This is the accessible text file for GAO report number GAO-07-820T 
entitled 'Climate Change: Financial Risks to Federal and Private 
Insurers in Coming Decades are Potentially Significant' which was 
released on May 3, 2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 


Before the Select Committee on Energy Independence and Global Warming, 
U.S. House of Representatives: 

United States Government Accountability Office: 


For Release on Delivery Expected at 9:30 a.m. EDT: 

Thursday, May 3, 2007: 

Climate Change: 

Financial Risks to Federal and Private Insurers in Coming Decades are 
Potentially Significant: 

Statement of John B. Stephenson, Director: 
Natural Resources and Environment: 


GAO Highlights: 

Highlights of GAO-07-820T, testimony before the Select Committee on 
Energy Independence and Global Warming, United States House of 

Why GAO Did This Study: 

Weather-related events in the United States have caused tens of 
billions of dollars in damages annually over the past decade. A major 
portion of these losses is borne by private insurers and by two federal 
insurance programs—the Federal Emergency Management Agency’s National 
Flood Insurance Program (NFIP), which insures properties against 
flooding, and the Department of Agriculture’s Federal Crop Insurance 
Corporation (FCIC), which insures crops against drought or other 
weather disasters. 

In this testimony, GAO (1) describes how climate change may affect 
future weather-related losses, (2) provides information on past insured 
weather-related losses, and (3) determines what major private insurers 
and federal insurers are doing to prepare for potential increases in 
such losses. This testimony is based on a report entitled Climate 
Change: Financial Risks to Federal and Private Insurers in Coming 
Decades are Potentially Significant (GAO-07-285) released on April 19, 

What GAO Found: 

Key scientific assessments report that the effects of climate change on 
weather-related events and, subsequently, insured and uninsured losses, 
could be significant. The global average surface temperature has 
increased over the past century and climate models predict even more 
substantial, perhaps accelerating, increases in temperature in the 
future. Assessments by key governmental bodies generally found that 
rising temperatures are expected to increase the frequency and severity 
of damaging weather-related events, such as flooding or drought, 
although the timing and magnitude are as yet undetermined. Additional 
research on the effect of increasing temperatures on weather events is 
expected in the near future. 

Taken together, private and federal insurers paid more than $320 
billion in claims on weather-related losses from 1980 to 2005. Claims 
varied significantly from year to year—largely due to the effects of 
catastrophic weather events such as hurricanes and droughts—but have 
generally increased during this period. The growth in population in 
hazard-prone areas and resulting real estate development have generally 
increased liabilities for insurers, and have helped to explain the 
increase in losses. Due to these and other factors, federal insurers’ 
exposure has grown substantially. Since 1980, NFIP’s exposure nearly 
quadrupled to nearly $1 trillion in 2005, and program expansion 
increased FCIC’s exposure 26-fold to $44 billion. 

Major private and federal insurers are both exposed to the effects of 
climate change over coming decades, but are responding differently. 
Many large private insurers are incorporating climate change into their 
annual risk management practices, and some are addressing it 
strategically by analyzing its potential long-term industry-wide 
impacts. In contrast, federal insurers have not developed and 
disseminated comparable information on long-term financial impacts. GAO 
acknowledges that the federal insurance programs are not profit-
oriented, like private insurers. Nonetheless, a strategic assessment of 
the potential implications of climate change for the major federal 
insurance programs would help the Congress manage an emerging high-risk 
area with significant implications for the nation’s growing long-term 
fiscal imbalance. 

Figure: Growth in Exposure of Federal Insurance Programs ($2005): 

[See PDF for Image] 

Source: GAO. 

[End of figure] 

What GAO Recommends: 

In its report, GAO recommended that the Secretaries of Agriculture and 
Homeland Security analyze the potential long-term fiscal implications 
of climate change for the FCIC and the NFIP, respectively, and report 
their findings to the Congress. Both agencies expressed agreement with 
the recommendation. 


To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John Stephenson at (202) 
512-3841 or 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss our findings on the potential 
financial implications of climate change for federal and private 
insurers. My testimony is based on our report entitled Climate Change: 
Financial Risks to Federal and Private Insurers in Coming Decades are 
Potentially Significant, released on April 19, 2007.[Footnote 1] I also 
presented the findings and recommendations from that report at a 
hearing before the Senate Homeland Security and Governmental Affairs 
Committee on the same day. The uncertain and potentially large losses 
associated with weather-related events are among the biggest risks that 
property insurers face. Virtually anything that is insured is 
vulnerable to weather-related events. 

The property and casualty segment of the insurance industry, spanning 
both the private and public sector, bears a large portion of weather- 
related losses--the dollar value of claims paid on damage attributable 
to weather-related events.[Footnote 2] The private sector includes 
primary insurers that insure individuals and businesses directly, and 
reinsurers that insure the primary insurers. The public sector includes 
federal and state programs that were established as an alternative to 
disaster assistance in markets where private insurance markets did not 
exist, such as for crop losses, and for losses that private insurers 
had deemed uninsurable, such as flood damage. The Federal Crop 
Insurance Corporation (FCIC) was established in 1938 to temper the 
economic impact of the Great Depression, and was significantly expanded 
in 1980 to protect farmers from the financial losses brought about by 
drought, flood, or other natural disasters. The Department of 
Agriculture's Risk Management Agency (RMA) administers the program in 
partnership with private insurance companies, which share a percentage 
of the risk of loss and the opportunity for gain associated with each 
insurance policy written. The National Flood Insurance Program (NFIP) 
was established in 1968 to protect communities vulnerable to flood 
damage. The Federal Emergency Management Agency (FEMA), within the 
Department of Homeland Security, is responsible for oversight and 
management of the NFIP. Private insurers administer the program in 
partnership with the federal government, but the federal government 
assumes the full liability for losses. 

To remain financially solvent, the insurance industry must estimate and 
prepare for the potential impact of future weather-related events. Any 
unanticipated changes in the frequency or severity of weather-related 
events can have financial consequences at the company level and 
industry-wide. Some infrequent weather-related events--drought or 
hurricanes, for example--are so severe that they pose unique challenges 
for insurers and reinsurers. Commonly referred to as extreme or 
catastrophic events, the unpredictability and sheer size of these 
events--both in terms of geography and number of insured parties 
affected--have the potential to overwhelm insurers' and reinsurers' 
capacity to pay claims. 

The earth's climate and weather patterns are dynamic, varying on 
seasonal, decadal, and longer time scales. Of particular concern, the 
global average surface temperature has increased by 1.3 degrees 
Fahrenheit (0.74 degrees Celsius) over the past 100 years, and the 
National Academy of Sciences (NAS) and other scientific organizations 
have concluded that available evidence points to continued, perhaps 
accelerating, increases over the next century. Much research and policy 
debate of late has centered on the extent to which human activities 
have contributed to this warming and accompanying changes in climate, 
and how much is due to natural variability. But in any case, climate 
change, defined by the Intergovernmental Panel on Climate Change (IPCC) 
as any change in the climate over time due to either natural 
variability or as a result of human activity,[Footnote 3] may affect 
social and economic activities in potentially profound ways--by raising 
sea levels, changing precipitation patterns, and altering the frequency 
or severity of weather-related events. 

My testimony summarizes our report, focusing on (1) what is known about 
how climate change might affect the frequency and severity of damaging 
weather-related events, (2) the extent of the insured losses incurred 
by private and federal insurers and reinsurers resulting from weather- 
related events, and (3) what major federal agencies and private 
insurers and reinsurers are doing to prepare for the potential risk of 
increased losses. 

To describe how climate change might affect insured and uninsured 
losses, we reviewed and summarized key scientific assessments by 
reputable international and national research organizations, including 
the IPCC, NAS, and the multi-federal agency Climate Change Science 
Program (CCSP). To determine the extent of insured losses, we analyzed 
key data from 1980 through 2005 from the insurance industry and federal 
agencies. Comparable data on 2006 losses were not available at the time 
we completed work on our report. To determine what federal and private 
insurers are doing to prepare for potential increases in losses, we 
interviewed agency officials and a subset of the largest insurers and 
reinsurers operating within the United States. We also interviewed 
officials from catastrophe modeling firms, insurance industry 
associations, the National Association of Insurance 
Commissioners,[Footnote 4] and universities to provide additional 
context for respondents' statements. In addition, we reviewed key 
reports and publications from federal agencies, insurance experts, and 
selected insurance companies. We performed our work in accordance with 
generally accepted government auditing standards. 


Assessments by key governmental scientific bodies have found that the 
effects of climate change on weather-related events could be 
substantial. IPCC projections, endorsed by NAS and CCSP, expect warmer 
surface temperatures to increase the frequency and severity of damaging 
weather-related events (such as flooding or drought), although the 
timing, magnitude, and duration of these changes are as yet 
undetermined. Further research on the relationship between increasing 
temperatures and weather events is ongoing. Of particular note, the 
IPCC is in the process of releasing its Fourth Assessment Report of the 
state of climate science throughout 2007, and CCSP has undertaken an 
assessment of the potential changes specific to North America in a 
report scheduled for release in 2008. 

