Background The Commercial Space Launch Act Amendments of 1988 established the  foundation for the current U.S. policy to potentially provide federal  payment for a portion of claims by third parties for injury, damage, or loss  that results from a commercial launch or reentry accident. A stated goal  of the act was to provide a competitive environment for the U.S.  commercial space launch industry. The act also provided for, among  other things, government protection against some losses—referred to as  indemnification—while still minimizing the cost to taxpayers. 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 reentry. According to agency officials, in 2016 FAA  issued five active licenses, which had an average third-party MPL of  about $51 million and ranged from $10 million to $99 million. The amount of insurance coverage that FAA requires launch companies  to purchase—the MPL value—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. FAA calculates separate MPL values for  potential damages to third parties and the federal government. For each  launch license that it issues, FAA determines MPL values for third parties  with the intent of estimating the greatest dollar amount of losses that  reasonably could be expected from a launch or reentry accident, which  have no less than a 1 in 10 million chance of occurring. For damages to  the federal government, FAA determines MPL values with the intent of  estimating the greatest dollar amount of losses that reasonably could be  expected from a launch or reentry accident, which have no less than a 1  in 100,000 chance of occurring. According to FAA, the agency defines  these probability thresholds to estimate the federal government’s  exposure to losses above the MPL. Agency officials said that the current  probability thresholds are set such that losses are very unlikely to exceed  launch companies’ private insurance and become potential costs for the  government under CSLCA. FAA’s process for determining the MPL value for a launch or reentry  license generally includes three elements:  1.  Number of casualties. Estimating the number of third-party  casualties involves adding the number of direct and secondary  casualties that could result from a launch accident. Direct casualty  estimates include serious injuries and deaths. Secondary casualties  include those resulting from fires and collapsing buildings.  2.  Cost of casualties. FAA uses $3 million as an estimate of the  average loss per casualty, which is multiplied by the number of  estimated casualties.  3.  Property damage. FAA applies a predetermined factor—which it  recently changed from 50 percent to 25 percent—to the estimated  cost of casualties to derive estimated losses from property damage. The total MPL is equal to the estimated cost of casualties plus property  damage. FAA has revised two components of its MPL methodology since our 2012  report. For example, in April 2016, the agency adopted a new method for  estimating the number of casualties, known as the risk profile method.  This method uses different tools to simulate a range of possible scenarios  to create a distribution of potential casualty numbers and the simulated  probability of different levels of casualty numbers. The risk profile method  replaced FAA’s “overlay method,” which was a method it had used since  the early 1990s which the agency said did not work well for launches of  small launch vehicles in remote areas, or for reentries. In addition, FAA  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. GAO Previously Reviewed  FAA’s MPL Methodology We have previously reviewed FAA’s MPL methodology in 2012 and 2017.  In 2012 we examined the U.S. government’s indemnification policy, the  federal government’s potential costs for indemnification, and the effects of  ending indemnification on the competitiveness of U.S. launch companies,  among other aspects of FAA’s MPL methodology. In 2017 we examined  the extent to which FAA had revised its MPL methodology since our 2012  report to address previously cited weaknesses and the potential effect of  any changes to that methodology on financial liabilities for the federal  government. The findings and recommendations of those reports,  including any unaddressed weaknesses, are discussed later in this report. FAA Did Not Fully  Address the CSLCA’s  Three Mandated  Requirements CSLCA required FAA to evaluate its MPL methodology incorporating  three requirements, but the agency’s report did not fully address these  requirements. First, the act required FAA to ensure a balance of risk between launch  companies and the federal government. However, agency officials  told us that they did not re-evaluate the probability thresholds—which  are used to divide the risk of loss between launch companies and the  federal government—as part of evaluating its MPL methodology when  implementing the risk profile method due to resource constraints. Second, the act required FAA to consider the cost impact of  implementing an updated MPL methodology, but the agency did not  evaluate the impact of implementing its revised methodology on the  direct costs to launch companies (insurance premiums) and to the  federal government (indemnification