Climate Change: Better Management of Exposure to Potential Future Losses Is Needed for Federal Flood and Crop Insurance
Published: 2014-10-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The May 2014 National Climate Assessment indicates that the frequency and/or severity of many weather and climate extremes may increase with climate change. Public and private property insurers can bear a large portion of the financial impact of such weather-related losses. In the public sector, federal insurance includes NFIP, managed by FEMA, and the federal crop insurance program, managed by RMA.
GAO was asked to review climate change's effect on insurers. This report examines (1) how federal and private exposure to losses has changed since GAO's 2007 report on the subject, and what is known about how climate change may affect insured and uninsured losses; (2) how public insurers are preparing for climate change, and any challenges they face; and (3) how private insurers are preparing for climate change and any challenges they face. GAO reviewed 20 studies, examined federal and private sector data on exposure to losses from 2000 to 2013, reviewed agency documents, and interviewed agency officials and a nonprobability sample of eight insurers and reinsurers.
section_title: What GAO Found
paragraphs: Since GAO's 2007 report on flood and crop insurance, exposure growth in hazard-prone areas has increased losses, and climate change and related increases in extreme weather events may further increase such losses in coming decades. Scientific and industry studies GAO reviewed generally found that increasing growth and property values in hazard-prone areas have increased losses to date and that climate change may compound this effect. From 2007 through 2013, data from the Federal Emergency Management Agency (FEMA) and the Risk Management Agency (RMA) show that exposure to potential losses for insured property grew from $1.3 trillion to $1.4 trillion (8 percent). According to industry data, private sector exposure to such loss grew from $60.7 trillion to $66.5 trillion (10 percent) from 2007 through 2012. Federal exposure to uninsured loss also increased by 46 percent over this period, based on a 2013 analysis by the Congressional Research Service. According to the studies GAO reviewed, climate change may substantially increase losses by 2040 and increase losses from about 50 to 100 percent by 2100.
FEMA and RMA have taken some steps to better understand and prepare for climate change's potential effects under the National Flood Insurance Program (NFIP) and the federal crop insurance program by, for example, commissioning climate change studies. However, both agencies face challenges that may limit their ability to minimize long-term federal exposure to climate change. For example, because of the short-term nature of insurance (i.e., contracts typically estimate and communicate risk of property losses for the 1-year term of a policy), FEMA and RMA face a challenge in encouraging policyholders to reduce their long-term exposure to climate change risks. Specifically, flood insurance policyholders who build to NFIP standards—which are based on current flood risk and not on long-term risks—may unintentionally increase their vulnerability to climate change as sea-level rises. Also, while federal law prohibits crop insurance from covering losses due to a farmers' failure to follow good farming practices, such as various irrigation methods, some of these practices maintain short-term production but may inadvertently increase the vulnerability of agriculture to climate change through increased erosion and inefficient water use. A recent executive order directed federal agencies to reform policies that may, perhaps unintentionally, increase the vulnerability of economic sectors or communities to climate change. Without encouraging NFIP and crop insurance policyholders to adopt building and agricultural practices that reduce long-term risk, FEMA and RMA may send policyholders signals that unintentionally encourage their vulnerability to climate change, counter to the direction of the executive order, which could exacerbate federal exposure to losses.
Many private insurers and reinsurers have taken steps since 2007 to better understand and prepare for climate change effects and related challenges, including participating in industry climate change surveys, and issuing reports that identify and assess climate change risks and trends in weather-related losses. According to industry officials, they can manage their exposure to climate change and related challenges through risk-based premiums, reinsurance, and other practices, although estimating weather-related risks still includes elements of uncertainty.
section_title: What GAO Recommends
paragraphs: GAO recommends that FEMA and RMA take additional steps to encourage flood and crop insurance policyholders to adopt building and agricultural practices that reduce long-term risk and federal exposure to losses. FEMA agreed with GAO's recommendation, and RMA neither agreed nor disagreed with GAO's recommendation.

section_title: Letter
paragraphs: The impacts and costs of certain weather disasters—such as floods,  drought, and hurricanes—will increase in significance as previously rare  events become more common and intense due to climate change,  according to the United States Global Change Research Program’s May  2014 National Climate Assessment. While the magnitude and extent of  future climate change effects are uncertain, climate change presents a  significant financial risk to the federal government in many areas. As a  result of these risks and the nation’s fiscal condition, in February 2013,  we added Limiting the Federal Government’s Fiscal Exposure by Better  Managing Climate Change Risks to our list of areas at high risk to fraud,  waste, abuse, and mismanagement, or most in need of transformation.
The uncertain and potentially large losses associated with weather- related events are among the biggest risks that property insurers face.  The property and casualty segment of insurance, which spans both the  public and private sectors, bears a large portion of the financial impact of  weather-related losses. In the public sector, federal insurance programs  include the National Flood Insurance Program (NFIP), administered by  the Federal Emergency Management Agency (FEMA) within the U.S.  Department of Homeland Security, which makes flood insurance available  to residential property owners and businesses, and the federal crop  insurance program, administered by the Risk Management Agency  (RMA) within the U.S. Department of Agriculture (USDA), which protects  farmers against financial losses caused by drought, floods, and other  natural disasters, among other things. In addition, the federal government  provides disaster assistance through FEMA and other federal agencies.  In certain states, insurance pools are administered by governmental  entities or entities established pursuant to state law that provide coverage  for losses caused by weather-related events. In the private sector,  primary insurers provide insurance to individuals and businesses directly,  and reinsurers provide insurance to primary insurers.
As of June 2014, FEMA’s debt to the U.S. Treasury from flood insurance  payments totaled about $24 billion—primarily to pay claims associated  with Hurricane Katrina in 2005 and Hurricane Sandy in 2012—and FEMA  had not repaid any principal on its loan since 2010. NFIP has been on our  High-Risk List since March 2006 because of concerns about its long-term  financial solvency and related operational issues. While FEMA is  implementing some changes to NFIP in response to recently enacted  legislation, it is unclear to what extent these changes will improve the  program’s financial condition. Additionally, in our 2013 High-Risk Update,  we concluded that FEMA obligated over $80 billion in federal assistance  for disasters declared during fiscal years 2004 through 2011. As of June  2014, FEMA’s Disaster Relief Fund had spent $3.8 billion for fiscal year  2014, with an unspent balance of over $11.3 billion. We have previously  found that the federal government does not fully budget for these costs— in part because supplemental appropriations are largely used to fund  them—obscuring the full cost of disaster relief commitments.
Further, as we reported in 2014, the federal government’s crop insurance  costs have increased in recent years, with appropriations more than  doubling from $3.4 billion in fiscal year 2001 to $7.6 billion in fiscal year  2012 as program expansion and rising crop prices have led to increasing  subsidy values and higher claims payments. In 2007, we found that  climate change could increase federal insurers’ financial risk and  recommended that the Secretaries of Agriculture and Homeland Security  analyze the potential long-term fiscal implications of climate change for  crop insurance and flood insurance, respectively, and report their findings  to Congress. USDA and DHS agreed with these recommendations and  in response issued reports containing such analyses.
You asked us to review the implications of climate change on public flood  and crop insurance and private sector insurance. This report examines  (1) how federal and private exposure to losses has changed since our  2007 report on flood and crop insurance and how climate change may  affect insured and uninsured losses; (2) how public insurers are preparing  for climate change and associated challenges, if any; and (3) how  selected private insurers and reinsurers are preparing for climate change  and associated challenges, if any.
To determine how exposure to losses has changed since our 2007 report  on flood and crop insurance and how climate change may affect insured  and uninsured losses, we reviewed scientific studies and other available  literature on climate change and analyzed federal and private sector  exposure data from 2007 through 2013. To understand longer-term  trends in exposure, we also analyzed federal exposure data from 2000.  We assessed the reliability of the exposure data and reviewed the  methodological soundness of each study and determined that the data  and studies were sufficiently reliable for describing trends in exposure  and the potential effect of climate change on insured and uninsured  losses. To determine how public insurers are preparing for climate  change, we reviewed FEMA and RMA documents and interviewed  agency officials and a nonprobability sample of three state insurers that  were identified by an industry forecaster as most at-risk of natural  disasters, whether the state had an insurance pool administered by a  governmental entity or entity established pursuant to state law, and  whether the state had experienced an extreme weather event in the past  decade. Further, to determine how private insurers and reinsurers are  preparing for climate change, we reviewed over 20 industry reports and  other information from industry representatives we interviewed. We  interviewed a nonprobability sample of eight insurers and reinsurers,  representing over 25 percent of the U.S. property and casualty insurance  market, 15 percent of the private crop insurance market, and over 30  percent of the U.S. reinsurance market. We selected both large and small  insurers with relevant experience in flood or crop insurance, to collect a  variety of perspectives. We also interviewed two catastrophe modeling  firms, two reinsurance brokerage firms, and eight industry groups  representing more than 1,000 large and small property and casualty  insurers. Because we used a nonprobability sample to select  interviewees, our results are not generalizable to the industry as a whole  but provide illustrative examples. Appendix I presents a more detailed  description of our objectives, scope, and methodology.
We conducted this performance audit from November 2013 to October  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Insurance can spread risk over time, across 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 limit potential financial exposures, earn profits,  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 insurance from reinsurers to cover specific portions of  their financial risk. Reinsurers use similar strategies to limit their risks,  including charging premiums and establishing underwriting standards.  States regulate private insurance and may impose various restrictions on  insurers’ risk management practices, such as premium rate increases and  coverage limitations, to protect consumers and to ensure insurer  solvency. However, many of these risk management strategies are not  available to NFIP, which is required to assume and retain all of the risk  and to generally accept all insurance applicants, including those with  potentially high-risk properties.
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—property, crops and livestock, business  operations, or human life and health—is vulnerable to weather-related  events. For insurers, remaining financially solvent generally involves  estimating and setting rates that reflect insured risks; any unanticipated  changes in the frequency or severity of weather-related events can have  financial consequences for them. Recent scientific assessments have  found that climate change has or will alter the frequency and/or severity of  damaging weather-related events—such as droughts and floods, alter  crop productivity, and threaten coastal communities as sea-level rises.
Under certain circumstances, the private sector may consider some risks  uninsurable. In other instances, the private sector may offer to insure a  risk, but at rates that many property owners cannot afford. Without  insurance, affected property owners must rely on their own resources or  seek disaster assistance from local, state, and federal sources in the  event of a loss. 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. For example, several states have established  Fair Access to Insurance Requirements (FAIR) and windstorm plans, that  pool resources from insurers doing business in the state to make  insurance available to property owners who either cannot obtain coverage  in the private insurance market or cannot do so at an affordable rate.
Similarly, at the federal level, the NFIP and the federal crop insurance  program were established to provide coverage where private markets did  not exist, and partly to provide an alternative to disaster assistance. NFIP  has three components: (1) the provision of flood insurance; (2) the  requirement that participating communities adopt and enforce floodplain  management regulations that are at least as stringent as FEMA’s national  minimum standards; and (3) the identification and mapping of floodplains,  which helps to determine which insurance premiums and regulations  apply to a particular property. Community participation in NFIP is  voluntary. However, communities must join NFIP and adopt FEMA- approved building standards and floodplain management strategies in  order for their residents to purchase flood insurance through the  program. In addition to meeting these federal standards, the regulations  that each community enacts and implements must meet the minimum  state requirements, which are established consistent with NFIP  standards. For example, communities must adopt at least the minimum  standards for floodplain management regulations, including building  requirements to reduce future flood damage, such as requiring new and  substantially improved or substantially damaged structures in special  flood hazard areas to be elevated to or above base flood elevation levels.  Additionally, FEMA provides premium reduction incentives for  policyholders within communities that take measures to mitigate flood risk  beyond NFIP minimum requirements through the agency’s program, the  Community Rating System. Under NFIP, the federal government  assumes the liability for covered losses and sets rates and coverage  limitations. While NFIP does not subsidize most policies, policyholders  with certain types of insured properties pay subsidized premiums.
For crop insurance, farmers participate voluntarily, but the federal  government encourages participation by subsidizing their insurance  premiums. USDA’s RMA administers the federal crop insurance program,  including issuing new insurance products and expanding existing  products to new geographic regions. RMA administers the program in  partnership with private insurance companies that share a percentage of  the risk of loss or the opportunity for gain associated with each policy.  Federal law prohibits crop insurance from covering losses due to a  farmer’s failure to follow good farming practices. Good farming practices  are identified by agricultural experts in a given area and provide  acceptable farming methods for crop insurance policyholders to use in  producing yields consistent with historical production. Agricultural experts  are individuals employed by USDA’s Cooperative Extension System or  the agricultural departments of universities, or other approved persons,  whose research or occupation is related to the specific crop or practice for  which expertise is sought.
The federal government’s disaster relief and flood and crop insurance  programs create fiscal exposure to weather-related events and climate  change. For the purposes of this report, fiscal exposures are  responsibilities, programs, and activities that may either obligate the  federal government to future spending or create the expectation for future  spending. For example, the government’s response to a weather-related  event or series of events can strengthen expectations that the  government will respond in the same way to similar events in the future.
Differences exist in the types of property that public insurers insure, as  well as their time horizons. For example, federal flood and crop insurance  programs insure different types of property, with different time horizons.  While state insurers and NFIP insure permanent structures that are  designed to last years or decades, federal crop insurance primarily covers  agricultural commodities that farmers plant and harvest each year. This  annual cycle can allow farmers to adapt their insured property to changes  in weather-related risk more easily than state or NFIP policyholders can  adapt their permanent structures to changing wind or flood risks.
Uncertainty about the magnitude, timing, and extent of the effects of  climate change in the future presents challenges to both public and  private insurers. For example, NFIP will likely be affected by future sea- level rise. According to the May 2014 National Climate Assessment,  although global mean sea level may increase anywhere from 8 inches to  7 feet in this century, the magnitude of the projected future sea-level rise  varies considerably along the U.S. coastline due to a variety of factors,  such as land subsidence and uplift. Officials from public insurers and  some representatives from private industry stated that uncertainty  regarding climate projections presents challenges to these insurers’ ability  to plan for the future. However, as stated in a 2010 National Research  Council (NRC) report, even though uncertainties exist regarding the exact  nature and magnitude of impacts, mobilizing now to increase the nation’s  resilience can be an insurance policy against future climate change  risks.
We define resilience as the ability to prepare and plan for, absorb,  recover from, and more successfully adapt to actual or potential adverse  events. Hazard mitigation—actions that reduce the long-term risks of life  and property by lessening the impact of disasters—and climate change  adaptation—the adjustments to natural or human systems in response to  actual or expected climate change—promote resilience to extreme  weather events, among other things.
Recent executive orders have addressed the topics of vulnerabilities to  extreme weather events and climate change-related risks. Executive  Order 13632, which was signed in December 2012, established the  Hurricane Sandy Rebuilding Task Force to, among other things, assess  current vulnerabilities to extreme weather. The task force was also to  identify opportunities for achieving rebuilding success and improving the  affected region’s resilience, consistent with the National Disaster  Recovery Framework’s commitment to support economic vitality, enhance  public health and safety, protect and enhance natural and man-made  infrastructure, and ensure appropriate accountability. Executive Order  13653, which was signed in November 2013, directs federal agencies to,  consistent with their missions, (1) address barriers to the nation’s  resilience to climate change; (2) reform policies that may, perhaps  unintentionally, increase the vulnerability of natural or built systems,  economic sectors, natural resources, or communities to climate change;  and (3) identify opportunities to support and encourage smarter, more  climate-resilient investments.
section_title: Growth in Federal and Private Sector Exposure Has Increased Losses to Date, and Climate Change May Increase Losses in Coming Decades
paragraphs: Growing federal and private sector exposure since our 2007 report on  flood and crop insurance has increased insured and uninsured losses to  date, and climate change and related increases in the frequency and  severity of extreme weather events may further increase such losses in  coming decades.
subsections: section_title: Federal and Private Sector Exposure Have Grown and Increased Losses to Date
paragraphs: Federal and private sector exposure to potential insured losses grew  since 2007. Specifically, inflation-adjusted federal exposure to potential  insured losses grew from $1.3 trillion to $1.4 trillion (8 percent) from 2007  through 2013. According to our analysis of the most recent data available,  private sector exposure grew from an estimated $60.7 trillion to $66.5  trillion (10 percent) from 2007 through 2012, in 2014 dollars. Property  insured under the NFIP comprised 91 percent of federal exposure to  insured loss in 2013, but it grew the least (4 percent) from 2007 to 2013.  Property insured under the federal crop insurance program accounted for  9 percent of total federal exposure to insured loss in 2013, but it grew the  most (68 percent) since 2007, as shown in table 1.
For historical context, in comparing the 7-year period shown in the table  to the preceding 7-year period (2000 to 2006), NFIP’s exposure to loss  grew more slowly from 2007 to 2013, and the federal crop insurance  program’s exposure grew more quickly. From 2000 to 2006, inflation- adjusted NFIP exposure grew from $749.2 billion to $1.20 trillion (60  percent), compared with 4 percent from 2007 to 2013. In contrast, from  2000 to 2006, the federal crop insurance program’s exposure grew from  $45.5 billion to $56.9 billion (25 percent) compared with 68 percent from  2007 to 2013, adjusted for inflation. Also, as a share of total federal  exposure, in 2006, federal crop insurance comprised 5 percent of total  federal exposure, compared to 9 percent in 2013.
Disaster relief appropriations—which could be considered a proxy for  federal exposure to uninsured losses—also grew. Based on a 2013  analysis of disaster relief appropriations by the Congressional Research  Service, the amount of inflation-adjusted disaster relief per fiscal year  increased from a median of $6.2 billion for the years 2000 to 2006, to a  median of $9.1 billion for the fiscal years 2007 to 2013 (46 percent).
Although federal exposure spans all 50 states, it is concentrated in certain  parts of the country, such as the Mississippi River Basin, California’s  central valley, and coastal areas, as shown in figure 1.
Federal and private insured exposure to loss grew for a variety of  reasons, including increases in the value of property insured and  increases in the amount of coverage written. For example, according to  data that the National Oceanic and Atmospheric Administration (NOAA)  obtained from the U.S. Census Bureau, the U.S. coastal population grew  by 39 percent from 1970 to 2010, and population density in coastal areas  is six times greater than inland areas. Furthermore, a study by an  insurance industry modeling firm found that the total value of property in  U.S. East Coast and Gulf Coast areas grew by just under 4 percent each  year since 2007 to over $10 trillion in 2012, in nominal dollars. Some  studies and our prior work, suggest that the current level of federal fiscal  exposure to losses may become increasingly difficult to sustain in coming  decades, given these socioeconomic factors and other budget  constraints.
The 20 scientific and industry studies we reviewed that examined the  historical loss record generally found that the exposure growth in hazard- prone areas has largely driven increased insured and uninsured losses to  date. Specifically, most loss analyses we reviewed that found an upward  trend, identified socioeconomic factors, such as growth in population and  the value of property, as the primary drivers of increasing losses to date.  Most studies we reviewed did not find a statistically significant increase in  such losses conclusively attributable to climate change. One  assessment of loss studies noted that climate change cannot be ruled out  as a factor because of limitations in data quality, different methods of  correcting for socioeconomic trends, and changes in insurance  coverage. Although most of the studies we reviewed did not find a clear  climate change signal in historical losses, they noted that climate change  may start to affect losses in the near future.
section_title: Climate Change and Related Extreme Weather May Increase Insured and Uninsured Losses in Coming Decades
paragraphs: Recent assessments of loss projections for certain weather events  suggest that climate change may increase losses substantially by 2040,  and potentially double annual losses by 2100, compounding existing loss  trends. For example, our analysis of 20 scientific studies shows a wide  range of projections that, on average, predict a 14 to 47 percent increase  in inflation-adjusted U.S. hurricane-related losses—which significantly  contribute to total U.S. losses—attributable to changes in the severity of  storms by 2040, and a 54 to 110 percent increase in losses by 2100, as  shown in table 2.
With exposure projected to increase over the same period, annual  insured and uninsured losses could be much higher by 2100 based on  some of the studies we reviewed. Specifically, one peer-reviewed study  projected property exposure in hazard-prone areas to more than double  losses by 2100. When combined with the range of climate change  projections, total losses could increase anywhere from about 50 to 340  percent by 2100.
For agriculture, climate disruptions to production have increased in the  past 40 years, and the May 2014 National Climate Assessment projects  such disruptions will increase over the next 25 years. According to this  report, producers have many available strategies for adapting to the  average temperature and precipitation changes projected for the next 25  years, including technological advancements, expansion of irrigated  acreage, and regional shifts in crop production, among others. However,  according to the report, by midcentury, when temperatures could increase  by between 1.8°F and 5.4°F and precipitation extremes could further  intensify, expected yields of major U.S. crops and farm profits could  decline, even with the current pace of technological advances and  geographic shifts.
section_title: Public Insurers Have Begun Taking Steps to Prepare for Climate Change Effects, but Challenges May Limit Their Ability to Manage Future Exposure
paragraphs: Public insurers have commissioned climate change studies, incorporated  climate change adaptation into their planning, and taken other steps to  better understand and prepare for climate change’s potential effects.  However, inherent challenges of federal insurance programs, such as  how federal insurers can address policyholders’ long-term risk given the  short-term focus of insurance contracts, may impede NFIP and RMA’s  ability to minimize long-term federal exposure to climate change.
subsections: section_title: Public Insurers Have Begun Taking Steps to Understand Climate Change Risk and Prepare for Related Effects
paragraphs: Public insurers have begun taking steps to understand climate change  risks, such as sea-level rise, and have identified actions that could  manage their exposure to climate change’s effects. For example, federal  insurers commissioned climate change studies and modeling to better  understand the long-term implications of climate change for their  programs. Regarding flood insurance, a FEMA-commissioned June 2013  study found that sea-level rise, erosion, and other changes in coming  decades will affect the NFIP by expanding areas prone to flooding and  requiring premium increases to cover higher losses. The report also  found that small annual rate increases could allow NFIP to adjust to  gradual climate change effects. Based on this report’s findings, FEMA  initiated two pilot studies to analyze sea-level rise and its impacts in  special flood hazard areas. FEMA appointed members to a Technical  Mapping Advisory Council to, among other things, develop  recommendations to ensure FEMA uses the best available methodology  to consider future development on flood risk as required by the Biggert- Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act).  According to FEMA officials, the council expects to release its flood  mapping report in September 2015.
Regarding crop insurance, RMA’s 2009 study found that the crop  insurance program has self-correcting features, which allow RMA to  manage its exposure to gradual changes in climate. For example,  farmers’ annual production history determines their coverage and, if  yields decrease under climate change, the program’s exposure adjusts  downward as well. RMA may also adjust the availability of coverage for  crops to respond to geographic shifts in production as conditions become  more or less favorable for certain crops. According to RMA officials,  farmers’ desire to maximize their profits and maintain their businesses will  motivate them to alter their production practices as climate change effects  occur. However, the agency’s 2009 study also recommended that RMA  should better monitor weather and climate to understand potential rapid  changes in future conditions and how to adapt agricultural and risk  management practices to address climate change. RMA entered into a  cooperative agreement with Oregon State University’s Parameter- elevation Regressions on Independent Slopes Model (PRISM), Climate  and Weather Group that will enhance RMA’s monitoring of weather and  climate. Representatives from PRISM and RMA said the two  organizations have engaged in a long-term program to develop a 100- year historical weather time series that could help analyze climate  change’s effect on agriculture.
Furthermore, in response to recent executive orders, FEMA and RMA  have developed climate change adaptation plans, which outline planned  agency actions to manage significant climate change related risks to, and  vulnerabilities in, agency operations and missions. For example,  according to its climate change adaptation policy statement, FEMA will  continue its study of climate change impacts on NFIP. Furthermore,  according to program officials, climate change efforts will incorporate the  best climate science available into flood maps—which form the basis for  identifying property owners’ flood risk and providing guidance to  communities on land-use decisions. According to its adaptation plan,  RMA will update program parameters, such as the earliest and final  planting dates. Changing planting dates, as needed, can help farmers  avoid exposing crops to new changes in weather or climate. RMA officials  told us that they also recently worked with USDA’s Natural Resources  Conservation Service to ensure consistency between crop insurance and  conservation programs that protect soil and water resources.
RMA also participates in the broader USDA climate change effort, such  as USDA’s Global Change Task Force, according to RMA and USDA  officials. This task force coordinates USDA activities related to climate  change and provides a venue for sharing information within the agency,  according to an agency document. In addition, USDA’s Agricultural  Research Service (ARS), has identified several climate change  adaptation strategies to promote long-term resilience to climate change  effects such as increased soil erosion and water scarcity. Specifically, a  2013 ARS report found that resilient agricultural practices such as  conservation tillage—where farmers leave some crop residue on fields— and water conservation will help minimize climate change costs and  sustain agricultural production in a changing climate. According to USDA  officials, the agency also plans to develop region-specific adaptation  strategies through its newly established Regional Climate Hubs, which  are to deliver science-based, practical information to farmers and to  support decision making related to mitigation of, and adaptation to,  climate change.
Additionally, for a variety of reasons, federal insurers have adjusted their  rate-setting calculations in ways that may better position them to respond  to climate change. Although not specific to climate change, the Biggert- Waters Act requires NFIP to establish a reserve to help meet expected  future obligations and to establish standards that ensure that its flood  maps’ flood risk determinations are adequate, both of which should help  the agency collect funds that more closely match the risks it incurs or that  are more likely to be sufficient to cover losses. FEMA officials said the  agency has also increased the reserve amount in premiums to cover  flood risk uncertainty, to better reflect the current flood risk associated  with properties below base flood elevation. Recently enacted legislation  required FEMA to phase out subsidies for some properties such as  nonprimary residences and business structures through 25 percent  annual premium increases until the full-risk rate is reached.
In response to a 2011 rate study, RMA changed its rate calculations to  more heavily weigh recent weather data, which RMA documents suggest  could enable premiums to more quickly and fully reflect changes in the  climate. By law, RMA must set crop insurance premiums at rates  sufficient to cover projected claims. Due in part to weather variability, in  some years, RMA will likely collect more premiums than it pays in claims,  and vice versa. RMA currently uses an average of the previous 20 years  of yields to calculate its rates, rather than the previous method of  assigning equal weight to all years back to the fixed base year of 1975— which was in place prior to 2012.
Moreover, FEMA, in conjunction with other federal agencies, has taken  some recent steps to manage future risks related to climate change for  disaster relief. For example, the Hurricane Sandy Rebuilding Task Force  implemented a minimum flood risk reduction standard for Sandy-related  disaster funding to account for future sea-level rise in response to  Executive Order 13632. Under this standard, structures repaired or  rebuilt must meet forward-looking standards, such as elevating the  ground floor of a building 1 foot higher than existing FEMA standards. In  addition, according to FEMA officials, a current interagency effort seeks to  develop a Federal Flood Risk Reduction Standard that would apply to  future disaster relief appropriations—although it is too early to know  whether such a standard will incorporate future risk. Furthermore,  according to a July 2014 White House statement, FEMA will issue new  guidance that requires states to incorporate climate change into their  hazard mitigation plans as a condition for receiving disaster relief.  FEMA’s Hazard Mitigation Assistance programs and post-disaster grants  currently do not require grantees to incorporate sea-level rise into their  cost-benefit calculations for proposed projects, although they do allow it.
Regarding other public insurance programs, at the state level, some state  insurers in hazard-prone areas have transferred risk to the private sector  to reduce their exposure to claims. Specifically, officials at two of the state  insurers we interviewed told us they have sold policies (“depopulation”),  bought reinsurance to transfer a portion of the risk in their portfolio to  another insurer, and sold bonds that provide funding to the insurer should  a catastrophic weather event occur (“catastrophe bonds”). These risk  transfer methods reduce exposure to losses from extreme weather.  Reinsurance and catastrophe bonds are short-term, market-based risk  transfer methods, typically of 1 to 3 years in duration. We previously  concluded that there are several strategies—many which would require  statutory authority to implement but a few that FEMA currently has  authority to implement—to be considered at the federal level to allow the  transfer of risk to the private sector. The Biggert-Waters Act also  required FEMA to issue a report in 2013 that assessed the capacity of the  private reinsurance, capital, and financial markets to assume a portion of  the insurance risk of NFIP.
section_title: Federal Insurers Face Challenges Managing Future Exposure to Climate Change
paragraphs: Federal insurers face two main program challenges that may constrain  their ability to manage their fiscal exposure and address future climate  change risk. First, federal law encourages federal insurers, such as  FEMA and RMA, to provide affordable insurance to policyholders through  subsidized rates, which lessens the agencies’ ability to collect sufficient  premiums from policyholders to pay claims, increases the federal  government’s fiscal exposure, and may reduce policyholders’ incentives  to manage risk by giving them inaccurate signals about the level of risk.  Specifically, federal insurers face a challenge between providing  affordable premiums through subsidies and managing financially self- sufficient programs by charging policyholders full-risk premiums.  Additionally, while insurers, in general, communicate the risk of incurring  losses to policyholders through their premium rates, by subsidizing some  policies, federal insurers have not provided all policyholders with accurate  price signals about their risk of incurring losses. As a result, some NFIP  and federal crop insurance policyholders may perceive their risk of loss to  be lower than it really is and may have less financial incentive to reduce  this risk.
For example, FEMA offers subsidized premium rates for policies covering  certain structures, some of which are in high-risk areas. As a result of  NFIP’s historical rate structure, the program has generated sufficient  premiums to cover claims in years with average losses but has not had  sufficient funds to cover claims in catastrophic loss years, and FEMA has  an outstanding balance with the U.S. Treasury of $24 billion to pay for  claims in these years. Although FEMA is phasing out most subsidies, they  may remain in place for many years, and while they are in place, newly  purchased residential properties may qualify for subsidized NFIP rates.  As long as some NFIP policyholders only pay for a portion of their risk of  losses due to subsidized premiums, they receive inaccurate price signals  about their property’s full flood risk—regardless of what other information  FEMA may provide. Consequently, policyholders who receive subsidized  rates may have limited financial incentive to take steps, such as  floodproofing their homes above base flood elevation, to reduce their  risk.
For federal crop insurance, although RMA is required to collect sufficient  premiums to cover projected claims, the premiums are subsidized by the  federal government. For example, we previously found that the  government paid about 62 percent of premium costs for the program in  2011. The government continued to pay 62 percent of premium costs in  2013, which totaled about $7.3 billion. Also, in August 2014, we found  that the costs of federal crop insurance have grown, primarily due to an  increase in the value of premium subsidies. According to an April 2014  Congressional Budget Office report, crop insurance program costs are  expected to average $8.9 billion annually, for fiscal years 2014 through  2023. Similar to flood insurance, federal crop insurance policyholders  receive inaccurate price signals about their potential risk of loss when  they receive such premium subsidies. Although farmers are informed of  the subsidy amount and have an incentive to maximize their annual  yields, they do not bear the true cost of their risk of loss due to weather- related events, such as drought—which could affect their farming  decisions.
In prior work, we concluded that reducing subsidies and charging full-risk  premiums to individual policyholders would decrease the federal  government’s fiscal exposure under the flood and crop insurance  programs. Reducing the federal government’s fiscal exposure to losses  under federal insurance programs and sending more accurate signals to  policyholders about their risk, become even more important as the risks  from climate change and related extreme weather events increase.
Second, given the short-term nature of insurance, public insurers face a  challenge in encouraging their policyholders to reduce their long-term  exposure to climate change risks. Property insurance contracts typically  estimate and communicate risk of property losses for the 1-year term of a  policy. However, climate change effects on insured property, such as  buildings or fields in production, may span decades. Because FEMA and  RMA only provide policyholders with price signals for expected losses in  the upcoming year, these policyholders may not be encouraged to reduce  long-term risks for their property. Similarly, in agriculture, the tension  between the short- and long-term extends beyond insurance into farming  operations. According to RMA officials, farmers make annual decisions on  the starting times and types of crops they plant and buy seed for the  following year. They focus more heavily on this short-term time horizon, in  part because seed and farming technology constantly change.
Furthermore, building to community standards that are identical to  existing NFIP standards—which are based on near-term flood risk—may  unintentionally increase policyholders’ long-term vulnerability to climate  change as sea-level rises or erosion increases properties’ flood risk— which does not reflect the direction contained in Executive Order 13653.
This is because, in the short-term, policyholders may be less likely to  consider taking actions to protect their homes or localities against future  risk and may continue to build in high-risk areas. According to FEMA  guidance, the NFIP standards are periodically revised to incorporate new  regulations or clarify old ones. Communities in turn must then update their  own regulations to maintain consistency with the NFIP standards. Without  incorporating forward-looking minimum standards into NFIP’s  requirements, similar to the minimum standard applied by the Hurricane  Sandy Rebuilding Task Force, NFIP policyholders and localities may  continue to build and rebuild structures to current community standards  that may not reflect the changing weather-related risks faced over  structures’ designed life spans—thereby exacerbating the federal  financial risk to climate change.
Regarding the federal crop insurance program, federal law prohibits crop  insurance from covering losses due to farmers’ failure to follow good  farming practices. RMA’s good farming practices provide acceptable  farming methods for crop insurance policyholders to use in producing  yields consistent with historical production. However, these practices are  focused on maintaining historic crop yields over the term of the annual  insurance contract, and some of these practices may unintentionally  increase the vulnerability of agriculture to climate change, contrary to  Executive Order 13653’s directive for agencies to manage vulnerabilities  to climate change. For example, certain practices, such as conventional  tillage and traditional irrigation methods, may maintain historic crop yields  in the short-term, but they may inadvertently reduce agriculture’s long- term resilience through increased erosion, depleted soil quality, and  inefficient water use. RMA officials said that crop insurance adjusts to  farmers’ best management practices and should follow their adjustments  rather than dictate their behavior. However, a variety of factors influence  farmers’ production practices and, in some cases, farmers may not adopt  resilient practices unless these practices also maximize farmers’ short- term net benefits, consistent with crop insurance’s focus on maintaining  historic production. By not encouraging agricultural experts to  recommend or incorporate resilient agricultural practices into their expert  guidance for growers’ good farming practices, RMA is likely missing an  opportunity to decrease existing and future fiscal exposures to climate  change. Consequently, crop insurance may continue to cover losses  resulting from practices that increase vulnerability to climate change.
section_title: Many Private Insurers and Reinsurers Have Identified and Assessed Climate Change Risks, but Preparing for Long- Term Effects Is Challenging
paragraphs: Many private property and casualty insurers and reinsurers have taken  some steps since our 2007 report on flood and crop insurance to  understand and report on their risks associated with climate change,  including participating in industry climate change surveys, and issuing  reports that identify and assess climate change risks and trends in  weather-related losses. While selected insurers we interviewed said they  manage climate change risks through their underwriting practices, we  found that the industry faces challenges in preparing for long-term climate  change, such as short-term insurance contracts and catastrophe  modeling limitations.
subsections: section_title: Many Private Insurers and Reinsurers Identified and Assessed the Climate Change Risks They May Face
paragraphs: Since our 2007 report on flood and crop insurance, industry  representatives, including insurers, reinsurers, and brokerage firms, have  reported on climate change risks they face. For example, many insurers  have reported on how they incorporate climate change into their risk  management practices through an annual industry survey adopted by the  National Association of Insurance Commissioners (NAIC) in 2010.  According to an analysis by the California Department of Insurance,  which administers the survey, 1,067 insurers participated in the climate  risk disclosure survey in 2013, for reporting year 2012. The California  Department of Insurance found that 74 percent of insurers that  participated in the 2012 survey indicated that they have a process for  identifying and assessing climate change-related risks, and 65 percent of  insurers indicated that they have encouraged policyholders to reduce the  losses caused by climate change-influenced events. According to several  insurers and industry representatives we interviewed, insurers generally  manage their exposure to weather-related losses associated with climate  change through their underwriting practices, which include charging risk- based premiums, managing coverage options, and sharing exposure to  losses by purchasing reinsurance.
In addition to insurers’ participation in the climate risk disclosure survey,  other insurance industry representatives have identified and assessed  risks associated with climate change. For example, representatives from  three of four reinsurers we interviewed said that they have issued reports  on climate change risks or weather-related losses. In addition, one of two  reinsurance brokers we interviewed has reported on climate change risks  and scientific assessments. The other reinsurance broker we interviewed  has issued monthly and annual reports on natural catastrophe losses  worldwide based on publicly available industry and climate data that  cover topics associated with climate change, including trends in hurricane  frequency, global temperatures, and weather-related losses.
section_title: Preparing for Long-Term Climate Change Effects is Challenging for Private Insurers
paragraphs: Private insurers face several challenges to prepare for the long-term  effects of climate change. One key challenge is similar to that identified  by public insurers: the short-term nature of insurance contracts. Insurers  generally write property coverage for 1-year terms. While short-term  contracts allow insurers flexibility to manage their exposure to losses  through (1) changes in coverage or pricing or (2) not renewing a particular  policy, the annual period of each contract makes it challenging for  insurers to incorporate long-term climate change projections into their risk  management practices.
According to several industry representatives we interviewed, insurers  and reinsurers use advanced computer modeling, known as catastrophe  models, to help estimate risks and price insurance policies. While  catastrophe modeling helps insurers and reinsurers estimate potential  short-term weather-related losses, they said that incorporating the effects  of climate change into catastrophe models remains a challenge.  According to a representative of a catastrophe modeling firm we  interviewed, catastrophe models that insurers use to price policies  generally estimate short-term risks based on historical weather data and  past losses and not on long-term climate change projections. Many  industry representatives said that advances in catastrophe modeling have  improved risk measurement over time. However, estimating weather- related risks still includes elements of uncertainty, and catastrophe  modeling information is limited for some weather-related risks. We  interviewed representatives from two catastrophe modeling firms and a  reinsurance broker that have developed models to estimate risks  associated with hurricanes, including wind and storm surge impacts, as  well as a model for estimating the effects of weather on crops. Several  firms are developing catastrophe models for inland flood risk, which will  help estimate potential flood risks, although FEMA officials and several  industry representatives said these models are not yet advanced enough  to allow insurers to estimate or price flood risk for individual properties.
Even with these challenges, several industry representatives said that,  barring any additional regulatory restrictions, insurers and reinsurers are  positioned to continue managing risks associated with climate change  through their ability to set risk-based prices, write coverage, or manage  exposure to losses. However, two reports by an industry group and  academics have found that past catastrophic events have caused the  private property casualty insurance market to retract following a major  disaster, placing greater pressure on public insurers to provide coverage.  For example, according to a 2012 Insurance Information Institute report,  some insurers became insolvent or stopped writing coverage in certain  areas following Hurricane Andrew in 1992 and, since then, Florida’s state  insurer has grown from a market of last resort to the state’s largest  insurer. While some industry representatives we interviewed said  insurers and reinsurers have successfully managed weather-related risks  through underwriting, some said additional incentives are needed to help  the private sector, government programs, and individuals manage their  exposure to risks associated with climate change. For example, several  industry representatives have said that South Carolina’s tax credit  program for homeowners who fortify their homes to make them more  resistant to hurricanes, catastrophic wind events, or flooding could  encourage individuals to take steps to reduce their exposure to such  risks.
Some industry representatives we interviewed also suggested that  federal, state, and local government adoption of building and land use  practices that recognize potential climate change effects would help  decrease both public and private exposure to insured and uninsured  weather-related losses. For example, land use practices and zoning  regulations that recognize potential climate change impacts could help  reduce public and private exposure to climate change by limiting new  construction or relocating existing structures from hazard-prone areas. In  addition, several insurers and reinsurers we interviewed and other  industry representatives have suggested that incentives are needed to  encourage more state or local governments to adopt resilient building  standards to help mitigate against weather-related losses. The Hurricane  Sandy Rebuilding Task Force reported in August 2013 that using  disaster-resistant building codes is the most effective method to ensure  new and rebuilt structures are designed and constructed to a more  resilient standard. The task force recommended that states and local  governments adopt the most current building codes to ensure that  buildings and other structures incorporate the latest science, advances in  technology, and lessons learned. A representative from one industry  group said updated and more resilient building codes, as well as  improved enforcement measures, would help reduce exposure to  weather-related risks including hurricanes, floods, wildfires, hail, and wind  storms, which are associated with climate change. The industry group  reported in December 2011 that while several hurricane-prone states,  including Florida, Virginia, and New Jersey, have adopted more resilient  building codes, opportunities exist for others to adopt stronger standards  and better enforcement measures.
To examine these and other issues, in November 2013, the President  established a Task Force on Climate Preparedness and Resilience  composed of state, local, and tribal leaders to advise the President and  an interagency council on how the federal government can support state,  local, and tribal preparedness for and resilience to climate change,  among other things. The task force’s recommendations, expected in the  fall of 2014 according to a White House press release, will address  removing barriers to resilient investments—such as improving data and  tools available to state and local decision makers, reforming existing  policies and federal funding programs, and identifying opportunities to  support more climate-resilient investments by states, local communities,  and tribes.
section_title: Conclusions
paragraphs: FEMA and RMA have commissioned climate change studies,  incorporated climate change adaptation into their planning, and taken  other steps to address aspects of their federal flood and crop insurance  programs that create fiscal exposures associated with climate change  and extreme weather. However, the agencies continue to face  fundamental challenges that send inaccurate price signals to  policyholders about their potential risk of loss and increase federal fiscal  exposure, and may unintentionally increase their policyholders’  vulnerability to climate change risks. We have previously concluded,  among other things, that reducing subsidies and charging full-risk  premiums to individual policyholders would decrease the federal  government’s fiscal exposure under the flood and crop insurance  programs.
Executive Order 13653 directs federal agencies to, consistent with their  missions, reform policies that may, perhaps unintentionally, increase the  vulnerability of natural or built systems, economic sectors, natural  resources or communities to climate change. Regarding FEMA’s flood  insurance program, the agency is phasing out most subsidies, and is  studying how to incorporate the projected effects of climate change, such  as future sea-level rise and erosion, into its flood maps, but the mapping  advisory council’s recommendations aren’t expected until September  2015. Until the agency implements these changes, some NFIP  policyholders will continue to receive inaccurate signals about their  current risk of loss, and all may not receive signals about their future risk  of loss over the designed lifespan of their insured property. Furthermore,  NFIP standards may not fully reflect policyholders’ long-term vulnerability  to climate change because these standards are based on current risk that  does not reflect future sea-level rise, erosion, or other changes. Without  incorporating forward-looking minimum standards into NFIP’s  construction and rebuilding requirements, similar to the minimum  standard adopted by the Hurricane Sandy Rebuilding Task Force, NFIP  policyholders and communities may continue to build and rebuild  structures to current NFIP standards that do not necessarily reflect the  changing weather-related risks faced over structures’ designed life  spans—which could exacerbate federal fiscal exposure amid already  strained federal resources.
In addition, a variety of agricultural practices are available to farmers that  would improve their long-term resilience to climate change, such as  practices that would promote long-term water conservation and soil  conservation. However, federal crop insurance policyholders may receive  inaccurate price signals about their current risks because of subsidized  premiums and because of the short-term nature of annual insurance  contracts they may not receive signals that reflect the long-term  implications of their short-term farming practice decisions. Additionally,  federal law prohibits crop insurance from covering losses due to a  farmers’ failure to follow good farming practices, although some of these  practices may increase the vulnerability of agriculture to climate change,  which may not reflect the direction contained in Executive Order 13653.  Without working with agricultural experts to recommend or incorporate  resilient agricultural practices into their expert guidance for growers’ good  farming practices, RMA is likely missing an opportunity to decrease  existing and future fiscal exposures to climate change. Consequently,  crop insurance may continue to cover losses resulting from practices that  increase vulnerability to climate change.
section_title: Recommendations for Executive Action
paragraphs: We are making two recommendations in this report.
To promote forward-looking construction and rebuilding efforts while  FEMA phases out most subsidies, we recommend that the Secretary  of the Department of Homeland Security direct FEMA to consider  amending NFIP minimum standards for floodplain management to  incorporate, as appropriate, forward-looking standards, similar to the  minimum standard adopted by the Hurricane Sandy Rebuilding Task  Force.
To promote greater resilience to climate change effects in U.S.  agriculture, we recommend that the Secretary of Agriculture direct  RMA to consider working with agricultural experts to recommend or  incorporate resilient agricultural practices into their expert guidance  for growers, so that good farming practices take into account long- term agricultural resilience to climate change.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USDA, Commerce, DHS, and  Treasury for review and comment. USDA provided written comments,  which are reproduced in appendix II; Commerce provided technical  comments, which we incorporated as appropriate; DHS provided written  comments, which are reproduced in appendix III; and the Department of  the Treasury did not provide comments. USDA did not specify their  agreement or disagreement with our recommendation, and DHS agreed  with our recommendation.
In its written comments, USDA referenced our finding that RMA’s good  farming practices focus on maintaining historic crop yields over the term  of the annual insurance contract and that some of these practices may  unintentionally increase the vulnerability of agriculture to climate change,  contrary to Executive Order 13653’s directive for agencies to manage  vulnerabilities to climate change. USDA stated that RMA does not direct  producers to take or carry out certain agronomic practices, but rather  relies on guidance from agricultural experts in the area.  USDA also  stated that to the extent that agricultural experts in an area recommend or  incorporate resilient practice recommendations into their expert guidance  for growers in a given area, then RMA would consider such in its good  farming practice determination for coverage of losses. While RMA may  not direct producers to follow certain agronomic practices, it can provide  incentives for farmers' adoption of resilient practices by working with  agricultural experts to recommend or incorporate resilient practices into  their expert guidance for growers’ good farming practices and therefore  eligibility determinations for claim payments. As we note in the report,  RMA has an opportunity to potentially reduce agriculture's long-term  vulnerability to climate change by encouraging the adoption of resilient  practices now. For that reason, we recommend that RMA consider  working with agricultural experts to recommend or incorporate resilient  agricultural practices into their expert guidance for growers so that good  farming practices take into account long-term agricultural resilience to  climate change.
In addition, USDA refers to one of our identified program challenges to  insurers that federal law encourages them to provide affordable insurance  to policyholders through subsidized rates, which may reduce  policyholders’ incentives to manage risk by giving them inaccurate signals  about the level of risk. USDA states that, while the federal government  does subsidize a significant share of a producer’s premium, every  producer receives a notification from his or her insurance provider, which  explains how much premium was paid by the government and how much  is to be paid by the producer. Therefore, USDA states that all producers  are made aware of the full risk. While notifying farmers of the subsidy  amount provides useful information, farmers do not bear the true cost of  their risk of loss. As a result, the market signal sent by federal insurers for  the price of the policyholders’ risk is the amount the policyholders actually  pay. We have modified the report and our recommendation to respond to  USDA’s comments.
In its written comments, DHS concurred with our findings that FEMA has  taken action to better understand and prepare for climate change’s  potential effects and that FEMA faces challenges that may limit its ability  to minimize long-term federal exposure to climate change.
DHS also concurred with our recommendation to consider amending  NFIP minimum standards for floodplain management to incorporate, as  appropriate, forward-looking standards, similar to the minimum standard  adopted by the Hurricane Sandy Rebuilding Task Force. In particular,  DHS stated that FEMA has already taken action to consider amending  NFIP minimum standards by (1) commissioning a 2006 study to assess  the adequacy of the NFIP’s minimum standards, (2) participating in a  2004 forum with key stakeholders about amending the NFIP minimum  standards, and (3) encouraging communities to participate in the NFIP’s  Community Rating System, which offers discounted flood insurance rates  in exchange for a community’s proactive efforts to reduce its flood risk.
We do not believe that these actions meet the intent of our  recommendation for several reasons. First, commissioning a study and  participating in a policy forum that discussed several aspects of NFIP  minimum standards are not sufficient evidence that FEMA officials  considered adopting forward-looking standards. FEMA has not provided  documentation of internal policy discussions or other actions taken in  response to the study or forum’s findings. Additionally, the study  commissioned by FEMA is 8 years old, and it therefore does not reflect  scientists’ current understanding of sea-level rise and other climate  change effects identified in more recent National Climate Assessments.   Similarly, the discussion with stakeholders occurred 10 years ago, and it  therefore does not reflect the current state of the program, stakeholders’  current understanding of climate-related risks, the adequacy of FEMA’s  floodplain maps, and recent advances in mapping technology.  Moreover,  the Community Rating System is voluntary and, as of March 2014, 1,296  of the nearly 22,000 NFIP-participating communities are in the program.  These communities represent about 67 percent of NFIP policyholders.  Accordingly, amending the NFIP minimum standards could reach the over  20,000 nonparticipating communities.
As the summary report from the 2004 forum notes, building in a margin of  error such as adding a foot or more to the calculated base flood  evaluation for flood hazard assessment at the outset of the program could  have avoided many of the program’s current problems regarding  uncertainty—including the uncertainty of climate change. We continue to  believe that FEMA should consider amending the NFIP minimum  standards to incorporate, as appropriate, forward-looking standards, and  we therefore do not consider the recommendation resolved and closed.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of Agriculture, the  Secretary of Commerce, the Secretary of Homeland Security, the  Secretary of Treasury, and other interested parties. In addition, the report  will be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To determine how federal and private sector exposure to losses has  changed since our 2007 report on flood and crop insurance and how  climate change has or may affect insured and uninsured losses, we  analyzed federal and private sector exposure data from 2007 through  2013. To understand longer-term trends in exposure, we also analyzed  federal exposure data from 2000, and we reviewed scientific studies and  other available literature on climate change. Specifically, we collected  agency data on the total value of property insured under the National  Flood Insurance Program (NFIP) and the federal crop insurance program.  For the private sector, we collected estimates of the total value insured by  property-casualty insurers—excluding auto—as determined by two  industry catastrophe modeling firms, AIR Worldwide and Risk  Management Solutions. We assessed the reliability of the agency and  industry data we collected and determined it was sufficiently reliable for  describing the total value of property insured. We also conducted a  literature review to identify pertinent studies on how climate change has  or may affect insured and uninsured losses. Specifically, we searched for  scholarly articles, industry articles and reports, think-tank reports,  conference reports, and government publications published from 2007  onward. Through the literature search, we identified a number of studies  that discussed climate change’s potential effects on insured and  uninsured losses and stakeholder perspectives of climate change risks.  For summarizing the effect of climate change on insured and uninsured  losses, we limited our review to scientific, empirical studies that evaluated  the historical loss record or projected future losses. Each of these studies  used various techniques to discern the respective influences on the loss  record of changes in exposure (e.g., wealth, population, insurance  penetration) versus changes in weather patterns. Based on these criteria,  we identified a total of 64 studies that were relevant and applicable to our  report, 20 of which directly addressed the issue of climate change’s effect  on losses. We reviewed the methodologies of these studies to ensure that  they were sound and determined that they were sufficiently reliable for  describing the potential effect of climate change on insured and uninsured  losses.
To determine how public insurers are preparing for climate change, we  reviewed agency documents related to climate change. We reviewed the  Department of Homeland Security’s (DHS) 2012 Climate Change  Adaptation Roadmap, the 2011 Federal Emergency Management  Agency’s (FEMA) Climate Adaptation Policy Statement, and a 2013  AECOM climate change study which FEMA commissioned. We also  reviewed the Risk Management Agency’s (RMA) 2012 Climate  Adaptation Plan and 2011-2015 Strategic Plan, RMA’s cooperative  agreement with Oregon State’s PRISM group, documents related to the  agency’s 2011 rate change calculations, and a 2009 RTI climate change  and modeling study which the agency commissioned. In addition, at the  federal level, we interviewed officials from NFIP, RMA, the U.S.  Department of Agriculture, the National Oceanic and Atmospheric  Administration, the Federal Insurance Office, and Council on  Environmental Quality. We also reviewed the Biggert-Waters Flood  Insurance Reform Act of 2012, the Homeowner Flood Insurance  Affordability Act of 2014, and the Agricultural Act of 2014. At the state  level, we interviewed officials from the Department of Insurance in three  states and the wind insurers in two of those three states. We selected a  nonprobability sample of states based on the following factors: identified  by an industry forecaster as most at-risk to natural disaster, whether the  state had an insurance pool administered by a governmental entity or  entity established pursuant to state law, and whether the state had  experienced an extreme weather-related event in the past decade.  Because we used a nonprobability sample to select states, our results are  not generalizable to all 50 states; however, our results can provide  illustrative information. We also spoke with several academic experts on  agriculture and modeling identified from publications, other experts, and  our prior work.
Further, to determine how private insurers and reinsurers are preparing  for climate change, we reviewed over 20 industry reports and other  information from industry representatives, and we interviewed a  nonprobability sample of representatives from four insurers and four  reinsurers, as well as catastrophe modeling firms, reinsurance brokers,  and industry groups representing more than 1,000 large and small  property casualty insurers. We selected a sample of four insurers to  interview based on market share, experience with flood or crop insurance,  and involvement in climate change issues. For insurers selected based  on market share, we identified those with a large share of the U.S.  property casualty market (about 50 percent cumulative share of the U.S.  property casualty market) and others with a smaller share of the market  (1 percent or less), based on 2012 industry data. Among these firms, we  selected four insurers with diverse experience in the public and private  insurance markets, and the four firms we interviewed represented over a  25 percent share of the U.S. property and casualty insurance market, and  a 15 percent share of the private crop insurance market. We also  interviewed representatives from a sample of 4 reinsurers, from among  10 reinsurance firms with the greatest share of the U.S. reinsurance  market. The reinsurers we interviewed represented over a 30 percent  share of the U.S. reinsurance market, based on 2012 industry data. In  addition, we interviewed 11 other industry participants, as well as  academic researchers for context. We identified industry participants to  interview through our prior work and relevant publications, as well as  suggestions from other interviewees. Industry participants we interviewed  included representatives from two catastrophe modeling firms, two  reinsurance brokerage firms, and seven industry groups representing  insurers, reinsurers, and others. Among the industry groups we  interviewed, two groups represented more than 1,000 large and small  property casualty insurers. Because we used a nonprobability sample to  select interviewees, our results are not generalizable to industry as a  whole but provide illustrative examples.
We conducted this performance audit from November 2013 to October  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the U.S. Department of Agriculture
section_title: Appendix III: Comments from the U.S. Department of Homeland Security
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Michael Hix (Assistant  Director), Charles Bausell, Alicia Puente Cackley, Heather Chartier,  Kendall Childers, Melinda Cordero, John Delicath, Steven Elstein,  Diantha Garms, Cindy Gilbert, Kathryn Godfrey, Susan Irving, Richard  Johnson, Jessica Lemke, Armetha Liles, Susan E. Offutt, Jeanette  Soares, Vasiliki Theodoropoulos, Frank Todisco, Lisa Van Arsdale,  Patrick Ward, Eugene Wisnoski, and Franklyn Yao made important  contributions to this report.