	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. 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. 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. China, France, and Russia had a first tier of insurance coverage that a  commercial launch company must obtain, similar to the United States. For all these countries, their commitments to pay have never been tested. 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. 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. Use of a casualty estimate that is based on 2002 data, however, still  raises questions about whether this figure is outdated, which could result  in underestimating the cost of casualties. 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. 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. 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, 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. 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. 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. In addition, we do not know whether or to what  extent launch customers might choose foreign launch companies over  U.S. companies. The same participants  said that two key factors—launch price and launch vehicle reliability— generally determine the competitiveness of launch companies. 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. Two said they might be more likely to choose a foreign  provider if the price of U.S. launches rose. 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. 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.
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.