The Federal Aviation Administration (FAA) should review and update as appropriate its probable loss methodology for calculating commercial launch providers’ insurance requirements as it relates to third-party indemnification, the Government Accountability Office (GAO) testified Tuesday.
Third-party indemnification is a term for the total amount of money the federal government would be responsible for paying beyond private insurance in case of public, or third-party, damages from a catastrophic commercial launch accident. In the anticipation of such an event, a launch company must purchase a fixed amount of insurance for each launch per calculation by the FAA.
GAO Financial Markets and Community Investment Director Alicia Cackley said during a House Science space subcommittee hearing that according to the 1988 amendments of the Commercial Space Launch Act (CSLA), the federal government is then potentially liable for claims beyond the amount of covered by private insurance, up to an additional $3 billion, as adjusted for inflation and subject to congressional appropriations.
Cackley said FAA officials told GAO in July 2012 that its method for calculating maximum probable loss was reasonable and conservative, but FAA agreed that a review could be beneficial and an involvement of outside experts might be helpful for improving methodology. Cackley testified that the FAA told GAO it has taken some initial steps toward revising and updating its maximum probable loss methodology, but that budget constraints had prevented greater progress in the short terms. A call to FAA for comment and clarification was not returned by press time Wednesday.
Cackley said the growth of the commercial space industry, with companies like Orbital Sciences [ORB] and Space Exploration Technologies Corp. (SpaceX), could increase the number of launches eligible for CSLA coverage, and thus, the potential costs for the federal government. Industry likes indemnification because it helps keep launch costs down. If, for example, commercial space launch companies didn’t have indemnification and were required to fully insure through private parties the entire cost that indemnification used to cover, they would certainly pass that cost down to its customer, driving up costs.
Cackley said indemnification helps keep United States commercial space launch competitive because competitors like Russia, China and France put no upper limit on the amount of their coverage, while in the U.S., coverage stops at about $3 billion per launch. However, for a given launch, the point at which the federal government starts to cover losses, the maximum probable loss, may be lower than in other countries, she said.
The trick, Cackley said, is that in all these countries, including the U.S., there has never been a third party claim that exceeded the launch company’s insurance and, thus, reached the level of government indemnification. As a result, potential cost to the federal government of indemnification for third party losses is unclear.
“Estimating probable losses from a rare catastrophic event is difficult,” Cackley testified. “How accurate that calculation is depends on the soundness of the methodology that generates it.”
The recent fiscal year 2014 omnibus spending bill signed into law by President Barack Obama in January included an extension of the indemnification regime first introduced in 1984. The Satellite Industry Association (SIA) lauded the extension in a release, saying it enables commercial launch providers to compete effectively with foreign providers that have unlimited indemnification coverage (Defense Daily, Jan. 17).