Testimony 

Before the Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 9:00 a.m. EDT 

Thursday, April 19, 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-07-760T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-07-760T. 

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 

stephensonj@gao.gov. 

Highlights of GAO-07-760T, testimony 

before the Committee on Homeland 

Security and Governmental Affairs, United 

States Senate 

April 19, 2007

CLIMATE CHANGE

Financial Risks to Federal and Private 

Insurers in Coming Decades Are 

Potentially Significant 

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 assessing 

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 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 long-term fiscal 

imbalance. 

Growth in Exposure of Federal Insurance Programs ($2005) 

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) being 

released today. 

What GAO Recommends

In the report, GAO is 

recommending that the Secretaries 

of Agriculture and Homeland 

Security analyze the potential longterm 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. 
Page 1 GAO-07-760T 

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 being released today entitled Climate 

Change: Financial Risks to Federal and Private Insurers in Coming 

Decades are Potentially Significant.

1

 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 weatherrelated events.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. 

 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. 
Page 2 GAO-07-760T 

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 industrywide. 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,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. 

 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. 
Page 3 GAO-07-760T 

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,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 weatherrelated 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 

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 

 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. 

Summary 
Page 4 GAO-07-760T 

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 losses. 

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 report being released today recommends that 

the Departments of Agriculture (USDA) and Homeland Security (DHS) 

analyze the potential long-term fiscal implications of climate change for 

the FCIC and NFIP, respectively, and report their findings to the Congress. 

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. 
Page 5 GAO-07-760T 

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 similar strategies as 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. 

Background 
Page 6 GAO-07-760T 

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.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.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 

 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. 

Climate Change Is 

Expected to Alter the 

Frequency or Severity 

of Damaging WeatherRelated Events 
Page 7 GAO-07-760T 

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 

Confidence in 

projected future 

changes, 2007 

Examples of major projected impacts relevant to property 

insurers 

Warmer and fewer cold days 

and nights; warmer/more 

frequent hot days and nights 

over most land areas 

Virtually certaina • Increased crop yields in colder environments 

• Decreased crop yields in warmer environments 

• Increased insect outbreaks in agriculture and forestry 

Warm spells/heat waves: 

frequency increases over 

most land areas 

Very likely • Reduced crop yields in warmer regions due to heat stress 

• Wildfire danger increases 

Heavy precipitation events: 

frequency increases over 

most areas 

Very likely • Damage to crops 

• Soil erosion 

• Inability to cultivate land due to excessive moisture content of soils

• Damage and disruption due to flooding 

Area affected by drought 

increases 

Likely • Land degradation, lower yields and damage or failure of crops 

• Increased livestock deaths 

• Increased risk of wildfire 

• Disruptions due to water shortages 

Intense tropical cyclone 

activity increases 

Likely • 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 used the following terms to indicated the assessed likelihood of an outcome--"virtually 

certain," which 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 occurrence. 

a

Warming of the most extreme days and nights each year. 
Page 8 GAO-07-760T 

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 projections. 

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. 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. 

Weather-Related 

Insured Losses 

Totaled More Than 

$320 Billion between 

1980 and 2005 and 

Appear to Be 

Increasing 
Page 9 GAO-07-760T 

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

Private insurers paid $243.5 billion—over 75 percent of the total weatherrelated 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. 
Page 10 GAO-07-760T 

Figure 2: Weather-Related Losses Paid by NFIP 

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. 
Page 11 GAO-07-760T 

Figure 3: Weather-Related Losses Paid by FCIC 

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—almost $146.8 billion. Moreover, 

as illustrated in Table 2, these losses appear to have increased during the 

past three decades. 

Dollars in millions

Source: GAO analysis of FCIC data.

Years

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Page 12 GAO-07-760T 

Table 2: Insured Losses Associated with Hurricanes 

 Category 1 & 2 Category 3, 4, & 5 Total

1980s $807 (11) $9,905 (6) $10,712 (17)

1990s $9,039 (11) $29,099 (8) $38,138 (19)

2000s $8,072 (7) $89,210 (7) $97,282 (14)

Total $17,918 (29) $128,214 (21) $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. 

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.7

 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.8

 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 

 7

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). 

8

Consensus statements agreed to at the workshop are listed in their entirety in appendix IV 

of GAO-07-285. 
Page 13 GAO-07-760T 

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 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 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 weatherrelated 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 

Major Private and 

Public Insurers Differ 

in How They Manage 

Catastrophic Risks 

Associated with 

Climate Change 

Major Private Insurers 

Prospectively Manage 

Potential Increases in 

Catastrophic Risk 

Associated with Climate 

Change 
Page 14 GAO-07-760T 

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.9

 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. 

NFIP and FCIC have not developed information on the programs’ longerterm 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.10 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 

 9

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. 

10FCIC 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 asneeded basis, and repay the borrowed funds with interest. 

Major Federal Insurers 

Have Taken Little Action 

to Prospectively Assess 

and Disseminate 

Information on Potential 

Increases in Catastrophic 

Risk Associated with 

Climate Change 
Page 15 GAO-07-760T 

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. 
Page 16 GAO-07-760T 

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

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. 

0

100

200

300

400

500

600

700

800

900

1,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Dollars in billions

Source: GAO analysis of NFIP and FCIC data.

Years

NFIP (left axis)

FCIC (right axis)

0

10,000

20,000

30,000

40,000

50,000

60,000

Dollars in millions
Page 17 GAO-07-760T 

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.”11 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 category. 

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 

 11GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: February 2005), 77. 

Information on Federal 

Agencies’ Long-Term 

Exposure to Catastrophic 

Risk Could Better Inform 

Congressional DecisionMaking 
Page 18 GAO-07-760T 

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. 

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 being released today recommends 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 to analyze 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. 

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 have. 

For further information about this testimony, please contact me, John 

Stephenson, at 202-512-3841 or stephensonj@gao.gov. 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; Alison O’Neill; and Lisa 

Van Arsdale. 

Concluding 

Observations 

Key Contact and Staff 

Acknowledgments 

(360827) 
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. However, 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. 
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. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). 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 www.gao.gov and select “Subscribe to Updates.” 

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) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER