Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant
Published: 2007-03-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Weather-related events have cost the nation billions of dollars in damages over the past decade. Many of these losses are borne by private insurers and by two federal insurance programs--the National Flood Insurance Program (NFIP), which insures properties against flooding, and the Federal Crop Insurance Corporation (FCIC), which insures crops against drought or other weather disasters. GAO was asked to (1) describe how climate change may affect future weather-related losses, (2) determine past insured weather-related losses, and (3) determine what major private insurers and federal insurers are doing to prepare for potential increases in such losses. In response, among other things, GAO reviewed key scientific assessments; analyzed insured loss data; and contacted private insurers, NFIP, and FCIC.
section_title: What GAO Found
paragraphs: Key scientific assessments report that the effects of climate change on weather-related events and, subsequently, insured and uninsured losses, could be significant. The global average surface temperature has increased by 0.74 degrees Celsius over the past 100 years and climate models predict additional, perhaps accelerating, increases in temperature. The key assessments GAO reviewed generally found that rising temperatures are expected to increase the frequency and severity of damaging weather-related events, such as flooding or drought, although the timing and magnitude are as yet undetermined. Additional research on the effect of increasing temperatures on weather events is expected in the near future, including a highly anticipated assessment of the state of climate science this year. Taken together, private and federal insurers paid more than $320 billion in claims on weather-related losses from 1980 to 2005. Claims varied significantly from year to year--largely due to the effects of catastrophic weather events such as hurricanes and droughts--but have generally increased during this period. The growth in population in hazard-prone areas and resulting real estate development have generally increased liabilities for insurers, and have helped to explain the increase in losses. Due to these and other factors, federal insurers' exposure has grown substantially. Since 1980, NFIP's exposure quadrupled, nearing $1 trillion in 2005, and program expansion increased FCIC's exposure 26-fold to $44 billion. Major private and federal insurers are both exposed to the effects of climate change over coming decades, but are responding differently. Many large private insurers are incorporating climate change into their annual risk management practices, and some are addressing it strategically by assessing its potential long-term industry-wide impacts. The two major federal insurance programs, however, have done little to develop comparable information. GAO acknowledges that the federal insurance programs are not profit-oriented, like private insurers. Nonetheless, a strategic analysis of the potential implications of climate change for the major federal insurance programs would help the Congress manage an emerging high-risk area with significant implications for the nation's growing fiscal imbalance.

section_title: Letter
paragraphs: As the 2004 and 2005 hurricane seasons demonstrated, weather-related  events can devastate affected communities and individuals, and are costly  to the insurance industry, government disaster assistance programs, and  other relief organizations. Apart from the record-setting losses  experienced in 2005, weather-related events over the past decade have  cost the country tens of billons of dollars each year.
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 private sector includes primary insurers that insure  individuals and businesses directly, and reinsurers that provide insurance  to the primary insurers. The public sector includes federal programs—in  particular, the National Flood Insurance Program (NFIP), which insures  properties at risk of damage from flooding, and the Federal Crop  Insurance Corporation (FCIC), which insures crops that are vulnerable to  drought, floods, or other natural disasters. Many states also administer  insurance pools that provide coverage for losses caused by weather- related events.
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. To remain financially solvent, the insurance industry must estimate  and prepare for the potential impact of weather-related events. As such,  any unanticipated changes in the frequency or severity of weather-related  events can have financial consequences at the company level and industry- wide.
The earth’s climate and weather patterns are dynamic, varying on  seasonal, decadal, and longer time scales. The global average surface  temperature has increased by 0..74 degrees Celsius over the past 100 years  and climate models predict additional, perhaps accelerating, increases in  temperature. While the temperature increases to date may appear small,  climate models project that additional changes in temperature may alter  social and economic activities in potentially profound ways. Much  research and policy debate has centered on the extent to which human  activities have contributed to the warming and how much is due to natural  variability. For the purposes of this report, climate change refers to any  change in the climate over time, whether due to natural variability or as a  result of human activity. Regardless of the cause, some contend that  increasing temperatures—accompanied by changes in other aspects of the  climate—may have adverse financial consequences for property insurers,  which might slow the growth of the industry and shift more of the burden  to governments and individuals.
Concerned about the implications of climate change for weather-related  losses incurred by federal agencies and private insurers, you asked us to  (1) describe what is known about how climate change might affect insured  and uninsured losses, (2) determine insured losses incurred by major  federal agencies and private insurers and reinsurers resulting from  weather-related events, and (3) determine what major federal agencies and  private insurers and reinsurers are doing to prepare for the potential risk  of increased losses due to more frequent or more severe weather-related  events associated with climate change.
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  Intergovernmental Panel on Climate Change Third Assessment Report,  National Academy of Sciences reports, and the multifederal agency  Climate Change Science Program. To determine insured losses  attributable to weather-related events, we analyzed data from 1980  through 2005 from the Department of Homeland Security’s Federal  Emergency Management Agency (FEMA) for the NFIP; from the  Department of Agriculture’s Risk Management Agency (RMA) for FCIC;  and from the Property Claims Service, a leading source of insurance data.  We analyzed changes in weather-related losses since 1980 and  supplemented this analysis with a review of existing literature and the  views of subject area experts on the key drivers of changes in losses.
To determine what key federal agencies and private insurers are doing to  assess and manage the potential for increased losses, we conducted  semistructured interviews with officials from the NFIP, RMA, and a  sample of the largest private primary insurers and reinsurers in the United  States, Europe, and Bermuda. The companies we interviewed represent  about 45 percent of the total domestic insurance market but should not be  generalized to represent all insurance companies. We also interviewed  officials from catastrophe modeling firms, insurance industry associations,  the National Association of Insurance Commissioners (NAIC), and  universities to provide additional context for respondents’ statements. To  supplement these interviews, we reviewed documentation of federal  agencies’ risk management practices, studies by subject area experts,  industry reports, insurance company documents, and previous GAO  reports. We performed our work between February 2006 and January 2007  in accordance with generally accepted government auditing standards. A  more extensive discussion of our scope and methodology appears in  appendix I.
subsections: section_title: Background
paragraphs: Insurance is a mechanism for spreading risk over time, across large  geographical areas, and among industries and individuals. While insurers  assume some financial risk when they write policies, they employ various  strategies to manage risk so that they earn profits, limit potential financial  exposures, and build capital needed to pay claims. For example, they  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 to limit their risks, including charging  premiums, establishing underwriting standards, and maintaining close,  long-term business relationships with certain insurers.
Both insurers and reinsurers must also predict the frequency and severity  of insured losses with some reliability to best manage financial risk. In  some cases, these losses may be fairly predictable. For example, the  incidence of most automobile insurance claims is predictable, and losses  generally do not occur to large numbers of policyholders at the same time.  However, some infrequent weather-related events—hurricanes, for  example—are so severe that they pose unique challenges for insurers and  reinsurers. Commonly referred to as catastrophic or extreme 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. Catastrophic  events may affect many households, businesses, and public infrastructure  across large areas, resulting in substantial losses that deplete insurers’ and  reinsurers’ capital.
Given the higher levels of capital that reinsurers must hold to address  catastrophic events, reinsurers generally charge higher premiums and  restrict coverage for such events. Further, in the wake of catastrophic  events, reinsurers and insurers may sharply increase premiums to rebuild  capital reserves and may significantly restrict insurance and reinsurance  coverage to limit exposure to similar events in the future.
Under certain circumstances, the private sector may determine that a risk  is uninsurable. For example, while homeowner insurance policies typically  cover damage and losses from fire and other perils, they usually do not  cover flood damage because private insurance companies are largely  unwilling to bear the financial risks associated with its potentially  catastrophic impact. 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. For example, several states have established Fair Access to  Insurance Requirements (FAIR) plans, which pool resources from insurers  doing business in the state to make property insurance available to  property owners who cannot obtain coverage in the private insurance  market, or cannot do so at an affordable rate. In addition, six southern  states have established windstorm insurance pools that pool resources  from private insurers to make insurance available to property owners who  cannot obtain it in the private insurance market.
Similarly, at the federal level, the Congress established the NFIP and the  FCIC to provide coverage where voluntary markets do not exist. The  Congress established the NFIP in 1968, partly to provide an alternative to  disaster assistance for flood damage. Participating communities are  required to adopt and enforce floodplain management regulations, thereby  reducing the risks of flooding and the costs of repairing flood damage.  FEMA, within the Department of Homeland Security, is responsible for,  among other things, oversight and management of the NFIP. Under the  program, the federal government assumes the liability for covered losses  and sets rates and coverage limitations.
