemed reliable— from 5 to 10 successful launches. They also told us that whether vehicles  are manned is secondary to the launch vehicle’s history and the launch’s  trajectory—over water or land—in determining risk and the price and  amount of third party liability coverage.
Third, having any people on board a space vehicle raises issues of  informed consent and cross waivers, which could affect third party liability  and the potential cost to the federal government. CSLA requires  passengers and crew on spaceflights to be informed by the launch  company of the risks involved and to sign a reciprocal waiver of claims  (also called a cross waiver) with the federal government—which means  that the party agrees not to seek claims against the federal government if  an accident occurs. CSLA also requires cross waivers among all involved  parties in a launch. Two key issues dealing with cross waivers include the  estates of spaceflight passengers and crew and limits on liability for  involved parties.
The estates of spaceflight passengers and crew, which are  considered third parties to a launch, are not covered by the informed  consent and cross waiver of claims, according to two insurance  companies and one legal expert. Although an insurance company  said that it would be difficult for estates to seek damages in case of an  accident, the legal expert said that the informed consent requirement  does not address future litigation issues. Officials from two Insurance  companies and one expert told us that they expect spaceflight  passengers to be high-income individuals, which could result in large  insurance claims by estates of the passengers, as determination of  the amount of claims is based on an individual’s expected earning  capacity over his or her lifetime.
According to two insurance companies and two legal experts,  requiring cross waivers among passengers, crew, the launch  company, and other involved parties may not minimize potential third  party claims as they would not place limitations on liability. An  insurance company and a legal expert stated that, without a limitation  on liability, insurance premiums for third party and other launch  insurance coverage could increase as the same small number of  insurance companies insures passengers, crew, launch vehicles, as  well as third parties to a launch. According to FAA, putting a limitation  on spaceflight passenger liability could foster the development of the  commercial space launch industry through lower costs for insurance  and liability exposure. Liability exposure and the related litigation  impose costs on industries and the limitation on liability shifts the risk  to spaceflight passengers, who have been informed of the launch  risks. If limitations on liability were set by federal legislation, it could  conflict with state law because at least five states had their own space  liability and indemnity laws limiting liability. Launch and insurance  companies believe that a limit or cap on passenger liability could  decrease uncertainty and consequently decrease the price of  insurance, according to a FAA task force report.
As previously discussed, the potential cost to the government depends on  the accuracy of the maximum probable loss calculation, which assesses a  launch’s risk. If the calculation is understated, then the government’s  exposure to liability is higher. Thus, whether the launch vehicle is newly  developed or manned, the effect on the government’s potential cost for  third party claims is still based on how accurately the maximum probable  loss calculation assesses launch risks. FAA officials told us that they  intend to use the same maximum probable loss assessment method for  manned launches as they currently do with unmanned launches.

		Gap in Federal Indemnification

Officials from the insurance industry and space launch companies and an  expert told us that a gap in federal indemnification was the lack of  coverage of on-orbit activities—that is, activities not related to launch or  reentry, such as docking with the ISS and relocating a satellite from one  orbit to another orbit—but they did not agree on the need to close this  gap. FAA licenses commercial launches and reentries, but does not  license on-orbit activities. Federal indemnification only applies to FAA- licensed space activities. NASA’s commercial manned launches to the  ISS that will involve on-orbit activities, including docking with the ISS, will  be subject to the cross waivers of liability required by agreements with  participating countries. This cross waiver is not applicable when CSLA is  applicable, such as during a licensed launch or reentry, and it does not  address liability for damage to non-ISS parties such as other orbiting  spacecraft. Claims between NASA and the launch company are not  affected by the ISS cross waiver and are historically addressed as a  contractual agreement. In addition, one commercial space launch  company’s operations will only have suborbital launches and reentries  and no on-orbit activities that require regulation. Officials from two launch  companies stated that they did not believe that on-orbit activities need to  be regulated by FAA or that federal indemnification coverage should be  provided. However, one insurer noted that other proposed manned  launches—such as one company’s planned on-orbit “hotel”—will not be  NASA related and therefore will not be covered by any regulatory regime.  An expert noted that such a proposal for an on-orbit hotel remains an  open question regarding regulation and liability exposure. In addition, the  expert noted that federal oversight of on-orbit activities may be needed to  provide consistency and coordination among agencies that have on-orbit  jurisdiction. He pointed out that the Federal Communications Commission  and the National Oceanic and Atmospheric Administration have  jurisdiction over their satellites and NASA has jurisdiction over the ISS.  Thus, according to the expert, there should be one federal agency that  coordinates regulatory authority over on-orbit activities.
At the time of our July 2012 report, FAA senior agency officials said that  they might seek statutory authority over on-orbit activities but as of  January 2014 have not done so.  An insurer told us that having FAA in  charge from launch to landing would help ensure that there were no gaps  in coverage. According to this insurer, this would help bring stability to the  insurance market in the event of an accident as involved parties would be  clear on which party is liable for which activities. However, having FAA  license on-orbit activities would increase the potential costs to the federal  government for third party claims. If FAA obtains authority to license on- orbit activities then the potential costs to the government may increase as  its exposure to risk increases.