Taken together, private and federal insurers paid more than $320 
billion in claims on weather-related losses from 1980 through 2005. In 
constant 2005 dollars, private insurers paid the largest part of this 
total, $243.5 billion (about 76 percent); followed by federal crop 
insurance, $43.6 billion (about 14 percent); and federal flood 
insurance, $34.1 billion (about 11 percent). Claims varied 
significantly from year to year--largely due to the incidence and 
effects of extreme weather events such as hurricanes and droughts--but 
generally increased during this period. The growth in population in 
hazard-prone areas, and resulting real estate development and 
increasing real estate values, have increased federal and private 
insurers' total coverage and have helped to explain the increase in 

While both major private and federal insurers are exposed to increases 
in the frequency or severity of weather-related events associated with 
climate change, the two sectors are responding in different ways. Many 
major private insurers are incorporating elements of climate change 
into their annual and strategic risk management practices to reduce 
their exposure to catastrophic risk--that is, their vulnerability to 
extreme weather-related events and the associated financial losses. One 
consequence is that they are transferring some of their exposure to 
policyholders and to the public sector. Federal insurance programs, on 
the other hand, have seen their exposure grow significantly--NFIP's 
total coverage has quadrupled from 1980 to 2005, nearing $1 trillion, 
and program expansion has increased FCIC's total coverage nearly 26- 
fold to $44 billion. These escalating exposures to catastrophic weather 
events are putting the federal government at increased financial risk, 
but federal insurers have done little to develop and disseminate the 
kind of information they, and other key decision-makers such as the 
Congress, need to understand their programs' long-term exposure to the 
increased financial risks associated with climate change. 

While we acknowledge that the mandate and operating environment of the 
major federal insurance programs is different from that of the private 
sector, we believe that better information about the federal 
government's exposure to potential changes in weather-related risk 
would help the Congress identify and manage this emerging high-risk 
area--one that potentially has significant implications for the 
nation's growing fiscal imbalance. Accordingly, our recently released 
report recommends that the Departments of Agriculture (USDA) and 
Homeland Security (DHS) assess the potential long-term fiscal 
implications of climate change for the FCIC and NFIP, respectively, and 
report their findings to the Congress. During the April 19 hearing, 
Senators Lieberman and Collins both requested that USDA and DHS notify 
the Committee of how they plan to implement this recommendation, and 
offered some guidance on the agencies' approaches in conducting such an 

In commenting on a draft of this report, both USDA and DHS agreed with 
our recommendation, although USDA took issue with several points made 
in the report. The Department of Commerce neither agreed nor disagreed 
with the report's findings, but instead commented on the presentation 
of several issues in the draft and offered technical comments which we 
incorporated into this report as appropriate. The Department of Energy 
elected not to provide comments on the draft. 


Insurance is a mechanism for spreading risk over time, across large 
geographical areas, and among industries and individuals. While private 
insurers assume some financial risk when they write policies, they 
employ various strategies to manage risk so that they earn profits, 
limit potential financial exposure, and build capital needed to pay 
claims. For example, insurers charge premiums for coverage and 
establish underwriting standards, such as refusing to insure customers 
who pose unacceptable levels of risk or limiting coverage in particular 
geographic areas. Insurance companies may also purchase reinsurance to 
cover specific portions of their financial risk. Reinsurers use 
strategies similar to primary insurers to limit their risks. 

Under certain circumstances, the private sector may determine that a 
risk is uninsurable. For example, homeowner policies typically do not 
cover flood damage because private insurers are unwilling to accept the 
risk of potentially catastrophic losses associated with flooding. In 
other instances, the private sector may be willing to insure a risk, 
but at rates that are not affordable to many property owners. Without 
insurance, affected property owners must rely on their own resources or 
seek out disaster assistance from local, state, and federal sources. 

In situations where the private sector will not insure a particular 
type of risk, the public sector may create markets to ensure the 
availability of insurance. The federal government operates two such 
programs--the NFIP and the FCIC. NFIP provides insurance for flood 
damage to homeowners and commercial property owners in more than 20,000 
communities. Homeowners with mortgages from federally regulated lenders 
on property in communities identified as being in high flood risk areas 
are required to purchase flood insurance on their dwellings. Optional, 
lower cost flood insurance is also available under the NFIP for 
properties in areas of lower flood risk. NFIP offers coverage for both 
the property and its contents, which may be purchased separately. FCIC 
insures agricultural commodities on a crop-by-crop and county-by-county 
basis based on farmer demand and the level of risk associated with the 
crop in a given region. Major crops, such as grains, are covered in 
almost every county where they are grown, while specialty crops such as 
fruit are covered only in some areas. Participating farmers can 
purchase different types of crop insurance and at different levels. 

