For the second time in 10 months, the U.S. Government Accountability Office (GAO) has questioned the FAA’s calculations in determining the proper balancing of risk between the federal government and the commercial space launch industry.
This risk sharing regime was initially established in the Commercial Space Launch Amendments of 1988 (section 5). Under this regime, space launch companies purchase insurance against claims by third parties and for loss or damage to federal property and personnel as a result of a launch or reentry accident, unless companies otherwise demonstrate sufficient financial responsibility 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 (referred to in the statute as “maximum probable loss” (MPL). The federal government is potentially liable for damages above the MPL, up to an estimated 2017 cap of $3.1 billion. In 2016, the FAA issued 5 commercial space launch licenses with third-party MPL amounts ranging from $10 million to $99 million.
The U.S. Commercial Space Launch Competitiveness Act, enacted in 2015, required the FAA to study its 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. A key feature of the Act is to ensure that the FAA’s MPL calculations do not expose the federal government to greater indemnification costs and that launch companies are not required to purchase more insurance coverage than necessary.
In its March 2017 report, Commercial Space Launch Insurance: Weakness in FAA’s Insurance Calculation May Expose the Federal Government to Excess Risk, the GAO pointed out that FAA contractors determined the agency’s estimate of the average cost of a commercial space launch casualty was too low and based on information from 1988. As a result, the GAO concluded that the FAA “may not be requiring launch companies to hold enough insurance, which, as a result, may expose the government to more risk than intended.” In its January 2018 report, Commercial Space Launch Insurance: FAA Needs to Fully Address Mandated Requirements, the GAO concluded that the FAA still has not revised its methodology for determining the cost of an individual casualty. The GAO also determined the FAA failed to comply with the 2015 Act in the following two respects by not: evaluating the cost impact of implementing an updated MPL methodology on the direct costs to launch companies (insurance Premiums) and to the federal government (indemnification liability); and consulting with commercial space sector entities and insurance providers on the cost impact of its revised MPL methodology. The FAA concurred in the GAO’s recommendations.