The Congress established the FCIC in 1938 to temper the economic impact  of the Great Depression and the weather effects of the dust bowl. In 1980,  the Congress expanded the program to provide an alternative to disaster  assistance for farmers that suffer financial losses when crops are damaged  by droughts, floods, or other natural disasters. Farmers’ participation is  voluntary, but the federal government encourages it by subsidizing their  insurance premiums. USDA’s RMA is responsible for administering the  crop insurance program, including issuing new insurance products and  expanding existing insurance products to new geographic regions. RMA  administers the program in partnership with private insurance companies,  which share a percentage of the risk of loss or the opportunity for gain  associated with each insurance policy written.
section_title: Climate Change May Increase Losses by Altering the Frequency or Severity of Weather-Related Events
paragraphs: Global temperatures have increased in the last 100 years and are projected  to continue to rise over the next century. Using observational data and  computer modeling, climatologists and other scientists are assessing the  likely effects of temperature rise associated with climate change on  precipitation patterns and on the frequency and severity of weather- related events. The key scientific assessments we reviewed generally  found that warmer temperatures are expected to alter the frequency or  severity of damaging weather-related events, such as flooding or drought,  although the timing, magnitude, and duration of these changes are as yet  undetermined. Additional research on the effect of increasing temperature  on weather events is expected in the near future. Nevertheless, research  suggests that the potential effects of climate change on damaging weather- related events could be significant.
subsections: section_title: Warming Temperatures Are Expected to Alter the Frequency and Severity of Damaging Extreme Weather-Related Events
paragraphs: We reviewed the reports released by IPCC, NAS, and the federal Climate  Change Science Program (CCSP) that are shown in figure 1. These leading  scientific bodies report that the Earth warmed during the twentieth  century—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. IPCC, NAS, CCSP, and other scientific bodies report that this  increase in temperature cannot be explained by natural variation alone.  IPCC’s 2001 assessment of the impact of increasing temperatures on  extreme weather events found that it was likely the frequency and severity  of several types of events will increase as greenhouse gas emissions  continue.
The earth’s climate system is driven by energy from the sun and is  maintained by complex interactions between the atmosphere, the oceans,  and the reflectivity of the earth’s surface, among other factors. Upon  reaching the earth, the sun’s energy is either reflected back into space, or  is absorbed by the earth and is subsequently reemitted. However, certain  gases in the earth’s atmosphere—such as carbon dioxide and methane— act like the glass in a greenhouse to trap some of the sun’s energy and  prevent it from returning to space. While these gases play an important  part in maintaining life on earth, their accumulation in the atmosphere can  significantly increase global temperatures.
The earth warmed by roughly 0.74 degrees Celsius over the past 100 years,  and is projected to continue warming for the foreseeable future. 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 Royal Academy (the United  Kingdom’s national academy of science) have concluded that human  activities, including the combustion of fossil fuels, industrial and  agriculture processes, landfills, and some land use changes, are  significantly increasing the concentrations of greenhouse gases and, in  turn, global temperatures.
Although climate models produce varying estimates of the extent of future  changes in temperature, NAS and other scientific organizations have  concluded that available evidence points toward continued global  temperature rise. 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 1.8 to 4.0 degrees Celsius during the next century.
Some scientists have questioned the significance of the earth’s present  temperature rise relative to past fluctuations. To address this issue, the  NAS recently assessed the scientific community’s efforts to reconstruct  temperatures of the past 2,000 years and place the earth’s current warming  in an historical context. Based on its review, the NAS concluded with a  high level of confidence that global mean surface temperature was warmer  during the last few decades of the twentieth century than during any  comparable period during the preceding 400 years. Moreover, NAS cited  evidence that temperatures at many, but not all, individual locations were  higher during the past 25 years than any period of comparable length over  the past 1,100 years.
subsections: section_title: IPCC Expects Continued Warming to Alter Frequency and Severity of Damaging Extreme Weather-Related Events
paragraphs: Determining the precise nature and extent of the relationship between  average global temperatures and weather-related events is an exceedingly  challenging task. Several key assessments of the state of this science have  addressed the large body of work on this topic. Using observational data  and computer models, scientists are examining the effects of rising  temperatures on precipitation patterns and the frequency and severity of  extreme weather-related events. The complexity of weather systems,  together with the limited statistical precision of projections of the extent  of future temperature change, often produces different model results, and  the results themselves represent a range of potential future conditions.
Nonetheless, a key assessment of climate model projections indicates that  an increase is likely in the frequency or severity of damaging extreme  weather-related events. In 2001, the IPCC, a leading scientific authority on  climate science, released its Third Assessment Report, which assessed the  state of knowledge of, among other things, the potential for global changes  in extreme weather-related events. The IPCC described the relationship  between temperatures, precipitation, and weather-related events.  Increased global mean surface temperatures are linked to global-scale  oceanographic, meteorological, and biological changes. For example, as  the earth warms, more water evaporates from oceans or lakes, eventually  falling as rain or snow. IPCC reported that permafrost is thawing, and the  extent of sea ice, snow cover, and mountain glaciers are generally  shrinking. The IPCC also noted that global sea level rose between 0.1 and  0.2 meters during the twentieth century through thermal expansion of  seawater and widespread loss of land ice, and that this sea level rise could  increase the magnitude of hurricane storm surge in some areas. Warming  is expected to change rainfall patterns, partly because warmer air holds  more moisture.
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). For instance, IPCC reported that increased  drought is likely across many regions of the globe, including the U.S. Great  Plains. Also, IPCC concluded that the intensity of precipitation events is  very likely to increase across almost all regions of the globe and that heavy  precipitation events are expected to become more frequent. Compared  with projected temperature increases, changes in the frequency and  severity of extreme events can occur relatively rapidly, according to the  IPCC.
Much research has been done since the IPCC’s Third Assessment Report,  but there has not been a similarly rigorous assessment of what is known  with regard to temperature increase, precipitation, and weather-related  events for the United States. However, significant assessments will be  completed in the near future. In particular, the IPCC is expected to release  its Fourth Assessment Report throughout 2007.
While we were completing our review, the IPCC released a summary of the  first of three components of its Fourth Assessment Report, which builds  upon past IPCC assessments and incorporates new findings from the  physical science research since the Third Assessment Report. The  summary 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. In particular, the  summary reports that it is very likely that hot extremes, heat waves, and  heavy precipitation events will continue to become more frequent.  Moreover, based on a range of models, IPCC’s summary states that it is  likely that future tropical cyclones (typhoons and hurricanes) will become  more intense, with larger peak wind speeds and more heavy precipitation  associated with ongoing increases in tropical sea surface temperatures.  IPCC reports less confidence in projections of a global decrease in the  number of tropical cyclones, and that the apparent increase in the  proportion of very intense storms since 1970 in some regions is much  larger than simulated by current models for that period. The full first  component report was not publicly released prior to the issuance of our  report and is expected some time after May 2007.
The other two components of the Fourth Assessment Report will cover  impacts, adaptation, and vulnerability, and mitigation. These reports are  expected to assess, among other things, key vulnerabilities and risks from  climate change, including changes in extreme events. Additionally, the  IPCC has committed to producing a capping report that is intended to  synthesize and integrate material contained in the forthcoming reports, as  well as other IPCC products.
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 (NOAA) 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.
section_title: More Frequent or More Severe Extreme Weather- Related Events Could Significantly Increase Insured Losses
paragraphs: Extreme weather-related events impact communities and economic  activity by damaging homes and vehicles (e.g., see fig. 2), interrupting  electrical service and business operations, or destroying crops. IPCC  reported that the insurance industry—especially the property and casualty  segment—are sensitive to the effects of weather-related events. This was  highlighted in the Department of Commerce’s comments on a draft of this  report, which observed that altering either the frequency or severity of  high impact extreme weather-related events could result in a significant  increase in the risk posed to an insurer. For example, the agency said that  what had been considered a 500-year event (i.e., its probability of  occurring in a given year is 1 in 500) could shift under climate change to  become a 100-year event (i.e., its probability of occurring in a given year is  1 in 100). Consequently, more frequent or more severe events have a  greater potential for damage and, in turn, insured losses. As an official  from Aon Re Australia, a large global reinsurer, reported, “The most  obvious impact of climate change on the insurance sector will be the  increase in insured property losses from extreme weather events.”
Notably, the economic damages associated with some extreme weather- related events could increase at a greater rate in comparison with changes  in the events themselves. Seemingly small changes in the characteristics of  certain weather-related events can lead to substantial increases in damage.  For example, recent work on hurricanes by researchers at the University  of Colorado, the National Weather Service, and other institutions  examined losses associated with hurricanes that made landfall in the  United States since 1900. Holding constant the increased population and  development in coastal counties during this period, the study compared  the economic damage of stronger storms with weaker storms, based on  the Saffir-Simpson Hurricane Scale. The researchers found that stronger  storms have caused many times more economic damages than weaker  storms, as shown in figure 3. These findings are consistent with other  independent analyses conducted by insurers and catastrophe modelers.
Moreover, public reports from several of the world’s largest reinsurance  companies and brokers underscore the potential for substantially  increased losses. These reports note that, in addition to greater losses in  absolute terms, the potential for greater variability in weather-related  events could significantly enhance the volatility of losses.
section_title: Insured Weather- Related Losses Have Been Sizeable, and Federal Insurers’ Exposure Has Grown Significantly
paragraphs: Taken together, insurers paid more than $320 billion in claims for weather- related losses between 1980 and 2005. Claims varied significantly from  year to year—largely due to the effects of catastrophic weather events  such as hurricanes and droughts—but generally increased during this  period. The growth in population in hazard-prone areas, and consequent  real estate development and increasing real estate values, have generally  increased insurers’ exposure to weather-related events and help to explain  their increased losses. Due to these and other factors, the federal  insurance programs’ liabilities have grown significantly, leaving the federal  government increasingly vulnerable to the financial impacts of extreme  events.
subsections: section_title: Claims Paid on Weather- Related Losses Totaled More Than $320 Billion between 1980 and 2005
paragraphs: Based on an examination of loss data from several different sources,  insurers incurred more than $320 billion in weather-related losses from  1980 through 2005 (see fig. 4). 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.
Of the $321.2 billion in weather-related loss payments we reviewed, private  insurers paid $243.5 billion—over three-quarters of the total. Figure 5  depicts the breakdown of these payments among key weather-related  events. Of the $243.5 billion paid by private insurers, hurricanes accounted  for $124.6 billion, or slightly more than half. Wind, tornados, and hail  associated with severe thunderstorms accounted for $77 billion, or nearly  one-third of the private total. Winter storms were associated with $25.1  billion, or about 10 percent.
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. Although the performance of both NFIP and  FCIC is sensitive to weather, the two programs insure fundamentally  different risks and operate in very different ways.
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.
NFIP claims totaled about $34.1 billion, or about 11 percent of all weather- related insurance claims during this period. As shown in figure 6, NFIP  covers only one cause of loss—flooding. Claims averaged about $1.3  billion per year, but ranged from $75.7 million in 1988 to $16.7 billion in  2005.
FCIC insures commodities on a crop-by-crop and county-by-county basis  based on farmer demand for coverage and the level of risk associated with  the crop in a given region. Over 100 crops are covered by the program.  Major crops, such as grains, are covered in almost every county where  they are grown, and specialty crops, such as fruit, are covered only in  some areas. Participating farmers can purchase different types of crop  insurance, including yield and revenue insurance, and at different levels.  For yield insurance, participating farmers select the percentage of yield of  a covered crop to be insured and the percentage of the commodity price  received as payment if the producer’s losses exceed the selected  threshold. Revenue insurance pays if actual revenue falls short of an  assigned target level regardless of whether the shortfall was due to low  yield or low commodity market prices.
Since 1980, FCIC claims totaled $43.6 billion, or about 14 percent of all  weather-related claims during this period. FCIC losses averaged about $1.7  billion per year, ranging from $531.8 million in 1987 to $4.2 billion in 2002.  Figure 7 shows the three causes of loss—drought, excess moisture, and  hail––that accounted for more than three-quarters of crop insurance  claims. In particular, drought accounted for $18.6 billion in losses, or more  than 40 percent of all insured crop losses. Excess moisture totaled $11.2  billion, followed by hail with total claims of $4.2 billion. The remaining  $9.6 billion in claims was spread among 27 different causes of loss,  including frost and tornados.
Importantly, the insured loss totals used in our analysis do not account for  all economic damage associated with weather-related events.  Specifically, data are not available for several categories of economic  losses, including uninsured, underinsured, and self-insured losses. As we  reported in 2005, FEMA estimates that one-half to two-thirds of structures  in floodplains do not have flood insurance because the uninsured owners  either are unaware that homeowners insurance does not cover flood  damage, or they do not perceive a serious flood risk. Furthermore,  industry analysts estimate that 58 percent of homeowners in the United  States are underinsured—that is, they carry a policy below the  replacement value of their property—by an average of 21 percent.  Finally, some individuals and businesses have the means to “self-insure”  their assets by assuming the full risk of any damage.
Various public and private disaster relief organizations provide assistance  to communities and individuals who suffer noninsured economic losses,  although it was beyond the scope of this report to collect data on these  losses. In particular, since 1989, $78.6 billion in federal disaster assistance  funds have been obligated through the Disaster Relief Fund administered  by FEMA, the largest—but not only—conduit for federal disaster  assistance money provided in the wake of presidentially declared disasters  and emergencies.
Overall, according to data obtained from Munich Re, one of the world’s  largest reinsurers, the type of insured losses we reviewed account for no  more than about 40 percent of the total losses attributable to weather- related events. NOAA’s National Hurricane Center (NHC) uses a similar  proportion to produce the agency’s estimates of total economic damage  attributable to hurricanes. Although we did not independently evaluate  the reliability of these estimates, subject area experts we spoke with  confirmed that it was the best such estimate available and is widely used  as an approximation of the relative distribution of losses.
The difficulties we and others faced in accounting for weather-related  losses were the subject of the National Academies’ The Impacts of  Natural Disasters: A Framework for Loss Estimation. Reporting how  best to account for the costs of natural disasters, including weather- related events, NAS found that there was no system in place in either the  public or the private sectors to consistently capture information about the  economic impact. Specifically, the NAS report found no widely accepted  framework, formula, or method for estimating these losses. Moreover,  NAS found no comprehensive clearinghouse for the disaster loss  information that is currently collected. To that end, NAS recommended  that the Office of Management and Budget, in consultation with FEMA and  other federal agencies, develop annual, comprehensive estimates of the  payouts for disaster losses made by federal agencies. Reviewing the status  of this recommendation was beyond the scope of this report. Nevertheless,  our experience with trying to obtain comprehensive information on  disaster costs and losses underscores the NAS findings.
section_title: Catastrophic Weather- Related Events Help Explain the Significant Year-to-Year Variance in Losses
paragraphs: The largest insured losses in the data we reviewed were associated with  catastrophic weather events. These events have a low probability of  occurrence, but their consequences are severe. Notably, both crop  insurers and other property insurers face the catastrophic risks posed by  extreme events, 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 all insured losses from 1980 to 2005, and the years with the  largest losses were associated with drought. Taken together, though,  hurricanes were the most damaging event experienced by insurers 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 insured losses—more than $146 billion. Moreover, these  losses appear to be increasing.
In the data we reviewed, the years with the largest insured losses were  generally associated with major hurricanes, defined as Category Three,  Four, or Five on the Saffir-Simpson Hurricane Scale. Table 2 shows that,  while 29 Category One and Two storms account for nearly $18 billion in  losses, the 21 major storms account for over $126 billion in losses. In fact,  claims associated with major hurricanes comprised 40 percent of all  weather-related insured losses since 1980.
Importantly, hurricane severity is only one factor in determining the size of  a particular loss—the location affected by the hurricane is also important.  Generally, the more densely populated an area, the greater the extent of  economic activity and accumulated value of the building stock. For  instance, several studies have reviewed the economic impact of Hurricane  Andrew, which tracked over Florida in 1992, in light of the dramatic real  estate development that has occurred in the meantime. Researchers have  normalized losses associated with the storm to account for societal  changes by holding constant the value of building materials, real estate,  and other factors so that the storm’s impact could be adjusted to reflect  contemporary conditions. Hurricane Andrew, which resulted in roughly  $25 billion in total economic losses in 1992, would have resulted in more  than twice that amount—$55 billion—were it to have occurred in 2005,  given current asset values.
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 this issue, Munich Re 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 loss trends. The workshop brought together a diverse group of  international experts in the fields of climatology and disaster research.  Among other things, the workshop sought to determine whether the costs  of weather-related events were increasing and what factors account for  increasing costs in recent decades.
Workshop participants reached consensus on several points, including  that analyses of long-term records of disaster losses indicate that societal  change and economic development are the principal factors explaining  observed increases in weather-related losses. 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 projected increase in the frequency or severity of weather-related  events.
section_title: Value at Risk in Federal Insurers’ Portfolios Increased Significantly between 1980 and 2005
paragraphs: The growth in population in hazard-prone areas, and consequent real  estate development and increasing real estate values, are leaving the  nation increasingly exposed to higher insured losses. 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. We reported in 2002 that the insurance industry faces potentially  significant financial exposure due to natural catastrophes. Heavily  populated areas along the Northeast, Southeast, and Texas coasts have  among the highest value of insured properties in the United States and  face the highest likelihood of major hurricanes. According to insurance  industry estimates, a large hurricane in Miami could cause up to $110  billion in insured losses with total losses as high as $225 billion. Several  states—including Florida, California, and Texas—have established  programs to help ensure that coverage is available in areas particularly  prone to these events.
AIR Worldwide, a leading catastrophe modeling firm, recently reported  that insured losses should be expected to double roughly every 10 years  because of increases in construction costs, increases in the number of  structures, and changes in their characteristics. AIR’s research estimates  that, because of exposure growth, probable maximum catastrophe loss  grew in constant 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.
Data obtained from both the NFIP and FCIC programs indicate the federal  government has grown markedly more exposed to weather-related losses  regardless of the cause. For example, NFIP data show that the number of  policyholders and the value of the properties insured have both increased  since 1980. Figure 8 shows the growth of NFIP’s exposure in terms of both  number of policies and the total coverage. The number of policies has  more than doubled in this time period, from 1.9 million policies to more  than 4.6 million. Moreover, although NFIP limits coverage to $250,000 for a  personal structure and $100,000 for its contents, and $500,000 of coverage  for a business structure and $500,000 on its contents, more policyholders’  homes are approaching (or exceeding) these coverage limits. Accordingly,  the total value covered by the program increased fourfold in constant  dollars during this time from about $207 billion to $875 billion in 2005.
Similarly, RMA data show that FCIC has effectively increased its exposure  base 26-fold during this period (in constant dollars). In particular, the  program has significantly expanded the scope of crops covered and  increased participation. Figure 9 shows the growth in FCIC exposure since  1980.
