Climate Change:

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

GAO-07-285: Published: Mar 16, 2007. Publicly Released: Apr 19, 2007.

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Weather-related events have cost the nation billions of dollars in damages over the past decade. Many of these losses are borne by private insurers and by two federal insurance programs--the National Flood Insurance Program (NFIP), which insures properties against flooding, and the Federal Crop Insurance Corporation (FCIC), which insures crops against drought or other weather disasters. GAO was asked to (1) describe how climate change may affect future weather-related losses, (2) determine past insured weather-related losses, and (3) determine what major private insurers and federal insurers are doing to prepare for potential increases in such losses. In response, among other things, GAO reviewed key scientific assessments; analyzed insured loss data; and contacted private insurers, NFIP, and FCIC.

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 by 0.74 degrees Celsius over the past 100 years and climate models predict additional, perhaps accelerating, increases in temperature. The key assessments GAO reviewed 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, including a highly anticipated assessment of the state of climate science this year. 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 quadrupled, nearing $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 assessing its potential long-term industry-wide impacts. The two major federal insurance programs, however, have done little to develop comparable information. GAO acknowledges that the federal insurance programs are not profit-oriented, like private insurers. Nonetheless, a strategic analysis 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 fiscal imbalance.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to the report, DHS/FEMA undertook the recommended to determine how seawater will surge onto shorelines around the United States as warming oceans expand and rise. According to FEMA, the study also seeks to establish how warming temperatures will affect inland flooding nationwide, potentially revealing the likelihood of more damage in some riverine areas. FEMA says it plans to redraw its flood insurance maps based on climate change projections, including the risks of more powerful storms and rising sea levels. It hopes to reduce its insurance risks and at the same time discourage people from living in damage-prone areas.

    Recommendation: The Secretary of Agriculture and the Secretary of Homeland Security should direct the Administrator of the Risk Management Agency and the Under Secretary of Homeland Security for Emergency Preparedness to analyze the potential long-term implications of climate change for the Federal Crop Insurance Corporation and the National Flood Insurance Program, 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. Key components of this analysis may include: (1) realistic scenarios of future losses under anticipated climate conditions and expected exposure levels, including both potential budgetary implications and consequences for continued program operation and (2) potential mitigation options that each program might use to reduce their exposure to loss.

    Agency Affected: Department of Homeland Security

  2. Status: Closed - Implemented

    Comments: In a February 11, 2010 memo, USDA's Risk Management Agency alluded to a contract it entered into to study the issues recommended in the GAO report. The text of the memo states, "RMA has received the final report for the Climate Change Impact on Crop Insurance contract. . . The contract was initiated due to a GAO report that directed RMA to look at the possible implications of climate change on the Federal crop insurance program".

    Recommendation: The Secretary of Agriculture and the Secretary of Homeland Security should direct the Administrator of the Risk Management Agency and the Under Secretary of Homeland Security for Emergency Preparedness to analyze the potential long-term implications of climate change for the Federal Crop Insurance Corporation and the National Flood Insurance Program, 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. Key components of this analysis may include: (1) realistic scenarios of future losses under anticipated climate conditions and expected exposure levels, including both potential budgetary implications and consequences for continued program operation and (2) potential mitigation options that each program might use to reduce their exposure to loss.

    Agency Affected: Department of Homeland Security

 

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