As  part of FAA’s process for issuing a license for a commercial launch or  reentry, the agency determines the amount of insurance a launch  company is required to purchase so the launch company can  compensate third parties and the federal government for any claims  for damages that occur as a result of activities carried out under the  license. The amount of insurance coverage that FAA requires launch companies  to purchase is intended to reflect the greatest dollar amount of loss to  third parties and the federal government for bodily injury and property  damage that can be reasonably expected to result from a launch or  reentry accident. This amount is known as the maximum probable loss  (MPL). FAA-contracted experts and others have found that FAA’s  estimates of the number of casualties have tended to be too high, that  estimates of losses from property damage may have been too high in  some cases and too low in others, and that the $3 million cost-of-casualty  amount was likely too low because it is based on outdated information. FAA implemented a revised process for estimating the number of  casualties and reduced the 50 percent factor it uses to estimate losses  due to property damage by half, and these revisions have tended to  reduce insurance requirements, with some exceptions. However, FAA  has not addressed the identified weakness of an outdated cost-of- casualty amount, which may indicate that FAA is not requiring launch  companies to have insurance coverage for losses that can be reasonably  expected and therefore may be exposing the government to excess risk. 1). FAA Has Revised Its Methodology for Estimating the Number of Casualties and Property Damage

In April 2016, FAA implemented a new MPL calculation methodology that  incorporates revisions to the processes for estimating the number of  casualties and losses due to property damage to address the  weaknesses identified in these elements of the MPL calculation. In 2016, ACTA completed the  design of a method for estimating the number of casualties that uses  computer software to simulate a range of possible launch accidents that  are intended to be more realistic than the scenario used in FAA’s  previous method. FAA has revised the factor it  uses to estimate losses from property damage in the MPL calculation and  is also testing a new process. Unaddressed Weakness in FAA’s Cost-of-Casualty Amount May Expose the Federal Government to Excess Liability Risk

FAA has not addressed the weakness identified in the cost-of-casualty  amount used in the MPL calculation, and, as of January 2017, it had not  determined when it would do so. However, FAA has faced challenges in identifying reliable information  because each of the sources that its contractor reviewed had significant  limitations. Federal internal control standards require that agency management  identify, analyze, and respond to risks related to achieving the entity’s  objectives, and use current data. These standards also require that  agency management define how to achieve objectives and the time  frames for achieving them. Further, because FAA’s contractors have concluded that the  cost-of-casualty amount is likely too low, the current MPL calculation may  not account for all damages to third parties and federal government  property and personnel that can reasonably be expected to result from a  launch accident, as required by FAA regulations. However, FAA’s identified steps to update the cost-of-casualty amount  remain incomplete because the agency has not prioritized this issue. FAA  officials said that they have prioritized other work, such as reviewing  launch license applications, ahead of addressing the weakness in the  cost-of-casualty amount. Conclusions

FAA’s mission includes promoting the development of the commercial  space launch industry as well as managing risk to the public and the  federal government. While there is substantial uncertainty in the MPL calculation, the  use of outdated data as the basis of the cost-of-casualty amount  represents a risk that the current MPL calculation may not account for  damages to third parties and federal property and personnel that can  reasonably be expected from a launch accident, as required by FAA  regulations. Recommendation for Executive Action

To help ensure that the government is not exposed to more liability risk  than intended, the Secretary of Transportation should ensure that the  FAA Administrator prioritizes the development of a plan to address the  identified weakness in the cost-of-casualty amount, including setting time  frames for action, and update the amount based on current information. Agency Comments and Third-Party Views

We provided a draft of this report to the Department of Transportation for  its review and comment.
Why GAO Did This Study

To assist in the development of the commercial space launch industry, the federal government shares liability risks for losses from damages to third parties or federal property. This risk-sharing arrangement requires space launch companies to have a specific amount of insurance for damages to third parties and federal property. The federal government is potentially liable for third-party claims above that amount, up to an estimated $3.1 billion in 2017, subject to appropriations.
The Commercial Space Launch Competitiveness Act enacted in 2015 required the Department of Transportation—of which FAA is a part—to study the methodology used to determine launch companies' insurance requirements. The law also contains a provision for GAO to evaluate the study's conclusions and any planned revisions.
This report discusses the extent to which FAA has revised its methodology for calculating insurance requirements to address previously cited weaknesses and the potential effect of any changes on financial liabilities for the government. GAO reviewed documents from FAA and its contractors on alternative methods for calculating insurance requirements, interviewed FAA officials and a contractor involved in designing alternative methods, and reviewed GAO's prior work and relevant laws.

What GAO Found

The Federal Aviation Administration (FAA) has revised its method for calculating insurance requirements to address some known weaknesses. FAA is the part of the Department of Transportation that determines the amount of insurance that commercial space launch companies must purchase to cover damages from accidents that harm third parties—that is, the uninvolved public—or federal property and personnel, unless companies otherwise demonstrate sufficient financial resources to cover the same calculated damages. The amount of insurance required is based on FAA's calculation of the maximum loss that can be reasonably expected. FAA contractors found the following:
FAA's estimates of the number of casualties (serious injuries and deaths) that could result from a launch accident have likely been too high, and have been based on an unrealistic scenario;
FAA's estimates of losses due to property damage may be too high in some cases, and too low in others;
FAA's estimate of the average cost of a casualty —referred to as the cost-of-casualty amount—is based on outdated information and is likely too low. The amount has been fixed at $3 million since 1988.
FAA implemented a new method for estimating the number of casualties in April 2016 that uses computer software to simulate a range of possible launch accidents that are intended to be more realistic than FAA's previous scenarios. FAA has also reduced the factor it uses to estimate losses due to property damage, based on tests of a new process for estimating such losses that showed the previous factor was too high. Both of these revisions have tended to reduce insurance requirements. In addition, FAA assigned one of its two contractors examining elements of the methodology to study potential improvements in estimating average casualty losses, but that contractor found significant limitations in each alternative approach that it reviewed.
Because FAA has not yet addressed the identified weakness in the cost-of-casualty amount used in its calculation, the federal government may be exposed to excess risk. FAA has identified potential steps to update the information the cost-of-casualty amount is based on, including seeking public input on whether and how to revise the amount, but the agency does not have a complete plan for updating the cost-of-casualty amount. Federal internal control standards require that agency management respond to risks related to achieving the entity's objectives, define how to achieve objectives, and set time frames for achieving them. FAA has not responded to the risk identified in using outdated data as the basis of the cost-of-casualty amount because FAA has prioritized other work, such as reviewing launch license applications, ahead of this issue. Further, because the weakness in the cost-of-casualty amount indicates that the amount is likely too low, the current calculation may not account for damages to third parties and federal property and personnel that can reasonably be expected from a launch accident, as required by FAA regulations. By leaving this weakness unaddressed, FAA's insurance requirements may not account for damages that can be reasonably expected, and may expose the government to more liability risk than intended under the risk-sharing arrangement.

What GAO Recommends

FAA should prioritize planning for addressing the identified weakness in the cost-of-casualty amount and update the amount based on current information. The agency did not comment on this recommendation.