A senior RMA official told us that the main implication of FCIC’s growth is  that the magnitude of potential claims, in absolute terms, is much greater  today than in the past. For example, if the Midwest floods of 1993 were to  occur today, losses would be five times greater than the $2 billion paid in  1993, according to RMA officials.
section_title: Major Private and Public Insurers Differ in How They Manage Catastrophic Risks Associated with Climate Change
paragraphs: Although the relative contribution of event intensity versus societal factors  in explaining the rising losses associated with weather-related events is  still under investigation, both major private and federal insurers are  exposed to increases in the frequency or severity of weather-related events  associated with climate change. Nonetheless, major private and federal  insurers are responding to this prospect differently. Many large private  insurers are incorporating some elements of near-term climate change into  their risk management practices. Furthermore, some of the world’s largest  insurers have also taken a long-term strategic approach toward changes in  climate. 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. We  acknowledge the different mandate and operating environment in which  the major federal insurance programs operate but 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 which may not constitute an immediate crisis  but which may pose an important longer term threat to the nation’s  welfare.
subsections: section_title: Major Private Insurers Prospectively Manage Potential Increases in Catastrophic Risk Associated with Climate Change
paragraphs: Extreme 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—has outlined a five-step process for  private insurers to follow to manage their catastrophic risk. These steps  include the following:  identifying catastrophic risk appetite by determining the maximum  potential loss they are willing to accept;   measuring catastrophic exposure by determining how vulnerable their  total portfolio is to loss, both in absolute terms and relative to the  company’s risk management goals;   pricing for catastrophic exposure by setting rates to collect sufficient  premiums to cover their expected catastrophic loss and other expenses;   controlling catastrophic exposure by reducing their policies in areas  where they have too much exposure, or transferring risk using reinsurance  or other mechanisms; and    evaluating their ability to pay claims by determining the sufficiency of  their financial resources to cover claims in the event of a catastrophe.
Additionally, insurers monitor their exposure to catastrophic weather- related risk using sophisticated computer models called “catastrophe  models.” AAA emphasizes the shortcomings of estimating future  catastrophic risk by extrapolating solely from historical losses and  endorses catastrophe models as a more rigorous approach. Catastrophe  models incorporate the underlying trends and factors in weather  phenomena and current demographic, financial, and scientific data to  estimate losses associated with various weather-related events. According  to an industry representative, catastrophe models assess a wider range of  possible events than the historical loss record alone. These models  simulate losses from thousands of potential catastrophic weather-related  events that insurers use to better assess and control their exposure and  inform pricing and capital management decisions. Figure 10 illustrates the  difference between estimating future catastrophic losses using historical  data versus catastrophe models.
To determine what major private insurers are doing to estimate and  prepare for risks associated with potential changes in climate arising from  natural or human factors, we contacted 11 of the largest private insurers  operating in the U.S. property casualty insurance market. Representatives  from each of the 11 major insurers we interviewed told us they use  catastrophe models that incorporate a near-term higher frequency and  intensity of hurricanes. Of the 11 private insurers, 6 specifically attributed  the higher frequency and intensity of hurricanes to the Atlantic  Multidecadal Oscillation, which—according to NOAA—is a 20- to 40-year  climatic cycle of fluctuating temperatures in the north Atlantic Ocean. The  remaining 5 insurers did not elaborate on the elements of climate change  driving the differences in hurricane characteristics.
Industry reports indicate that insurance companies’ perception of  increased risk from hurricanes has prompted them to reduce their near- term catastrophic exposure, in both reinsurance and primary insurance  coverage along the Gulf Coast and eastern seaboard. For example, a  recent industry analysis from a leading insurance broker reported that  reinsurance coverage is substantially limited in the southeastern United  States and that reinsurance prices have more than doubled from 2005 to  2006, following a record-setting hurricane season. According to the  Insurance Information Institute, a leading source of information about the  insurance industry, primary insurance companies have also raised prices  in coastal states to cover rising reinsurance costs. Additionally, a recent  report co-authored by a major international insurance company cites  several examples of large primary insurers either limiting coverage or  withdrawing from vulnerable areas such as Florida, the Gulf Coast, and  Long Island.
As private insurers limit their exposure, catastrophic risk is transferred to  policyholders and the public sector. Insurance companies transfer risk to  policyholders by increasing premiums and deductibles, or by setting lower  coverage limits for policies. Insurers can also transfer risk to policyholders  by passing along the mandatory participation costs of state-sponsored  insurance plans. For example, after the 2004 hurricane season, insurers  assessed a surcharge of about 7 percent to every policyholder in Florida to  recoup the cost of insurers’ participation in the state-sponsored wind  insurance plan. The public sector assumes management of weather-related  risk at the local, state, and national level by providing disaster relief and  recovery, developing mitigation projects, appropriating funds and,  ultimately, providing insurance programs when private insurance markets  are not sufficient or do not exist.
In addition to managing their aggregate exposure on a near-term basis,  some of the world’s largest insurers have also taken a long-term strategic  approach to changes in catastrophic risk. For example, 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. Moreover, 6 of the 11 private insurers we  interviewed provided one or more additional activities they have  undertaken when asked if their company addresses changes in climate  through 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 climate change (3 insurers), among  others.
Furthermore, recent research on insurers’ activities to address climate  change outlines several other actions that private sector companies are  taking, such as developing specialized policies and new products,  evaluating risks to company stock investments, and disclosing to  shareholders information about company-specific risks due to climate  change. Additionally, concern over the potential impacts of climate  change on the availability and affordability of private insurance has led  state insurance regulators to establish a task force to formally address the  issue. The report, issued by the NAIC, is expected to be published in the  summer of 2007.
section_title: Major Federal Insurers Have Taken Little Action to Prospectively Assess Potential Increases in Catastrophic Risk Associated with Climate Change
paragraphs: The goals of the major federal insurance programs are fundamentally  different from those of private insurers. Specifically, 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. Although both programs manage  risk within their statutory guidelines, unlike the private sector, neither  program is required to limit its catastrophic risk strictly within the  programs’ ability to pay claims on an annual basis. One important  implication of the federal insurers’ risk management approach is that they  each have little reason to develop information on their long-term exposure  to the potential risk of increased low-frequency, high-severity weather  events associated with climate change.
The statutes governing the NFIP and FCIC promote broad participation  over financial self-sufficiency in two ways: (1) by offering discounted or  subsidized premiums to encourage participation and (2) by making  additional funds available during high-loss years. For example,  discounted insurance premiums are available under the NFIP for some  older homes situated within high flood risk areas where insurance would  otherwise have been prohibitively expensive. FEMA is also authorized to  borrow additional federal funds for the NFIP on an as-needed basis,  subject to statutory limits, to cope with catastrophes. One effect has been  that the NFIP’s exposure has expanded well beyond the ability to pay  claims in high-loss years.
Similar to the discounted premiums offered by the NFIP, the FCIC’s  subsidized premiums are designed to make crop insurance available and  affordable to as many participants as possible. For example, the FCIC is  mandated to provide fully subsidized catastrophic coverage for producers  in exchange for a minimal administrative fee, as well as partial subsidies  for additional levels of coverage. Also like the NFIP, the FCIC is  authorized to use additional federal funds on an as-needed basis during  high-loss years—although, unlike the NFIP, the FCIC is not required to  reimburse those additional funds.
Unlike the private sector, the NFIP and the FCIC can use additional  federal funds, and so neither program is required to assess and limit its  catastrophic risk strictly within its ability to pay claims on an annual basis.  Instead, each program manages its risk to the extent possible, within the  context of its broader purposes, in accordance with its authorizing  statutes and implementing regulations. For example, the FCIC uses  coverage limits, exclusions, and premium rates to meet their statutory goal  of a long-term loss ratio no greater than 1.075—including premium  subsidies. Although the program has experienced high-loss years that  required additional federal funds, over time, these high-loss years have  been offset by low-loss years, which have allowed the program to meet its  goal and build reserves.
By developing a goal to generate sufficient revenue to pay for an average  loss year, the NFIP has also been able to generate a surplus in low-loss  years despite borrowing funds in high-loss years. In the past, the program  has been able to repay borrowed funds with interest to the Department of  the Treasury, however, it is unlikely FEMA will be able to repay the nearly  $21 billion borrowed following the 2005 hurricane season based on the  program’s current premium income.
Although neither program faces the potential of financial ruin like the  private sector, 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. NFIP and FCIC officials  explained that these efforts were informal exercises and were not  performed on a regular basis. FCIC officials also said they use a hurricane  model developed by NOAA to inform pricing decisions for some  commodities such as citrus crops, according to FCIC officials. However,  unlike the catastrophic risk faced by private insurers, hurricane damages  have not been a primary source of crop insurance claims.
According to NFIP and FCIC officials, their risk management processes  adapt to near-term changes in weather as they affect existing data. As one  NFIP official explained, NFIP 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 the  private sector, neither program has conducted an analysis to assess the  potential impacts of an increase in the frequency or severity of weather- related events on their program operations over the near- or long-term.
section_title: Information on Federal Agencies’ Long-term Exposure to Catastrophic Risk Could Better Inform Congressional Decision Making
paragraphs: 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 annual operations, it could nonetheless provide valuable  information for the Congress and other policymakers 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 one report, for example, 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.” The prospect  of increasing program exposure, coupled with expected increases in  frequency and severity of weather events associated with climate change,  would appear to pose such a problem.
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 levels 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 climate  change poses, 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  long-term changes in weather-related risk to remain solvent, suggests the  kind of information that might be developed to help congressional and  other policymakers in assessing current and alternative strategies.  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 large weather events  occurring simultaneously. A similar analysis could provide the Congress  with valuable information about the potential scale of losses facing the  NFIP and FCIC in coming decades, particularly in light of the programs’  expansion since 1980.
section_title: Conclusions
paragraphs: Recent assessments by leading scientific bodies provide sufficient cause  for concern that climate change may have a broad range of long-term  consequences for the United States and its citizens. While a number of key  uncertainties regarding the timing, location, and magnitude of impacts  remain, climate change has implications for the fiscal health of the federal  government, which already faces other significant challenges in meeting  its long-term fiscal obligations. NFIP and FCIC are two major federal  programs which, as a consequence of both future climate change and  substantial growth in exposure, may see their losses grow by many billions  of dollars in coming decades.
We acknowledge that to carry out their primary missions, these public  insurance programs must focus on the near-term goals of ensuring  affordable coverage for individuals in hazard-prone areas. Nonetheless, we  believe the two programs are uniquely positioned to provide strategic  information on the potential impacts of climate change—information that  would be of value to key decision makers charged with such a long-term  focus. 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.
section_title: Recommendation for Executive Action
paragraphs: We recommend 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 Federal Crop Insurance Corporation and the National  Flood Insurance Program, respectively, and report their findings to the  Congress. This analysis should use forthcoming assessments from the  Climate Change Science Program and the Intergovernmental Panel on  Climate Change to establish sound estimates of expected future  conditions. Key components of this analysis may include: (1) realistic  scenarios of future losses under anticipated climatic conditions and  expected exposure levels, including both potential budgetary implications  and consequences for continued program operation and (2) potential  mitigation options that each program might use to reduce their exposure  to loss.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of Agriculture  (USDA), Commerce, Energy, and Homeland Security (DHS) for their  review. DHS agreed via email with the report’s recommendation, noting  that conducting an assessment of the impact of climate change beyond  FEMA’s current statistical modeling (which is based on historical loss  experience) could be helpful if resources were available to pursue such an  analysis.
USDA also agreed with the report’s recommendation, and commented on  the presentation of several findings. (See app. V for the letter from the  Under Secretary for Farm and Foreign Agricultural Services and GAO’s  point-by-point response.) In particular, USDA disagreed that it had thus far  taken little action to prospectively assess potential increases in  catastrophic risk associated with climate change. USDA explained that  RMA does assess both the current and long-term exposure of the crop  insurance program to catastrophic weather events, noting specifically that  RMA (1) updates and publishes total program liability on a weekly basis  and (2) estimates expected changes in liability up to 10 years ahead  through its baseline projections. We acknowledge these activities, but  believe it is important to note that they are limited in scope, focusing  almost exclusively on retrospective measures of performance and not on  the potential for increasingly frequent and intense weather-related events.  These events, including drought and heavy precipitation events, are the  key events acknowledged by USDA as posing catastrophic risk to the crop  insurance program. Moreover, other RMA efforts to capture changes in  weather-related risk rely on data reflecting what has been experienced in  the past, not on what could be experienced in the future.
The Department of Commerce neither agreed nor disagreed with the  report’s findings, but instead offered several comments on the  presentation of several issues in the draft (particularly the depth in which  several issues are discussed) as well as technical comments. We have  incorporated these comments as appropriate and address them in detail in  appendix VI. Notably, the Department of Commerce underscored the  vulnerability of high-risk coastal development, stating that such  vulnerabilities will only be amplified by climate change-related increases  in the frequency or severity of weather-related events.
Finally, the Department of Energy elected not to provide comments on the  draft.
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  Secretaries of Agriculture, Commerce, Energy, and Homeland Security, as  well as other interested parties. We also will make copies available to  others upon request. In addition, the report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions regarding this report, please contact  me 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 report. Key contributors are listed in appendix VII.
section_title: Appendix I: Scope and Methodology
paragraphs: We were asked us to (1) describe what is known about how climate  change might affect insured and uninsured losses, (2) determine insured  losses incurred by major federal agencies and private insurers and  reinsurers resulting from weather-related events, and (3) determine what  major federal agencies and private insurers and reinsurers are doing to  assess and manage the potential risk of increased losses due to changes in  the frequency and severity of weather-related events associated with  climate change.
subsections: section_title: Scientific Literature
paragraphs: To address the first objective, we reviewed and summarized existing  literature from significant policy-oriented scientific assessments from  reputable international and national research organizations including the  Intergovernmental Panel on Climate Change, National Academy of  Sciences, and the multifederal agency U.S. Climate Change Science  Program, as specified in table 3. It was beyond the scope of this report to  independently evaluate the results of these studies.
section_title: Insured Loss Data
paragraphs: To address the second objective, we analyzed insured loss data from  January 1, 1980, through December 31, 2005, from the Federal Emergency  Management Agency (FEMA) for the National Flood Insurance Program  (NFIP); the Department of Agriculture’s Risk Management Agency (RMA)  for the Federal Crop Insurance Corporation (FCIC); and the Property  Claim Services (PCS) for private property insurance. Through electronic  testing and other means, we assessed the reliability of each of the data sets  to determine whether the data were sufficiently reliable for our purposes.  Specifically, we interviewed the sources for each of the data sets to gather  information on how records were collected, processed, and maintained.  Because not all catastrophes are weather-related, we excluded all events  attributable to terrorist acts, tsunamis, earthquakes, and other  nonweather-related losses, based on discussions with the data provider.  To adjust for the general effects of inflation over time we used the chain- weighted gross domestic product price index to express dollar amounts in  inflation-adjusted 2005 dollars. We reviewed any changes in data  collection methodologies that have occurred over time, and evaluated the  effect of any changes on our ability to report losses. We believe that these  data are sufficiently reliable for the purpose of describing insured losses.  We note, however, that these data likely understate the actual insured  losses.
PCS data are estimates of insured losses, or claims paid by private  insurance companies, for catastrophe loss events for the 50 states, as well  as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. PCS  defines “catastrophes” as events that, in their estimation, affect a  significant number of policyholders and that cause more than $25 million  in damages. To identify catastrophes, PCS reviews daily weather reports  and wire service news stories to determine if potentially damaging  weather has occurred anywhere in the nation. PCS contacts adjusters,  insurance claims departments, or public officials to gather additional  information about the scope of damage and potential insured losses for  events. Damages associated with a single storm event are grouped  together as a single catastrophe, even if they are separated by distance.  PCS obtains its insured loss data from information reported by insurers.  PCS estimates include losses under personal and commercial property  insurance policies covering real property, contents, business interruption,  vehicles, and boats. PCS estimates also typically include amounts paid by  state wind pools, joint underwriting associations, and certain other  residual market mechanisms, such as Fair Access to Insurance  Requirements (FAIR) plans. However, PCS estimates do not include  damage to uninsured or self-insured property including uninsured publicly  owned property and utilities; losses involving agriculture, aircraft and  property insured under NFIP or certain specialty lines (such as ocean  marine), or loss adjustment expenses. Generally, PCS finalizes its  estimates within 6 months of the occurrence of a PCS-identified  catastrophe, according to company documents. PCS does not  independently verify or audit the accuracy of the reported losses. Thus,  loss totals are the best estimates of primary insurers compiled by PCS  professionals, and may or may not accurately and completely reflect  actual industry-insured losses. Nevertheless, PCS has determined their  data to be very close to other independent estimates. PCS officials said  that, when compared with state insurance commissioners’ estimates based  on all loss data from insurance companies following particularly large  catastrophes, PCS data are within 3 to 5 percent of actual amounts. For  the data used in our review, company officials told us that most estimates  included in the data provided to us are final, except the 2005 hurricanes.
NFIP data are actual claim payment totals, not estimated amounts. NFIP  data represent the budget outlays that satisfy claims submitted by NFIP  policyholders to their participating program companies. The companies  report these data to the NFIP on a monthly basis. According to a senior  program official, the Department of Homeland Security performs periodic  audits of company records reported to NFIP. Although nearly all claims in  the NFIP data we reviewed are considered closed by the agency (and,  therefore, final), a small portion of claims associated with 2004 and 2005  hurricane season are not reflected in data we reviewed, according to the  agency’s database manager.