liability). Third, the act required FAA to consult with the commercial space  sector and insurance providers in evaluating its MPL, but they did not  consult such parties in response to the act. Without fully addressing CSLCA’s mandated requirements, FAA cannot  ensure that the federal government is not exposed to greater liability  costs than intended or that launch companies are not required to  purchase more insurance coverage than necessary. FAA Has Not Fully  Evaluated the Balance  between Government  Liability Exposure and  Industry Insurance Costs In its report, FAA states that implementing an updated MPL methodology  in April 2016—the risk profile method—helps ensure that the federal  government is not exposed to greater liability costs than intended and that  launch companies are not required to purchase more insurance coverage  than necessary, as required under CSLCA. Further, agency officials told  us that their updated methodology is technically more valid and improves  their ability to avoid overestimating MPL values (which can cause launch  companies to purchase more insurance coverage than necessary) or  significantly underestimating MPL values (which can expose the federal  government to greater costs than intended). While an improved model may provide a more realistic calculation of the  MPL, by changing the resulting estimates it can also change the balance  between the federal government’s exposure to liability costs and the  amount of insurance launch companies are required to purchase. For  example, if the more realistic results produced by the revised  methodology increased the MPL estimates, this would increase insurance  costs for the launch companies and reduce the federal government’s  exposure, thereby shifting the balance of costs between the two and  suggesting a reevaluation of the thresholds. In addition, FAA officials told us that they had not reevaluated the  probability thresholds upon implementing the revised MPL methodology,  although defining these thresholds is their primary mechanism for  adjusting the balance of risk between launch companies and the federal  government. Agency officials acknowledged that an examination of the  thresholds’ continued appropriateness would be warranted in the future. However, they told us that changing the probability thresholds would  require significant effort because it would require them to change federal  regulations and that resources are currently allocated to other rulemaking  priorities. Nevertheless, without evaluating the appropriateness of the  probability threshold as part of the mandated evaluation of the MPL  methodology, FAA cannot ensure that the federal government is not  exposed to greater liability costs than intended or that launch companies  are not required to purchase more insurance coverage than necessary. FAA Evaluated Only  Indirect Costs to Industry  and Government of  Implementing a New  Methodology CSLCA also required FAA to consider the cost impact on both the  commercial space launch industry and the federal government of  implementing an updated MPL methodology. In its report to Congress,  the agency discussed indirect costs to launch applicants and the federal  government. For example, FAA discussed indirect data burden costs on  launch company applicants and FAA analysts associated with the  agency’s risk profile method implementation. The report states that the  risk profile method requires more data from a launch applicant than the  previous method, but that the added burden is minimal because the  information is similar to the type of information required by FAA for a risk  analysis. Agency officials also said that the risk profile method requires  more of an FAA analyst’s time than the overlay method, but that the  added burden is minimal because the work done by FAA on risk analysis  provides much of the foundation for an MPL analysis. However, FAA’s report did not include an evaluation of the direct costs to  launch companies and the federal government of implementing an  updated MPL methodology. The report identifies the direct cost to the  launch industry as insurance premiums, and the direct cost to the federal  government include potential indemnification payments. Agency officials  also told us that the agency does not track commercial space launch  insurance costs, and that they do not have meaningful insights on  insurance premiums paid by commercial launch companies. FAA officials  told us that they only have a general notion of insurance premiums  because the industry is reluctant to share such information. FAA officials  also told us that, outside of the work done for the report, they have not  evaluated the economic implications for launch companies of  implementing an updated MPL methodology. Without evaluating direct  costs to both the launch companies and the federal government, FAA will  be limited in its ability to consider the impact of the cost to both the  industry and the federal government of implementing an updated  methodology. FAA Obtained Limited  Input from the Commercial  Space Sector and  Insurance Providers Although CSLCA required FAA to consult with the commercial space  sector and insurance providers in evaluating its MPL methodology for the  mandated report, it obtained limited input. For example, FAA officials told  us that they obtained input from their Commercial Space Transportation  Advisory Committee (COMSTAC) in April 2016 about what to include in  their report to Congress, but did not consult with the commercial space  sector and insurance providers to evaluate their MPL methodology in  response to CSLCA. FAA officials also said that, to respond to CSLCA’s consultation  requirement, they did not think they needed to repeat the consultations  they took in 2013. In January 2013, the agency solicited input from  COMSTAC’s Business/Legal Working Group about how to best conduct a  review of FAA’s methodology for calculating MPL, in response to our July  2012 report. FAA also briefed the Business/Legal Working Group in  May 2013 to solicit input on MPL methodologies, including the risk profile  method. In the January 2013 meeting, a COMSTAC member suggested  several contractors for a study by outside experts of the complete MPL  methodology, and FAA subsequently hired one of these contractors to  develop the risk profile method that it implemented in April 2016.  However, the agency did not solicit input from COMSTAC about its risk  profile methodology prior to its April 2016 implementation or following  CSLCA’s November 2015 mandated evaluation. As a result, FAA lacks  input on the effect of its revised MPL methodology on launch companies  and the federal government, making it difficult to evaluate the balance of  risk between the two. FAA’s Revised MPL  Methodology Does  Not Fully Address  Certain Previously  Identified  Weaknesses Our 2012 report identified concerns with all three components of FAA’s  MPL methodology: estimating the number of casualties, estimating the  cost of casualties, and deriving estimated property damage costs from  estimated casualty costs. In that report we recommended that the agency  reassess its methodology, including the reasonableness of several key  elements. As noted in our 2017 report, FAA has since made  improvements to its methodology. However, it still has not yet updated the  cost of a casualty. In addition, in our 2017 report we also noted that there  are instances where deriving estimated property damage from estimated  casualty costs is inappropriate. As of November 2017, FAA does not have  guidance to identify such instances or to guide decisions on which tools to  use in developing the MPL estimate. FAA Has Made  Improvements to Its MPL  Methodology but Has Not  Updated the Cost-of- Casualty Amount FAA has taken steps designed to improve two of three elements of its  MPL methodology, including revising its methodology for estimating the  number of potential casualties for a given launch and changing the factor  it uses to derive estimated property damage from estimated casualties.  However, the agency has not updated the third element, the amount it  uses for the cost of an individual casualty, leaving a previously identified  weakness unaddressed. Our 2012 report raised concerns with each of the three components of  FAA’s MPL calculation methodology. First, we found that FAA’s method for estimating the number of  casualties involved use of a single loss scenario instead of applying  the insurance industry’s standard practice of catastrophe modeling,  and that the agency’s method might significantly understate the  number of potential casualties. Catastrophe modeling, unlike the  single-loss approach, generally estimates losses by using various  tools to simulate tens of thousands of scenarios to create a  distribution of potential losses and the simulated probability of  different levels of loss. Second, we reported that FAA had been using an outdated and likely  understated figure of $3 million to estimate the cost of a single  casualty—including injury or death—which Office of Commercial  Space Transportation officials said has not been updated since they  began using it in 1988. Third, we reported that the agency’s approach of estimating potential  property damage by adding a flat 50 percent to the estimated casualty  damage could lead to estimates that were too high in some cases. Given these weaknesses, we recommended that FAA reassess its MPL  methodology, including assessing the reasonableness of the cost-of- casualty amount and other assumptions used. Because the agency took  actions to assess its MPL methodology, we closed the recommendation  as implemented. In March 2017 we reported that FAA had taken steps to address  weaknesses in two of these three areas. Specifically, we reported that  FAA’s adoption of the risk profile method in April 2016 had improved its  estimates of the number of potential casualties associated with a  particular license launch. In addition, we reported that the agency had  revised the factor it uses to estimate losses from property damage in the  MPL calculation from 50 percent to 25 percent. This change has resulted  in property damage estimates that FAA officials believe are still  conservative but more realistic than previous estimates. However, in our March 2017 report we also determined that FAA had not  yet addressed weaknesses in the cost-of-casualty amount we had  previously identified; despite the conclusion by a contractor it had hired to  study the cost-of-casualty that it was too low. Agency officials told us that  they had not addressed this weakness because of other priorities. Given  the significance of the cost-of-casualty amount to the MPL calculations,  we recommended that FAA prioritize 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. In October 2017, FAA officials told us that they had not yet  updated the cost-of-casualty because they have continued to prioritize  completing other work with their limited resources, such as reviewing  launch applications and fulfilling other safety responsibilities. As a result,  our recommendation remains open. FAA officials told us that they have identified potential steps to update the  cost-of-casualty amount, including seeking public input on whether and  how to revise the amount, but that they do not expect to make a decision  on whether to make any changes to the cost-of-casualty amount until  June 30, 2018, at the earliest. FAA officials told us that in order to  prioritize the development of a plan to address the identified weakness in  the cost-of-casualty amount they will need to consult with both the  commercial space and insurance industries about the necessity and  implications of any potential increase in the cost-of-casualty amount.  Agency officials said that they plan to do such consultations through  COMSTAC. However, because COMSTAC was just reestablished in  June 2017 after not having been active since November 2016 and new  members had not been approved as of October 2017, the anticipated  decision date of June 2018 could be further delayed. As we reported in March 2017, an understated cost-of-casualty amount  can lead to an inaccurate loss calculation, which in turn understates the  amount of insurance a launch company must obtain. This could increase  the potential exposure to the federal government, as the insurance  amount would be less than the potential losses associated with the  launch activity and the property would be inadequately protected.  Because of this potential exposure, we maintain that addressing this  weakness is a priority. FAA Does Not Have  Guidance for When to  Estimate Property  Damage Separately from  the Number of Casualties  and Which Analytical Tool  to Use As noted above, in our 2012 report we raised concerns about the first  element of FAA’s MPL methodology, which is estimating the number of  potential casualties. FAA officials said that they have implemented two  tools for estimating the number of potential casualties, and that each tool  requires a different level of resources and is more appropriate for different  launch scenarios. The Range Risk Analysis Tool creates physics-based  simulations of possible accidents using launch vehicle data, such as  launch trajectory and types of failures, and assigns each simulated  accident a probability of occurrence based on the failure rates of the  different elements of the launch vehicle. According to agency officials, the  Range Risk Analysis Tool is a comprehensive, high-fidelity tool and is the  most appropriate tool for coastal launch sites, which are often located in  heavily populated areas, and is labor intensive. The Risk Estimator Sub- orbital and Orbital Launch Vehicle and Entry tool, which in contrast to the  Range Risk Analysis Tool, is a medium-fidelity tool that can be used for  low-risk launches, such as launch sites located in very sparsely populated  areas and reentry operations that do not need the use of a high-fidelity  tool. According to FAA, this tool significantly reduces the time required to  estimate the risk from launch and reentry vehicle operations. In our 2017 report, we also reiterated that there are cases where the third  element of FAA’s methodology, deriving estimated property damage from  estimated casualties, could lead to misleading MPL calculations.  Specifically, in March 2017 we reported that estimating losses from  property damage as a percentage of losses from casualties could lead to  overestimates. For example, FAA’s contractor found that, if a launch  accident affected a residential area, the agency’s practice of estimating  property damage based on casualties would likely overstate property  damages because residential structures have relatively low values  compared to losses from casualties. We also reported in March 2017 that  in some accidents the number of casualties may be low but property  losses could still be very large, in which case FAA’s estimating property  losses based on casualties would likely understate potential property  damage. For example, a launch vehicle could strike an unoccupied  structure that is very expensive, such as a neighboring launch complex.  Agency officials said that while deriving property losses from casualty  losses is a simpler method that may be an effective use of limited FAA  resources, it could be inappropriate in scenarios where the number of  casualties might be low but property losses could still be very large. In October 2017, agency officials said that FAA had not developed  guidance for determining, for a given launch license, which of the  available tools would be most appropriate to estimate the number of  potential casualties, and whether it would be more appropriate to estimate  property losses separately rather than derive them from estimated  casualties. While FAA officials said they believe their current decision  process is adequate and that they do not need more formal guidance at  this time, they also told us that they were in the process of developing  internal guidance on the most appropriate tool to use for future launches.  