Commercial Space Launches: FAA's Risk Assessment Process Is Not Yet Updated
Released: 2014-02-04T00:00:00

Letter

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.

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