The loss data provided by FCIC represent the actual amount paid to  policyholders, not estimates. FCIC data represent the budget outlays that  satisfy claims submitted by policyholders to their participating insurance  companies. Participating insurance companies submit claims information  for processing through a computerized validation system. Automated  processing of claims information occurs annually for a period going back 5  years, but agency officials said that indemnities may have changed after  automated processing closed in very specific cases, such as settlement of  litigation or arbitration cases.
subsections: section_title: Identifying Insured Losses Associated with Hurricanes
paragraphs: To determine the insured losses associated with major and nonmajor  hurricanes, we identified losses associated with hurricanes in both the  PCS and NFIP data sets. We used the name and year of each hurricane to  link loss records to information from the National Oceanic and  Atmospheric Administration (NOAA) on the peak intensity of each  hurricane at or near landfall.
section_title: Independent Studies
paragraphs: We supplemented our descriptive analysis with a review of existing  literature and the views of subject area experts on the primary drivers of  changes in the weather-related loss record in general. Given the data  challenges faced by natural hazard researchers, the data sets used in these  studies are generally different.
section_title: Interviews with Major Insurers
paragraphs: To address the third objective, we conducted semistructured interviews  with officials from the NFIP, RMA, and a nonprobability sample of the  largest private property/casualty primary insurance and reinsurance  companies as defined by national market share. In the private sector, 11  out of 14 potential respondents elected to participate, drawing from  companies in the United States, Europe, and Bermuda. Although the  results from this sample should not be generalized to represent all  insurance companies, the companies we interviewed represent about 45  percent of the total domestic insurance market. In developing our  semistructured questionnaire, we reviewed existing literature on risk  assessment and management practices, GAO guidance on risk  management, and interviewed subject area experts knowledgeable about  the insurance industry and federal insurance programs. Insurance industry  experts included representatives from insurance brokers, catastrophe  modeling firms, industry associations, the Insurance Information Institute,  and academics. To reduce response error, we pretested our questions for  clarity, relevancy, and sensitivity with representatives from several  insurance industry associations, including the American Insurance  Association, the National Association of Mutual Insurance Companies, the  Property Casualty Insurance Association of America, and the Reinsurance  Association of America. On the basis of feedback from the pretests, we  modified the questions as appropriate. We distinguished proactive risk  management responses to climate change from other responses according  to whether insurers indicated that they were adjusting their activities  based on projected changes in underlying weather trends rather than  adapting only as changes in weather conditions reveal themselves in  historical data. During our interviews, some private insurers attributed  their actions to changes in the Atlantic Multidecadal Oscillation (AMO).
Because NOAA considers the AMO to be a climatic cycle, we categorized  the actions of these insurers as responding to climate change.
We asked the participating federal agencies and private insurance and  reinsurance companies to identify individuals knowledgeable about their  weather-related risk management practices for our interviews. Based on  these criteria, we spoke with a range of senior officials and representatives  that included actuaries, underwriters, catastrophe specialists, regulatory  affairs and counsel. During the interviews, we asked a series of questions  about risk assessment and management practices for weather-related risk,  significant drivers of changes to past and future weather-related risk,  respondents’ perception of and actions to address climate change in their  risk management processes, and risk management best practices that  might be transferable to federal insurers.
We also interviewed officials from rating agencies, catastrophe modeling  firms, insurance industry associations, the National Association of  Insurance Commissioners, and universities to provide additional context  for respondents’ statements. To supplement our interviews, we reviewed  documentary evidence of risk management practices from federal  agencies, studies from subject area experts, industry reports, publicly  available insurance company documents, and previous work from GAO to  provide context and support for respondents’ statements.
We performed our work between February 2006 and January 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: National Flood Insurance Program
paragraphs: Floods are the most common and destructive natural disaster in the  United States. According to NFIP statistics, 90 percent of all natural  disasters in the United States involve flooding. Because of the catastrophic  nature of flooding and the inability to adequately predict flood risks,  private insurance companies largely have been unwilling to underwrite  and bear the risk of flood insurance. As a result, flooding is generally  excluded from homeowner policies that cover damages from other types  of losses, such as wind, fire, and theft.
The NFIP was established in 1968 to address uninsured losses due to  floods. Prior to the establishment of the NFIP, structural flood controls on  rivers and shorelines (e.g., dams and levees) and disaster assistance for  flood victims were the federal government’s primary tools for addressing  floods. The Mississippi River Commission, created in 1879 to oversee the  development of a levee system to control the river’s flow, was the first of  these federal efforts to address flooding. Due to the limited effectiveness  of structural flood controls, continued development in flood-prone areas,  and a desire to reduce postdisaster assistance payments, the Congress  began examining the feasibility of prefunding flood disaster costs via  federal insurance in the 1950s. Although the first federal flood insurance  program authorized by the Congress in 1956 failed due to lack of funding,  a series of powerful hurricanes and heavy flooding on the Mississippi  River in the early 1960s prompted the Congress to revisit the issue and  direct the Department of Housing and Urban Development (HUD) to  conduct a feasibility study of a federal flood insurance program. The 1966  HUD feasibility study helped lead to the passage of the National Flood  Insurance Act of 1968, which authorized the creation of the NFIP.
Since its inception, the NFIP has undergone several major changes in  response to significant flood events. Hurricane Agnes in 1972 led to the  mandatory flood insurance requirements on certain persons in flood-prone  areas included in the Flood Disaster Protection Act of 1973, which also  significantly increased coverage limits in a further effort to increase  participation. Following the Midwest floods of 1993, the Congress enacted  the National Flood Insurance Reform Act of 1994, which strengthened  lender compliance requirements with mandatory purchase provisions  requiring mortgage-holders in flood-prone areas to purchase flood  insurance and prohibited flood disaster assistance for properties that had  not maintained their mandatory coverage. In 2004, recognizing that losses  from repetitive flooding on some insured properties was straining the  financial condition of the NFIP, the Congress passed the Flood Insurance  Reform Act of 2004, which provided NFIP with additional tools to reduce  the number and financial impact of these properties. These tools include:  increased authorization of funding for mitigation of repetitive loss  properties and statutory authority to penalize policyholders who refuse  government assistance to mitigate certain structures that have been  substantially or repetitively damaged by flooding, among others. Recently,  the Congress has begun exploring additional changes to the NFIP to  address the financial and operational challenges presented by the 2005  hurricane season.
subsections: section_title: How the Program Works
paragraphs: FEMA, within the Department of Homeland Security (DHS), is responsible  for the oversight and management of the NFIP. Under this program, the  federal government assumes the liability for covered losses and sets rates  and coverage limitations, among other responsibilities.
The NFIP combines three elements: (1) property insurance for potential  flood victims, (2) mapping to identify the boundaries of the areas at  highest risk of flooding, and (3) incentives for communities to adopt and  enforce floodplain management regulations and building standards (such  as elevating structures) to reduce future flood damage. The effective  integration of all three of these elements is needed for the NFIP to achieve  its goals of    providing property flood insurance coverage for a high proportion of  property owners who would benefit from such coverage, reducing taxpayer-funded disaster assistance when flooding strikes, and reducing flood damage through floodplain management and the  enforcement of building standards.
Over 20,000 communities across the United States and its territories  participate in the NFIP by adopting and agreeing to enforce state and  community floodplain management regulations to reduce future flood  damage. In exchange, the NFIP makes federally backed flood insurance  available to homeowners and other property owners in these  communities. As of 2005, the program had over 4.9 million policyholders,  representing about $875 billion in assets. Homeowners with mortgages  from federally regulated lenders on property in communities identified to  be in high flood risk areas are required to purchase flood insurance on  their dwellings. Optional, lower cost coverage is also available under the  NFIP to protect homes in areas of low to moderate risk. The mandated  coverage protects homeowners’ dwellings only; to insure furniture and  other personal property items against flood damage, homeowners must  purchase separate NFIP personal property coverage.
Prior to the 2005 hurricanes, NFIP had paid about $14.6 billion in flood  insurance claims, primarily from policyholder premiums that otherwise  would have been paid through taxpayer-funded disaster relief or borne by  home and business owners themselves. According to FEMA, every $3 in  flood insurance claims payments saves about $1 in disaster assistance  payments, and the combination of floodplain management and mitigation  efforts save about $1 billion in flood damage each year.
To make flood insurance available on “reasonable terms and conditions to  persons who have need for such protection,” the NFIP strikes a balance  between the scope of the coverage provided and the premium amounts  required to provide that coverage. Policy coverage limits arise from statute  and regulation, including FEMA’s standard flood insurance policy (SFIP),  which is incorporated in regulation and issued to policyholders when they  purchase flood insurance. As of 2006, FEMA estimated 26 percent of its  policies were subsidized, and 74 percent were charged “full-risk premium”  rates. In 1981, FEMA set the operating goal of generating premiums at  least sufficient to cover losses and expenses relative to the “historical  average loss year.” However, the heavy losses from the 2005 hurricane  season may increase the historical average loss year to a level beyond the  expected long-term average. In light of this, FEMA is currently revisiting  the use of the historical average loss year as a premium income target.
section_title: Risk Assessment Practices
paragraphs: The NFIP uses hydrologic models to estimate loss exposure in flood-prone  areas, based on the method outlined in the 1966 HUD report, Insurance  and Other Programs for Financial Assistance to Flood Victims. These  techniques of analysis were first developed by hydrologists and hydraulic  engineers to determine the feasibility of flood protection.
The hydrologic method uses available data on the occurrence of floods  and flood damages to establish both the frequency of flood recurrence and  the damage associated with a flood of a given height. The NFIP augments  available flood data with detailed engineering studies, simulations, and  professional judgment to establish the scientific and actuarial basis for its  risk assessment process and rates.
Flood-elevation frequency data for specific communities is published in  Flood Rate Insurance Maps, which differentiate areas based on their flood  risk. These maps are the basis for setting insurance rates, establishing  floodplain management ordinances, and identifying properties where flood  insurance is mandatory.
To estimate expected annual losses and determine the basis for rate  setting, NFIP combines flood-elevation frequency data with depth-damage  calculations to estimate a range of flood probabilities and associated  damages. Each possible flood is multiplied by the expected damage should  such a flood occur, and then each of these is added together. The total of  each possible flood’s damage provides an expected per annum percentage  of the value of property damage due to flooding. This expected damage  can then be converted to an expected loss per $100 of property value  covered by insurance. This per annum expected loss provides the  fundamental component of rate setting. Rates are also adjusted to  incorporate additional expense factors, such as adjustment costs and  deductibles.
section_title: Program Funding
paragraphs: To the extent possible within the context of its broader purposes, the  NFIP is expected to pay operating expenses and flood insurance claims  with premiums collected on flood insurance policies rather than with tax  dollars. However, as we have reported, the program is not actuarially  sound by design because the Congress authorized subsidized insurance  rates to be made available for policies covering certain structures to  encourage communities to join the program. As a result, the program does  not collect sufficient premium income to build reserves to meet the long- term future expected flood losses. FEMA has statutory authority to  borrow funds from the Department of the Treasury to keep the NFIP  solvent. Prior to the 2005 hurricane season, FEMA had exercised its  borrowing authority four times, when losses exceeded available fund  balances. For example, FEMA borrowed $300 million to pay an estimated  $1.8 billion on flood insurance claims resulting from the 2004 hurricane  season. Following hurricanes Katrina, Rita, and Wilma, FEMA estimates it  will need to borrow nearly $21 billion dollars to cover outstanding claims.  Although FEMA has repaid borrowed funds with interest in the past,  FEMA does not expect to be able to meet the $1 billion in annual interest  payments for these borrowed funds.
section_title: Appendix III: Federal Crop Insurance Corporation
paragraphs: In general, farm income is determined on the basis of farm production and  prices, both of which are subject to wide fluctuations due to external  factors. Because a substantial part of farming depends on weather, farm  production levels can vary substantially on an annual basis. Commodity  prices are also subject to significant swings due to supply and demand on  the domestic and international markets. The Congress created FCIC in  1938 to administer a federal crop insurance program on an experimental  basis to temper the weather effects of the dust bowl and the economic  effects of the Great Depression.
The federal crop insurance program protects participating farmers against  financial losses caused by droughts, floods, or other natural disasters.  Until 1980, the federal crop insurance program was limited to major crops  in the nation’s primary production areas. The Federal Crop Insurance Act  of 1980 expanded crop insurance both in terms of crops and geographic  areas covered. The expansion was designed to allow the disaster  assistance payment program provided by the government under previous  farm bills to be phased out. To encourage participation, the 1980 act  required a 30 percent premium subsidy for producers who purchased  coverage up to the 65 percent yield level. Despite the subsidies, program  participation remained low, and the Congress authorized several ad hoc  disaster payments between 1988 and 1993. Congressional dissatisfaction  with the size and frequency of these payments prompted the Congress to  pass the Federal Crop Insurance Reform Act of 1994, which mandated  participation in the crop insurance program as a prerequisite for other  benefits, including agriculture price support payments. The 1994 act also  introduced catastrophic risk protection coverage, which compensated  farmers for losses exceeding 50 percent of their average yield at 60 percent  of the commodity price. Premiums for catastrophic risk protection  coverage were completely subsidized, and subsidies for other coverage  levels were also increased.
As part of the 1996 Farm Bill, the Congress created the Office of Risk  Management under the U.S. Department of Agriculture (USDA), and USDA  established RMA to administer the FCIC insurance programs, among other  things. The Congress also required the creation of a revenue insurance  pilot project and repealed the mandatory participation provision of the  1994 Act. However, participation in the crop insurance program has not  necessarily precluded the need for further disaster assistance. For  example, due to low commodity prices in 1997 and multiple years of  natural disasters, the Congress enacted an emergency farm financial  assistance package totaling almost $6 billion in 1998, which included over  $2 billion in crop disaster payments, and an $8.7 billion financial  assistance package in 1999 that included $1.2 billion in crop disaster  payments.
In 2000, the Congress enacted the Agricultural Risk Protection Act, which  further increased subsidies for insurance above the catastrophic risk  protection coverage level, subsidized a portion of the cost of revenue  insurance products, improved coverage for farmers affected by multiple  years of natural disasters, required pilot insurance programs for livestock  farmers, and authorized pilot programs for growers of other commodities  not currently covered, gave the private sector greater representation on  the FCIC Board of Directors, reduced eligibility requirements for  permanent disaster payment programs for noninsured farmers, and  provided new tools for monitoring and controlling program abuses, among  other provisions. These changes required $8.2 billion in additional  spending from fiscal years 2001 through 2005.
subsections: section_title: How the Program Works
paragraphs: RMA has overall responsibility for supervising the federal crop insurance  program, which it administers in partnership with private insurance  companies. Insurance policies are sold and completely serviced through  approved private insurance companies that have their losses reinsured by  USDA. These companies share a percentage of the risk of loss or  opportunity for gain associated with each insurance policy written. In  addition, RMA pays companies a percentage of the premium on policies  sold to cover the administrative costs of selling and servicing these  policies. In turn, insurance companies use this money to pay commissions  to their agents who sell the policies and fees to adjusters when claims are  filed. RMA oversees the development of new insurance products and the  expansion of existing insurance products to new areas to help farmers  reduce the chance of financial loss.
The USDA determines whether the federal crop insurance program will  insure a commodity on a crop-by-crop and county-by-county basis, based  on farmer demand for coverage and the level of risk associated with the  crop in the region, among other factors. Over 100 crops are covered; major  crops such as grains are covered in almost every county where they are  grown, and specialty crops such as fruit are covered in some areas. For  many commodities, producers may also purchase revenue insurance.  Based on commodity market prices and the producer’s production history,  producers are assigned a target revenue level. The producer receives a  payment if their actual revenue falls short of the target level, whether the  shortfall was due to low yield or low prices. Premiums for revenue  insurance are subsidized at the same level as traditional crop insurance  policies.
Farmers’ participation in the federal crop insurance program is voluntary,  but the federal government encourages it by subsidizing the insurance  premiums. Participating farmers are assigned a “normal” crop yield based  on their past production history and a commodity price based on  estimated market conditions. The producer selects both the percentage of  yield to be covered and the percentage of the commodity price received as  payment if the producer’s losses exceed the selected threshold. Premium  prices increase as levels of yield and price coverage rise. However, all  eligible producers can receive fully subsidized catastrophic risk protection  coverage that pays producers for losses exceeding 50 percent of normal  yield, at a level equal to 55 percent of the estimated market price, in  exchange for a $100 administrative fee. Producers who purchase this  coverage can buy additional insurance at partially subsidized rates up to  85 percent of their yield and 100 percent of the estimated market price.
As an alternative, the Group Risk Plan provides coverage based on county  yields rather than a producer’s actual production history. If county yield  falls below the producer’s threshold yield (a percentage of the historical  county yield), then the producer receives a payment.
section_title: Risk Assessment Practices
paragraphs: RMA’s risk assessment/rate-setting methodology is complex because the  risk of growing a particular crop varies by county, farm, and farmer.  Because of all the possible combinations involved, hundreds of thousands  of rates are in place. Each year, RMA follows a multistep process to  establish rates for each crop included in the program. The process  involves establishing base rates for each county crop combination and  adjusting these basic rates for a number of factors, such as coverage and  production levels. In addition, rates are adjusted to account for the  legislated limitations in price increases.
For each crop, RMA extracts data on counties’ crop experience from its  historical database. The data elements for each crop, crop year, and  county include (1) the dollar amount of the insurance coverage sold, (2)  the dollar amount of the claims paid, and (3) the average coverage level.  The historical data are adjusted to the 65 percent coverage level (the most  commonly purchased level of coverage) so that liability and claims data at  different coverage levels can be combined to develop rates. Using the  adjusted data, FCIC computes the loss-cost ratio for each crop in each  county. The loss-cost ratio is calculated by dividing the total claim  payments by the total insurance in force; the result is stated as a  percentage. To reduce the impact a single year will have on the average  loss-cost ratio of each county, RMA caps the adjusted average loss-cost  ratio for any single year at 80 percent of all years. To establish the base  rate for each county, the average for all the years since 1975 is calculated  using the capped loss-cost ratios and a weighting process to minimize the  differences in rates among counties.
Rates are further adjusted by: a disaster reserve factor, a surcharge for  catastrophic coverage for each crop based on pooled losses at the state  level, a prevented planting factor, farm divisions, crop type, and  differences in both average yield and coverage levels.
section_title: Program Funding
paragraphs: The crop insurance program is financed primarily through general fund  appropriations and farmer-paid premiums. In addition to the premiums  paid by producers, FCIC receives an annual appropriation to cover  necessary costs for the program’s premium subsidies, excess losses,  delivery expenses, and other authorized expenses. According to USDA  budget documents, for fiscal year 2005, insurance premium and  administrative fee revenue from farmers was approximately $2.1 billion,  and gross claims equaled almost $3.3 billion. Total government operating  costs in fiscal year 2005 were approximately $3 billion.
RMA is required to set crop insurance premiums at actuarially sufficient  rates, defined as a long-run loss ratio target of no more than 1.075. From  its initial expansion in 1981 through 1994, the crop insurance program had  an average loss ratio of 1.47 and paid roughly $3.2 billion in claims excess  of subsidized premium income during that period. From 1995 to 2005, the  program had an average loss ratio of 0.91, and collected roughly $2.7  billion in subsidized premium excess of claims during that period.  Excluding subsidies and measuring performance on the basis of a  producer premium, from 1981 to 1994, the crop insurance program  averaged a loss ratio of 1.93 and paid roughly $5.2 billion in claims excess  of producer premium over that period; from 1995 to 2005, the program  averaged a loss ratio of 2.15 and paid roughly $14.2 billion in claims excess  of a producer premium during that period.