	Ending Indemnification Could Potentially Decrease U.S. Competitiveness

Based on work for our July 2012 report, the actual effects that eliminating  CSLA indemnification would have on the competitiveness of U.S.  commercial launch companies are unknown. For example, we do not  know how insurance premiums or other costs might change as well as the  availability of coverage. In addition, we do not know whether or to what  extent launch customers might choose foreign launch companies over  U.S. companies. Furthermore, it is difficult to separate out the effects of  withdrawing indemnification on the overall competitiveness of the U.S.  commercial space launch industry. Many factors affect the industry’s  competitiveness, including other U.S. government support, such as  research and development funds, government launch contracts, and use  of its launch facilities, in addition to the third party indemnification.
While the actual effects on competition of eliminating CSLA  indemnification are unknown, several launch companies and customers  with whom we spoke said that in the absence of CSLA indemnification,  increased risk and higher costs would directly affect launch companies  and indirectly affect their customers and suppliers. The same participants  said that two key factors—launch price and launch vehicle reliability— generally determine the competitiveness of launch companies. According  to two launch customers, launch prices for similar missions could vary  dramatically across countries. For example, at the time of our July 2012  report two customers said that a similar launch might cost about $40  million to $60 million with a Chinese launch company, about $80 million to  $100 million with a French launch company, and approximately $120  million with a U.S. launch company. However, another U.S. launch  company told us that it was developing a vehicle for a similar launch for  which it intended to charge about $50 million. Other considerations also  would be involved in selecting a launch company, according to launch  customers with whom we spoke. For example, some said that export  restrictions for U.S. customers could add to their costs or prevent them  from using certain launch companies. One launch customer also said that  it considered the costs of transporting the satellite to the launch site as  well as other specific aspects of a given launch.
Launch company officials said that the lack of government indemnification  would decrease their global competitiveness by increasing launch costs.  Launch company officials said their costs would increase as a result of  their likely purchase of greater levels of insurance to protect against the  increased potential for third party losses, as the launch companies  themselves would be responsible for all potential third party claims, not  just those up to the maximum probable loss amount. As previously  discussed, whether the private insurance market has the capacity to  provide coverage at levels currently provided by the government, or at  what price they might sell such coverage, is uncertain. Some launch  company officials said that their costs may also increase if their suppliers  decided to charge more for their products or services as a result of being  at greater risk from a lack of CSLA indemnification. That is, to  compensate for their greater exposure to potential third party claims,  some suppliers might determine that they need to charge more for their  products to cover the increased risks they are now assuming. Some  launch companies told us that they would likely pass additional costs on  to their customers by increasing launch prices. Two launch customers  told us that in turn, they would pass on additional costs to their  customers. Several also told us that they might increase the amount of  their own third party liability insurance, another cost they might pass on to  their customers. Two said they might be more likely to choose a foreign  provider if the price of U.S. launches rose.
According to launch companies and customers we spoke with, ending  CSLA indemnification would also decrease the competitiveness of U.S.  launch companies because launch customers would be exposed to more  risk than if they used launch companies in countries with government  indemnification. For example, officials from several launch companies  and customers said that if some aspect of the launch payload is  determined to have contributed to a launch failure, they could be exposed  to claims for damages from third parties. Launch customers are currently  protected from such claims through the CSLA indemnification program.  Several launch customers with whom we spoke said that without CSLA  indemnification they might be more likely to use a launch company in a  country where the government provides third party indemnification.
According to launch companies with whom we spoke, ending CSLA  indemnification could also have other negative effects. For example,  some said that the increased potential for significant financial loss for third  party claims could cause launch companies, customers, or suppliers to  reassess whether the benefits of staying in the launch business outweigh  the risks. If some companies decided it was no longer worthwhile to be  involved in the launch business, it could result in lost jobs and industrial  capacity. Lastly, one industry participant pointed out that some suppliers,  such as those that build propulsion systems, have to maintain significant  amounts of manufacturing capacity whether they build one product or  many. If there are fewer launches, the cost of maintaining that capacity  will be spread among these fewer launches, resulting in a higher price for  each launch. To the extent that the federal government is a customer that  relies on private launch companies for its space launch needs, it too could  face potentially higher launch costs.

	Concluding Observations

Although the number of commercial launches by U.S. companies has  been lower in the past few years than in years prior, commercial space is  a dynamic industry with newly developing space vehicles and missions.  With the termination of the shuttle program, NASA has begun to procure  cargo delivery to the ISS from private launch companies and intends to  use private companies to carry astronauts to the ISS starting in 2017. In  addition, private launch companies have been developing launch vehicles  that will eventually carry passengers as part of an emerging space  tourism industry. Both of these developments would increase the number  and type of flights eligible for third party liability indemnification under  CSLA. As the industry changes and grows, continually assessing federal  liability indemnification policy to ensure that it protects both launch  companies and the federal government will be important. This  assessment would be impacted by the amount of coverage the insurance  industry is willing to provide for space launches, which depends on a  number of factors including the number of launches and reentries and  insurers’ ability to evaluate the underlying risks. To the extent insurance  capacity might increase, it could reduce the need for indemnification  under CSLA. It is also possible, however, that certain events, such as a  launch failure with large losses, could reduce insurance industry capacity  for this type of coverage. Review of potential alternative means for  addressing the risks associated with space launches, while beyond the  scope of our work, would also be an important part of any ongoing  assessment of CSLA indemnification.
Several factors raise questions about FAA’s methodology for determining  the maximum probable loss for a commercial space launch, which  determines the amount of insurance coverage launch companies must  buy and the amount above which government indemnification begins.
During work for our July 2012 report, FAA said it believed its approach  was conservative, but acknowledged that parts of the maximum probable  loss methodology have not been updated, including a dollar amount for  estimating space launch losses from casualties and fatalities which the  insurance industry says is outdated. In addition, FAA used this estimate  of losses from casualties and fatalities as the basis for estimating  potential property damage, an approach that could underestimate  property losses. Moreover, FAA had not had outside experts and risk  modelers review its methodology. FAA officials told us that subsequent to  our prior report they have taken some initial steps toward revising and  updating their MPL methodology, but that budget constraints have  prevented further progress in the short term. FAA officials have recently  suggested that the Consolidated Appropriations Act of 2014 provides the  resources to assess the MPL methodology, possibly as soon as March  2014.  We agree with FAA that the benefits of developing and  implementing a potentially more comprehensive maximum probable loss  methodology need to be balanced against the possible increased costs to  the agency and to launch companies. However, the importance of a  sound calculation makes review of the current methodology a worthwhile  effort.  An inaccurate maximum probable loss value can increase the cost  to launch companies by requiring them to purchase more coverage than  is necessary, or result in greater exposure to potential cost for the federal  government. Thus, we continue to believe that our July 2012  recommendation that FAA periodically review and update as appropriate  its methodology for calculating launch providers’ insurance requirements  has merit and should be fully implemented.
Chairman Palazzo, Ranking Member Edwards, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

	GAO Contacts and Staff Acknowledgments

If you or your staff have any questions about this testimony, please  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.
Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement.
GAO staff who made key contributions to this testimony are, in addition to  the contacts named above, Teresa Spisak and Patrick Ward (Assistant  Directors), Chris Forys, David Hooper, Maureen Luna-Long, Sara Ann  Moessbauer, and Steve Ruszczyk made key contributions to this report.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Summary:
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, 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, subject to congressional appropriations. As of 2013, the inflation-adjusted amount is about $3 billion. CSLA provides for this payment, called indemnification.
This testimony is based on a July 2012 report and January 2014 updates to FAA launch data, FAA progress on implementing GAO recommendations, and insurance industry capacity. It discusses (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.

What GAO Found

According to studies, the United States in 2012 provided 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 U.S. is limited by the Commercial Space Launch Act (CSLA). 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. This is 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, which may not be sound. FAA had 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 was outdated. 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 agreed that a review could be beneficial and that involving outside experts might be helpful. FAA officials said that subsequent to GAO's 2012 report they have taken initial steps to improve their methodology for estimating probable losses.
The insurance market is generally willing and able to provide up to about $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 $82 million per launch, and coverage available through CSLA is about $3 billion above that, insurers could provide some of the coverage currently available through CSLA. 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 CSLA 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 not clear.

What GAO Recommends

GAO continues to believe that its July 2012 recommendation that FAA periodically review and update as appropriate its methodology for calculating launch providers' insurance requirements has merit and should be fully implemented.