Climate Change Is Expected to Alter the Frequency or Severity of 
Damaging Weather-Related Events: 

Assessments by leading scientific bodies suggest that climate change 
could significantly alter the frequency or severity of weather-related 
events, such as drought and hurricanes. Leading scientific bodies 
report that the Earth warmed during the twentieth century--1.3 degrees 
Fahrenheit (0.74 degrees Celsius) from 1906 to 2005 according to a 
recent IPCC report--and is projected to continue to warm for the 
foreseeable future.[Footnote 5] While temperatures have varied 
throughout history, triggered by natural factors such as volcanic 
eruptions or changes in the earth's orbit, the key scientific 
assessments we reviewed have generally concluded that the observed 
increase in temperature in the past 100 years cannot be explained by 
natural variability alone. In recent years, major scientific bodies 
such as the IPCC, NAS, and the United Kingdom's Royal Academy have 
concluded that human activities are significantly increasing the 
concentrations of greenhouse gases and, in turn, global temperatures. 
Assuming continued growth in atmospheric concentration of greenhouse 
gases, the latest assessment of computer climate models projects that 
average global temperatures will warm by an additional 3.2 to 7.2 
degrees Fahrenheit (1.8 to 4.0 degrees Celsius) during the next 
century.[Footnote 6] 

Based on model projections and expert judgment, the IPCC reported that 
future increases in the earth's temperature are likely to increase the 
frequency and severity of many damaging extreme weather-related events 
(summarized in table 1). The IPCC recently published summaries of two 
of the three components of its Fourth Assessment Report. The first, in 
which IPCC summarized the state of the physical science, reports higher 
confidence in projected patterns of warming and other regional-scale 
features, including changes in wind patterns, precipitation, and some 
aspects of extreme events such as drought, heavy precipitation events, 
and hurricanes. The second, in which IPCC addresses climate impacts and 
vulnerabilities, reported that the potential societal impacts from 
changes in temperature and extreme events vary widely across sector and 
region. For example, although the IPCC projects moderate climate change 
may increase yields for some rain-fed crops, crops that are near their 
warm temperature limit or depend on highly-used water resources face 
many challenges. Additionally, local crop production in any affected 
area may be negatively impacted by projected increases in the frequency 
of droughts or floods. Furthermore, the IPCC stated that the economic 
and social costs of extreme weather events will increase as these 
events become more intense and/or more frequent. Rapidly-growing 
coastal areas are particularly vulnerable, and the IPCC notes that 
readiness for increased exposure in these areas is low. These reports 
have not been publicly released in their entirety, but are expected 
sometime after May 2007. 

Table 1: Selected IPCC Estimates of Confidence in Projected Changes in 
Weather-Related Events: 

Weather-related event: Warmer and fewer cold days and nights; warmer/ 
more frequent hot days and nights over most land areas; 
Confidence in projected future changes, 2007: Virtually certain[A]; 
Examples of major projected impacts relevant to property insurers: 
* Increased crop yields in colder environments; 
* Decreased crop yields in warmer environments; 
* Increased insect outbreaks in agriculture and forestry. 

Weather-related event: Warm spells/heat waves: frequency increases over 
most land areas; 
Confidence in projected future changes, 2007: Very likely; 
Examples of major projected impacts relevant to property insurers: 
* Reduced crop yields in warmer regions due to heat stress; 
* Wildfire danger increases. 

Weather-related event: Heavy precipitation events: frequency increases 
over most areas; 
Confidence in projected future changes, 2007: Very likely; 
Examples of major projected impacts relevant to property insurers: 
* Damage to crops; 
* Soil erosion; 
* Inability to cultivate land due to excessive moisture content of 
* Damage and disruption due to flooding. 

Weather-related event: Area affected by drought increases; 
Confidence in projected future changes, 2007: Likely; 
Examples of major projected impacts relevant to property insurers: 
* Land degradation, lower yields and damage or failure of crops; 
* Increased livestock deaths; * Increased risk of wildfire; 
* Disruptions due to water shortages. 

Weather-related event: Intense tropical cyclone activity increases; 
Confidence in projected future changes, 2007: Likely; 
Examples of major projected impacts relevant to property insurers: 
* Damage to crops and trees; 
* Disruption and damage due to flooding and high winds; 
* Withdrawal of private insurance from vulnerable areas. 

Source: IPCC, Climate Change 2007: Impacts, Adaptation, and 
Vulnerability, Summary for Policymakers, 2007. 

Note: IPCC uses the following terms to indicate the assessed likelihood 
of an outcome--"virtually certain" indicates a 99% probability of 
occurrence; "very likely" indicates a greater than 90% probability of 
occurrence; and "likely" indicates a greater than 66% probability of 

[A] Warming of the most extreme days and nights each year. 