Generally, producers can purchase crop insurance to insure up to 85  percent of their normal harvest (yield), based on production history. In  2007, the USDA expects the FCIC to provide $48 billion in risk protection  on 287 million acres nationwide, which represents approximately 80  percent of the nation’s acres planted to principal crops. The USDA  estimates this level of coverage will cost the federal government $4.2  billion in 2007.
section_title: Appendix IV: Consensus Statement among Participants at 2006 Munich Re Workshop
paragraphs: Munich Re, one of the world’s largest reinsurance companies, and the  University of Colorado jointly convened an international workshop on  climate change and disaster loss trends in May 2006 in Hohenkammer,  Germany. The workshop brought together 32 experts in the fields of  climatology and disaster research from 13 countries. White papers were  prepared and circulated by 25 participants in advance of the workshop and  formed the basis of the discussions. In the course of the event, participants  developed a list of statements that each represent a consensus among  participants on issues of research and policy as related to the workshop’s  two central organizing questions: (1) What factors account for increasing  costs of weather related disasters in recent decades? and (2) What are the  implications of these understandings, for both research and policy?
Consensus (unanimous) statements of the workshop participants:  1.  Climate change is real, and has a significant human component related  to greenhouse gases.  2.  Direct economic losses of global disasters have increased in recent  decades with particularly large increases since the 1980s.  3.  The increases in disaster losses primarily result from weather related  events, in particular storms and floods.  4.  Climate change and variability are factors which influence trends in  disasters.  5.  Although there are peer reviewed papers indicating trends in storms  and floods there is still scientific debate over the attribution to  anthropogenic climate change or natural climate variability. There is  also concern over geophysical data quality.  6.  IPCC (2001) did not achieve detection and attribution of trends in  extreme events at the global level.  7.  High quality long-term disaster loss records exist, some of which are  suitable for research purposes, such as to identify the effects of  climate and/or climate change on the loss records.  8.  Analyses of long-term records of disaster losses indicate that societal  change and economic development are the principal factors  responsible for the documented increasing losses to date.  9.  The vulnerability of communities to natural disasters is determined by  their economic development and other social characteristics.  10. There is evidence that changing patterns of extreme events are drivers  for recent increases in global losses.  11. Because of issues related to data quality, the stochastic nature of  extreme event impacts, length of time series, and various societal  factors present in the disaster loss record, it is still not possible to  determine the portion of the increase in damages that might be  attributed to climate change due to greenhouse gas emissions.  12. For future decades the IPCC (2001) expects increases in the  occurrence and/or intensity of some extreme events as a result of  anthropogenic climate change. Such increases will further increase  losses in the absence of disaster reduction measures.  13. In the near future the quantitative link (attribution) of trends in storm  and flood losses to climate changes related to greenhouse gas  emissions is unlikely to be answered unequivocally.  14. Adaptation to extreme weather events should play a central role in  reducing societal vulnerabilities to climate and climate change.  15. Mitigation of greenhouse gas emissions should also play a central role  in response to anthropogenic climate change, though it does not have  an effect for several decades on the hazard risk.  16. We recommend further research on different combinations of  adaptation and mitigation policies.  17. We recommend the creation of an open-source disaster database  according to agreed upon standards.  18. In addition to fundamental research on climate, research priorities  should consider needs of decision makers in areas related to both  adaptation and mitigation.  19. For improved understanding of loss trends, there is a need to continue  to collect and improve long-term and homogenous data sets related to  both climate parameters and disaster losses.  20. The community needs to agree upon peer reviewed procedures for  normalizing economic loss data.
section_title: Appendix V: Comments from the U.S. Department of Agriculture
paragraphs: The following are GAO’s comments on the U.S. Department of  Agriculture’s letter dated February 23, 2007.
subsections: section_title: GAO Comments
paragraphs: 1.  We agree that the loss experiences of NFIP, FCIC, and private insurers  are distinct and sought to reflect these distinctions in our draft report.  For example, we acknowledged on page 23 of the draft the specific  distinction USDA highlights—that the main cause of catastrophic  losses for FCIC is drought in the nation’s interior (see pages 24 and 25  of this document). Despite these and other differences, however, we  believe the report’s findings and underlying message are still  applicable to the NFIP, the FCIC, and private insurers.  2.  Our analysis of insured losses does not attempt to attribute increases  in past losses to changes in the severity of weather events in the data  sets we reviewed, as implied by the comment. Moreover, we  acknowledge that the increase in FCIC’s losses (indemnities) largely  reflected the rapid growth of the crop insurance program. However,  given the IPCC’s projections for potential increase in the frequency  and severity of weather-related events—including those that affect  crops—we believe that limiting an evaluation of FCIC’s future  weather-related risk to the program’s loss ratio—which only captures  historical performance of the program based on past climatic and  market conditions—to be a potentially misleading metric upon which  to make a prospective assessment.   3.  We acknowledged these activities in the draft report. However, we  believe that USDA’s actions are limited in scope, focusing almost  exclusively on actuarial performance and not on the potential  implications of climate change for FCIC’s operations (i.e., changes in  the frequency and severity of weather-related events, weather  variability, growing seasons, and pest infestations). Accordingly, we  believe the program should do more to prospectively assess the  implications of climate change.  4.  We employed the IPCC’s definition of climate change, which includes  statistically significant variations in climate, brought on by factors that  are both internal and external to the earth’s climate system, and that  persist over time—typically decades or longer. Under this definition,  the Atlantic hurricane cycle, as with other significant variations that  are understood to be internal to the earth’s climate system, can be  considered climatic changes. Our use of the definition was  corroborated by a senior NOAA scientist.   5.  We updated our discussion of FCIC’s modeling activities (see page 36)  to reflect this hurricane model. However, as stated on page 22, 75  percent of FCIC’s claims were associated with drought, excess  moisture, and hail from 1980 to 2005, whereas hurricanes were  associated with a much smaller portion of FCIC’s claims during this  period. Accordingly, we believe that if more sophisticated, prospective  risk assessment techniques (such as those used in FCIC’s hurricane  model) were applied to drought, moisture, and hail events, it would  allow for a far more useful assessment of the potential implications of  climate change for FCIC’s operations.
section_title: Appendix VI: Comments from the Department of Commerce
paragraphs: The following are GAO’s comments on the Department of Commerce’s  letter dated February 26, 2007.
subsections: section_title: GAO Comments
paragraphs: 1.  We agree that a clear and accurate definition of climate change is a  necessary prerequisite for any discussion of the issue. While a variety  of definitions for the term are in use, we did not attempt to  independently define the term. Rather, we relied upon the IPCC’s most  current publicly-available definition.  2.  We revised the introductory statement referred to in Commerce’s  comments for editorial purposes (see page 2). To the extent  practicable, we also incorporated the Working Group I Summary for  Policymakers of the IPCC’s Fourth Assessment Report into the  detailed discussion of the potential changes in the frequency and  severity of weather-related events identified in the 2001 Third  Assessment Report (see pages 8 to 13).  3.  We included an elaboration on page 14 of how altering the frequency  and severity of weather-related events is linked to risk.  4.  It was outside the scope of this report to conduct our own quantitative  trend analysis of the relative roles of societal factors (such as  development or agricultural prices) and climate change in shaping the  increases in weather-related insured losses observed in the data. In  response to the comment, however, we clarified which studies we  reviewed that addressed this question, both for coastal hazards (such  as hurricanes) and inland hazards (such as drought and excess  moisture).
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Elstein, Assistant  Director; Chase Huntley; Alison O’Neill; Michael Sagalow; and Lisa Van  Arsdale made key contributions to this report. Charles Bausell, Jr.;  Christine Bonham; Mark Braza; Lawrence Cluff; Arthur James, Jr.;   Marisa London; Justin Monroe; and Greg Marchand also made important  contributions to this report.
We also wish to give special tribute to our dear friend and colleague,  Curtis Groves, who died many years too soon after a long battle with  multiple myeloma near the conclusion of our work.
section_title: Related GAO Products
paragraphs: National Flood Insurance Program: New Processes Aided Hurricane  Katrina Claims Handling, but FEMA’s Oversight Should Be Improved.  GAO-07-169. Washington, D.C.: December 15, 2006.
Catastrophic Disasters: Enhanced Leadership, Capabilities, and  Accountability Controls Will Improve the Effectiveness of the Nation’s  Preparedness, Response, and Recovery System. GAO-06-618. Washington,  D.C.: September 6, 2006.
Crop Insurance: More Needs To Be Done to Reduce Program’s  Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington,  D.C.: June 15, 2006.
High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006.
Federal Emergency Management Agency: Improvements Needed to  Enhance Oversight and Management of the National Flood Insurance  Program. GAO-06-119. Washington, D.C.: October 18, 2005.
Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to  Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30,  2005.
Catastrophe Risk: U.S. and European Approaches to Insure Natural  Catastrophe and Terrorism Risks. GAO-05-199. Washington, D.C.:  February 28, 2005.  21st Century Challenges: Reexamining the Base of the Federal  Government. GAO-05-325SP. Washington, D.C.: February 2005.
Climate Change: Information on Three Air Pollutants’ Climate Effects  and Emissions Trends. GAO-03-25. Washington, D.C.: April 28, 2003.