The officials said that they did not have a projected completion date for  the guidance, primarily because the agency has other priorities and  resource limitations. As noted earlier, these priorities include reviewing  commercial space launch license applications and managing program  safety. Federal internal control standards state that, as part of an entity’s risk  assessment component, management should identify, analyze, and  respond to risks to achieving objectives. For example, the standards  state that management should design control activities in response to the  entity’s objectives and risks to achieve an effective internal control  system. Without such guidance, FAA could face challenges in ensuring that it is  using the most appropriate method to calculate an MPL for a given launch  and is making the most efficient use of its resources. Such guidance  could become more important as the number of commercial space  launches increases, potentially creating greater demands on its  resources. We have previously reported that the commercial space  launch industry has experienced significant growth in the number and  complexity of launches in the past half-decade. FAA has also reported  that its licensed launches have increased 60 percent and industry  revenue has increased 471 percent since 2012. Conclusions FAA’s MPL methodology is critical in balancing the encouragement of the  U.S. commercial space industry with the need to manage the federal  government’s risk exposure because it determines how much risk each  party will bear for third-party damages resulting from potential space  launch accidents. However, despite changes to the methodology, the  probability threshold that the agency uses to achieve this balance of risk  has been the same since the 1990s, and has not been reviewed for  appropriateness. In addition, while FAA evaluated the effect of its MPL  methodology on the indirect costs of launch companies and the federal  government, it did not similarly evaluate direct costs. Further, although  FAA has obtained input from some stakeholders on certain aspects of its  MPL methodology, it has not consulted with launch providers and  insurance companies to evaluate effects on key potential costs to launch  companies and the federal government, as required under CSLCA. FAA  officials told us that resource issues and pursuing other priorities have  prevented them from taking these actions. However, the longstanding  nature of these issues, as well as their importance in determining the  federal government’s financial exposure, makes their completion a  priority. FAA has also begun improving other aspects of its MPL process, but  important actions remain incomplete. For example, the cost of a casualty,  a key component of the methodology, has not been updated since 1988.  While FAA has identified potential steps to update this amount, it has not  implemented these steps and our March 2017 recommendation to  prioritize the updating of this amount remains open. Further, agency  officials said they have begun to develop internal guidance on how to  determine which methodological tools should be used for a given launch,  but are not sure when this process will be completed. These are  important steps to help ensure the validity of the MPL methodology and  the results obtained for each launch, which in turn determine the balance  between the amount of insurance launch companies are required to  purchase and the potential financial exposure for the federal government. Recommendations for  Executive Action We are making the following four recommendations to FAA:  The FAA Administrator should fulfill the CSLCA mandate to include  ensuring a balance of risk between the federal government and launch  companies as part of FAA’s MPL methodology evaluation by reexamining  the current probability thresholds. (Recommendation 1) The FAA Administrator should fulfill the CSLCA mandate to analyze the  cost impact of implementing its revised MPL methodology by evaluating  the impact on the direct costs of launch companies and the federal  government. (Recommendation 2) The FAA Administrator should fulfill the CSLCA mandate to evaluate its  MPL methodology in consultation with the commercial space sector and  insurance providers by consulting with those entities on the cost impact of  its revised MPL methodology, including an updated cost-of-casualty  amount, on the launch industry and the federal government.  (Recommendation 3) The FAA Administrator should establish an estimated completion date for  developing and implementing a plan to establish guidance on the most  appropriate MPL methodologies and tools to use for each launch.  (Recommendation 4) Agency Comments We provided a draft of this report to the Department of Transportation for  their review and comment. In its comments, reproduced in appendix I, the  Department of Transportation concurred with our recommendations. The  Department of Transportation also provided technical comments, which  we incorporated as appropriate. We are sending copies of this report to interested congressional  committees and the Secretary of the Department of Transportation. In  addition, this report will be available at no charge on GAO’s website at  http://www.gao.gov. If you or your staff have any questions or would like to discuss this work,  please contact Alicia Puente Cackley at (202) 512-8678 or  cackleya@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Individuals making key contributions to this report are listed in appendix II. Appendix I: Comments from the Department  of Transportation Appendix II: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the contact named above, Patrick Ward (Assistant Director),  Jessica Artis, Isidro Gomez (Analyst in Charge), Courtney La Fountain,  Maureen Luna-Long, Jessica Sandler, Jennifer Schwartz, Joseph  Silvestri, and Shana Wallace made key contributions to this report.
The federal government shares liability risks with the commercial space launch industry for accidents that result in damages to third parties or federal property. This arrangement requires space launch companies to have a specific amount of insurance to cover these damages. The government is potentially liable for damages above that amount, up to a cap GAO estimated to be $3.1 billion in 2017, subject to appropriations in advance. CSLCA, enacted in 2015, directed the Department of Transportation, of which FAA is a part, to evaluate its MPL methodology and, if necessary, develop a plan to update that methodology. The act also included a provision requiring GAO to assess FAA's evaluation and any actions needed to update the methodology. This report discusses the extent to which (1) FAA's evaluation report addresses the requirements in CSLCA and (2) FAA has addressed previously identified weaknesses in the MPL methodology. GAO reviewed documents and interviewed FAA on its loss methodology evaluation and actions to address weaknesses. The Federal Aviation Administration's (FAA) report evaluating its maximum probable loss (MPL) methodology did not fully address the evaluation and consultation requirements specified by the U.S. Commercial Space Launch Competitiveness Act (CSLCA). Balance of Risk. CSLCA required FAA to include ensuring that the federal government is not exposed to greater indemnification costs and that launch companies are not required to purchase more insurance coverage than necessary as a result of FAA's MPL methodology. FAA said that it ensured this balance by improving its methodology, but it did not reevaluate its probability thresholds after revising its methodology. These thresholds are used to divide the risk of loss between launch companies and the government. Impact on Costs. The act required FAA to consider the costs to both the industry and the federal government of implementing an updated methodology. FAA's report discussed the impact on indirect costs, such as data collection, but did not discuss direct costs: insurance premiums for launch companies and indemnification liability for the federal government. Consultation. The act also required FAA to consult with the commercial space sector and insurance providers in evaluating its MPL methodology in accordance with the preceding requirements. While the agency consulted with some stakeholders, these consultations were limited in scope. FAA officials said they have not been able to take the actions needed to fully satisfy the mandated elements because of issues such as resource limitations and the lack of available data. However, by not resolving these issues, FAA lacks assurance that launch companies are not purchasing more insurance than needed or that the federal government is not being exposed to greater indemnification costs than expected. FAA has addressed two of three previously identified weaknesses in its MPL methodology but has not yet dealt with the remaining weakness. Specifically, the agency has revised its methodology for estimating the number of potential casualties for a launch and changed the factor it uses to derive estimated property damage from estimated casualties. However, FAA has not updated the amount used for the cost of an individual casualty. GAO recommended in a March 2017 report (GAO-17-366) that FAA update this amount. Not doing so could understate the amount of insurance launch companies are required to purchase, exposing the federal government to excess risk. GAO also determined that while FAA has two tools and methods it can use in making its MPL estimates, it does not have guidance on determining which are most appropriate for a given launch scenario. For example, one tool is more comprehensive but also labor intensive to use, while the other is inappropriate for certain launch scenarios and could result in misleading MPL amounts. Officials said they have begun to create such guidance but do not have an estimated completion date. Without such guidance, FAA cannot ensure that the most appropriate MPL methodology is used for each launch.