[End of table] 

In addition to the IPCC's work, CCSP is assessing potential changes in 
the frequency or intensity of weather-related events specific to North 
America in a report scheduled for release in 2008. According to a 
National Oceanic and Atmospheric Administration official and agency 
documents, the report will focus on weather extremes that have a 
significant societal impact, such as extreme cold or heat spells, 
tropical and extra-tropical storms, and droughts. Importantly, 
officials have said the report will provide an assessment of the 
observed changes in weather and climate extremes, as well as future 

Weather-Related Insured Losses Totaled More Than $320 Billion between 
1980 and 2005 and Appear to Be Increasing: 

Based on an examination of loss data from several different sources, we 
found that insurers incurred about $321.2 billion in weather-related 
losses from 1980 through 2005. In particular, as illustrated in Figure 
1, our analysis found that weather-related losses accounted for 88 
percent of all property losses paid by insurers during this 
period.[Footnote 7] All other property losses, including those 
associated with earthquakes and terrorist events, accounted for the 
remainder. Weather-related losses varied significantly from year to 
year, ranging from just over $2 billion in 1987 to more than $75 
billion in 2005. 

Figure 1: Annual Weather-and Nonweather-Related Insured Losses: 

[See PDF for image] 

Sources: GAO analysis of PCS, NFIP, and FCIC data. 

[End of figure] 

Private insurers paid $243.5 billion--over 75 percent of the total 
weather-related losses we reviewed. The two major federal insurance 
programs--NFIP and FCIC--paid the remaining $77.7 billion of the $321.2 
billion in weather-related loss payments we reviewed. NFIP paid about 
$34.1 billion, or about 11 percent of the total weather-related loss 
payments we reviewed during this period. As illustrated in Figure 2, 
claims averaged about $1.3 billion per year, but ranged from $75.7 
million in 1988 to $16.7 billion in 2005. 

Figure 2: Weather-Related Losses Paid by NFIP: 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

[End of figure] 

Since 1980, FCIC claims totaled $43.6 billion, or about 14 percent of 
all weather-related claims during this period. As illustrated in Figure 
3, FCIC losses averaged about $1.7 billion per year, ranging from 
$531.8 million in 1987 to $4.2 billion in 2002. 

Figure 3: Weather-Related Losses Paid by FCIC: 

[See PDF for image] 

Source: GAO analysis of FCIC data. 

[End of figure] 

The largest insured losses in the data we reviewed were associated with 
catastrophic weather events. Notably, crop insurers and other property 
insurers both face catastrophic weather-related risks, although the 
nature of the events for each is very different. In the case of crop 
insurance, drought accounted for more than 40 percent of weather- 
related loss payments from 1980 to 2005, and the years with the largest 
losses were associated with drought. Taken together, though, hurricanes 
were the most costly event in the data we reviewed. Although the United 
States experienced an average of only two hurricanes per year from 1980 
through 2005, weather-related claims attributable to hurricanes totaled 
more than 45 percent of all weather-related losses--more than $146 
billion. Moreover, as illustrated in Table 2, these losses appear to 
have increased during the past three decades. 

Table 2: Insured Losses Associated with Hurricanes: 

Category 1 & 2: $807 (11); 
Category 3, 4, & 5: $9,905 (6); 
Total: $10,712 (17). 

Category 1 & 2: $9,039 (11); 
Category 3, 4, & 5: $29,099 (8); 
Total: $38,138 (19). 

Category 1 & 2: $8,072 (7); 
Category 3, 4, & 5: $89,210 (7); 
Total: $97,282 (14). 

Category 1 & 2: $17,918 (29); 
Category 3, 4, & 5: $128,214 (21); 
Total: $146,132 (50). 

Source: GAO analysis of PCS and NFIP data; National Oceanic and 
Atmospheric Administration (hurricane severity classification). 

Note: Totals in millions of 2005 dollars. Totals do not include crop 
losses associated with hurricanes. Number of hurricanes associated with 
losses is included in parentheses. Hurricane classification was based 
on peak intensity at landfall. 

[End of table] 

Several recent studies have commented on the apparent increases in 
hurricane losses during this time period, and weather-related disaster 
losses generally, with markedly different interpretations. Some argue 
that loss trends are largely explained by changes in societal and 
economic factors, such as population density, cost of building 
materials, and the structure of insurance policies. Others argue that 
increases in losses have been driven by changes in climate. To address 
the issue, Munich Re--one of the world's largest reinsurance companies-
-and the University of Colorado's Center for Science and Technology 
Policy Research jointly convened a workshop in Germany in May 2006 to 
assess factors leading to increasing weather-related losses.[Footnote 
8] The workshop brought together a diverse group of international 
experts in the fields of climatology and disaster research. Workshop 
participants agreed that long-term records of disaster losses indicate 
that societal change and economic development are the principal factors 
explaining weather-related losses.[Footnote 9] However, participants 
also agreed that changing patterns of extreme events are drivers for 
recent increases in losses, and that additional increases in losses are 
likely, given IPCC's projections. 

