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. 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.) 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. 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. 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.