The close relationship between the value of the resource exposed to 
weather-related losses and the amount of damage incurred may have 
ominous implications for a nation experiencing rapid growth in some of 
its most disaster-prone areas. AIR Worldwide, a leading catastrophe 
modeling firm, recently reported that insured losses should be expected 
to double roughly every 10 years because of increases in construction 
costs, increases in the number of structures, and changes in their 
characteristics. AIR's research estimates that, because of exposure 
growth, probable maximum catastrophe loss--an estimate of the largest 
possible loss that may occur, given the worst combination of 
circumstances--grew in constant 2005 dollars from $60 billion in 1995 
to $110 billion in 2005, and it will likely grow to over $200 billion 
during the next 10 years. 

Major Private and Public Insurers Differ in How They Manage 
Catastrophic Risks Associated with Climate Change: 

Major private and federal insurers are responding differently to the 
prospect of increasing weather-related losses associated with climate 
change. Many large private insurers are incorporating both near and 
longer-term elements of climatic change into their risk management 
practices. On the other hand, for a variety of reasons, the federal 
insurance programs have done little to develop the kind of information 
needed to understand the programs' long-term exposure to climate 

Major Private Insurers Prospectively Manage Potential Increases in 
Catastrophic Risk Associated with Climate Change: 

Catastrophic weather events pose a unique financial threat to private 
insurers' financial success because a single event can cause insolvency 
or a precipitous drop in earnings, liquidation of assets to meet cash 
needs, or a downgrade in the market ratings used to evaluate the 
soundness of companies in the industry. To prevent these disruptions, 
the American Academy of Actuaries (AAA)--the professional society that 
establishes, maintains, and enforces standards of qualification, 
practice, and conduct for actuaries in the United States--recommends, 
among other steps, that insurers measure their exposure to catastrophic 
weather-related risk. In particular, AAA emphasizes the shortcomings of 
estimating future catastrophic risk by extrapolating solely from 
historical losses, and endorses a more rigorous approach that 
incorporates underlying trends and factors in weather phenomena and 
current demographic, financial, and scientific data to estimate losses 
associated with various weather-related events. 

In our interviews with eleven of the largest private insurers operating 
in the U.S. property casualty insurance market, we sought to determine 
what key private insurers are doing to estimate and prepare for risks 
associated with potential climatic changes arising from natural or 
human factors. Representatives from each of the 11 major insurers we 
interviewed told us they incorporate near-term increases in the 
frequency and intensity of hurricanes into their risk estimates. Six 
specifically attributed the higher frequency and intensity of 
hurricanes to a 20-to 40-year climatic cycle of fluctuating 
temperatures in the north Atlantic Ocean, while the remaining five 
insurers did not elaborate on the elements of climatic change driving 
the differences in hurricane characteristics. 

In addition to managing their aggregate exposure on a near-term basis, 
some of the world's largest insurers have also taken a longer-term 
strategic approach to changes in catastrophic risk.[Footnote 10] Six of 
the eleven private insurers we interviewed reported taking one or more 
additional actions when asked if their company addresses climatic 
change in their weather-related risk management processes. These 
activities include monitoring scientific research (4 insurers), 
simulating the impact of a large loss event on their portfolios (3 
insurers), and educating others in the industry about the risks of 
climatic change (3 insurers), among others. Moreover, major insurance 
and reinsurance companies, such as Allianz, Swiss Re, Munich Re, and 
Lloyds of London, have published reports that advocate increased 
industry awareness of the potential risks of climate change, and 
outline strategies to address the issue proactively. 

Major Federal Insurers Have Taken Little Action to Prospectively Assess 
and Disseminate Information on Potential Increases in Catastrophic Risk 
Associated with Climate Change: 

NFIP and FCIC have not developed information on the programs' longer- 
term exposure to the potential risk of increased extreme weather events 
associated with climate change as part of their risk management 
practices. The goals of the key federal insurance programs are 
fundamentally different from those of private insurers. Whereas private 
insurers stress the financial success of their business operations, the 
statutes governing the NFIP and FCIC promote affordable coverage and 
broad participation by individuals at risk over the programs' financial 
self-sufficiency by offering discounted or subsidized premiums. Also 
unlike the private sector, the NFIP and the FCIC have access to 
additional federal funds during high-loss years.[Footnote 11] Thus, 
neither program is required to assess and limit its catastrophic risk 
strictly within its ability to pay claims on an annual basis. Instead, 
to the extent possible, each program manages its risk within the 
context of its broader purposes in accordance with authorizing statutes 
and implementing regulations. 

Nonetheless, an improved understanding of the programs' financial 
exposure is becoming increasingly important. Notably, the federal 
insurance programs' liabilities have grown significantly, which leaves 
the federal government increasingly vulnerable to the financial impacts 
of catastrophic events. Data obtained from both the NFIP and FCIC 
programs indicate the federal government has grown markedly more 
exposed to weather-related losses. Figure 4 illustrates the growth of 
both program's exposure from 1980 to 2005. For NFIP, the program's 
total coverage increased fourfold in constant dollars during this time 
from about $207 billion to $875 billion in 2005 due to increasing 
property values and a doubling of the number of policies from 1.9 
million to more than 4.6 million. The FCIC has effectively increased 
its exposure base 26-fold during this period. In particular, the 
program has significantly expanded the scope of crops covered and 
increased participation. The main implication of the exposure growth 
for both the programs is that the magnitude of potential claims, in 
absolute terms, is much greater today than in the past. 

Figure 4: Total Coverage of NFIP and FCIC, 1980-2005: 

[See PDF for image] 

Source: GAO analysis of NFIP and FCIC data. 

[End of figure] 

Neither program has assessed the implications of a potential increase 
in the frequency or severity of weather-related events on program 
operations, although both programs have occasionally attempted to 
estimate their aggregate losses from potential catastrophic events. For 
example, FCIC officials stated that they had modeled past events, such 
as the 1993 Midwest Floods, using current participation levels to 
inform negotiations with private crop insurers over reinsurance terms. 
However, NFIP and FCIC officials explained that these efforts were 
informal exercises, and were not performed on a regular basis. 
Furthermore, according to NFIP and FCIC officials, both programs' 
estimates of weather-related risk rely heavily on historical weather 
patterns. As one NFIP official explained, the flood insurance program 
is designed to assess and insure against current--not future--risks. 
Over time, agency officials stated, this process has allowed their 
programs to operate as intended. However, unlike private sector 
insurers, neither program has conducted an analysis of the potential 
impacts of an increase in the frequency or severity of weather-related 
events on continued program operations in the long-term. 

Information on Federal Agencies' Long-Term Exposure to Catastrophic 
Risk Could Better Inform Congressional Decision-Making: 

While comprehensive information on federal insurers' long-term exposure 
to catastrophic risk associated with climate change may not inform the 
NFIP's or FCIC's day-to-day operations, it could nonetheless provide 
valuable information for the Congress and other policy-makers who need 
to understand and prepare for fiscal challenges that extend well beyond 
the two programs' near-term operational horizons. We have highlighted 
the need for this kind of strategic information in recent reports that 
have expressed concern about the looming fiscal imbalances facing the 
nation. In particular, we observed that, "Our policy process will be 
challenged to act with more foresight to take early action on problems 
that may not constitute an urgent crisis but pose important long-term 
threats to the nation's fiscal, economic, security, and societal 
future."[Footnote 12] The prospect of increasing program liabilities, 
coupled with expected increases in frequency and severity of weather 
events associated with climate change, would appear to fit into this 

Agency officials identified several challenges that could complicate 
their efforts to assess these impacts at the program level. Both NFIP 
and FCIC officials stated there was insufficient scientific information 
on projected impacts at the regional and local level to accurately 
assess their impact on the flood and crop insurance programs. However, 
members of the insurance industry have analyzed and identified the 
potential risks climatic change poses to their business, despite 
similar challenges. Moreover, as previously discussed, both the IPCC 
and CCSP are expected to release significant assessments of the likely 
effect of increasing temperatures on weather events in coming months. 

The experience of many private insurers, who must proactively respond 
to longer-term changes in weather-related risk to remain solvent, 
suggests the kind of information that needs to be developed to make 
sound strategic decisions. Specifically, to help ensure their future 
viability, a growing number of private insurers are actively 
incorporating the potential for climate change into their strategic 
level analyses. In particular, some private insurers have run a variety 
of simulation exercises to determine the potential business impact of 
an increase in the frequency and severity of weather events. For 
example, one insurer simulated the impact of multiple large weather 
events occurring simultaneously. We believe a similar analysis could 
provide Congress with valuable information about the potential scale of 
losses facing the NFIP and FCIC in coming decades, particularly in 
light of the programs' expansion over the past 25 years. 

Concluding Observations: 

We believe that the FCIC and NFIP are uniquely positioned to provide 
strategic information on the potential impacts of climate change on 
their programs--information that would be of value to key decision 
makers charged with a long-term focus on the nation's fiscal health. 
Most notably, in exercising its oversight responsibilities, the 
Congress could use such information to examine whether the current 
structure and incentives of the federal insurance programs adequately 
address the challenges posed by potential increases in the frequency 
and severity of catastrophic weather events. While the precise content 
of these analyses can be debated, the activities of many private 
insurers already suggest a number of strong possibilities that may be 
applicable to assessing the potential implications of climate change on 
the federal insurance programs. 

Accordingly, our report recommended that the Secretary of Agriculture 
and the Secretary of Homeland Security direct the Administrator of the 
Risk Management Agency and the Under Secretary of Homeland Security for 
Emergency Preparedness assess the potential long-term implications of 
climate change for the FCIC and the NFIP, respectively, and report 
their findings to the Congress. This analysis should use forthcoming 
assessments from the Climate Change Science Program and the 
Intergovernmental Panel on Climate Change to establish sound estimates 
of expected future conditions. Both agencies expressed agreement with 
this recommendation. In addition, at an April 19, 2007, hearing on our 
report convened by the Senate Homeland Security and Governmental 
Affairs Committee, Chairman Joseph Lieberman and Ranking Member Susan 
Collins directed the agencies to provide the Committee a deadline by 
which they plan to transmit this assessment to the Congress in 
fulfillment of this recommendation. Chairman Lieberman also asked the 
agencies to prepare and disseminate this assessment independent of any 
annual reports to the Congress. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
respond to any questions that you or other Members of the Committee may 

Key Contact and Staff Acknowledgments: 

For further information about this testimony, please contact me, John 
Stephenson, at 202-512-3841 or Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Contributors to this testimony 
include Steve Elstein, Assistant Director; Chase Huntley; Micah 
McMillan; Alison O'Neill; Kate Robertson; and Lisa Van Arsdale. 


[1] GAO, Climate Change: Financial Risks to Federal and Private 
Insurers in Coming Decades are Potentially Significant, GAO-07-285 
(Washington, D.C.: Mar. 16, 2007). 

[2] Insurers use the term "loss" to refer to the dollar value of 
approved or settled claims arising from damages incurred by a 
policyholder. "Loss" does not account for premium or other income, 
deductibles, co-payments, or damages in excess of coverage. 

[3] More specifically, the IPCC definition refers to climate change as 
a statistically significant variation in either the mean state of the 
climate or in its variability, persisting for an extended period 
(typically decades or longer). Climate change may be due to natural 
factors (e.g., internal processes or external forcings such as solar 
variations or heavy volcanic activity), or to persistent human-induced 
changes in the composition of the atmosphere or land use patterns. 

[4] The National Association of Insurance Commissioners is an 
organization of insurance regulators from the 50 states, the District 
of Columbia, and the five U.S. territories. 

[5] This estimate comes from a recently released summary of a key 
component of IPCC's Fourth Assessment Report of the state of climate 
science, which reported an updated 100-year linear trend (1906 through 
2005) of 1.3 degrees Fahrenheit--larger than the corresponding 1.0 
degrees Fahrenheit (0.6 degrees Celsius) reported in the 2001 Third 
Assessment Report. 

[6] IPCC narrowed its range of projected warming in its recently 
released summary from the corresponding range of 2.5 to 10.4 degrees 
Fahrenheit (1.4 to 5.8 degrees Celsius) reported in the 2001 Third 
Assessment Report. Although these two sets of projections are broadly 
consistent, they are not directly comparable. IPCC notes in the summary 
that the new range is more advanced in that it provides best estimates 
and an assessed likelihood range. It also relies on a larger number of 
climate models of increasing complexity and realism, as well as new 
information regarding the nature of feedbacks from the carbon cycle and 
constraints on climate response from observations. 

[7] The insured loss totals used in our analysis understate total 
economic damage associated with weather-related events. Due to data 
limitations, we did not account for uninsured, underinsured, and self-
insured losses. According to data obtained from Munich Re, the type of 
insured losses we reviewed account for no more than about 40 percent of 
the total economic losses attributable to weather-related events. 
Various public and private disaster relief organizations provide 
assistance to communities and individuals who suffer economic losses 
that are not insured. Additionally, weather-related events are also 
responsible for many indirect and non-market impacts that are not 
wholly accounted for in economic terms, such as environmental damage. 
This issue is discussed on pages 23-25 of Climate Change: Financial 
Risks to Federal and Private Insurers in Coming Decades Are Potentially 
Significant (GAO-07-285). 

[8] Peter Höppe and Roger Pielke, Jr., eds., Report of the Workshop on 
Climate Change and Disaster Losses: Understanding and Attributing 
Trends and Projections, Hohenkammer, Germany, May 25-26, 2006 (Munich, 
Germany: October 2006). 

[9] Consensus statements agreed to at the workshop are listed in their 
entirety in appendix IV of GAO-07-285. 

[10] Additionally, concern over the potential impacts of climate change 
on the availability and affordability of private insurance has led the 
National Association of Insurance Commissioners to establish a task 
force to formally address the issue in a report expected this summer. 

[11] FCIC receives additional funds for excess losses through USDA's 
annual appropriations process. The NFIP is authorized to borrow 
additional funds from the Treasury on an as-needed basis, and repay the 
borrowed funds with interest. 

[12] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005), 77. 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site ( Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 

To Report Fraud, Waste, and Abuse in Federal Programs: 


Web site: E-mail: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: