	Background

Insurance is a mechanism for spreading risk over time, across large  geographical areas, and among industries and individuals. Climate Change Is Expected to Alter the Frequency or Severity of Damaging Weather- Related Events

Assessments by leading scientific bodies suggest that climate change  could significantly alter the frequency or severity of weather-related  events, such as drought and hurricanes. 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. 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). Weather-Related Insured Losses Totaled More Than $320 Billion between 1980 and 2005 and Appear to Be Increasing

Based on an examination of loss data from several different sources, we  found that insurers incurred about $321.2 billion in weather-related losses  from 1980 through 2005. In particular, as illustrated in Figure 1, our  analysis found that weather-related losses accounted for 88 percent of all  property losses paid by insurers during this period. Weather-related losses varied significantly  from year to year, ranging from just over $2 billion in 1987 to more than  $75 billion in 2005. Major Private and Public Insurers Differ in How They Manage Catastrophic Risks Associated with Climate Change

Major private and federal insurers are responding differently to the  prospect of increasing weather-related losses associated with climate  change. Many large private insurers are incorporating both near and  longer-term elements of climatic change into their risk management  practices. In our interviews with eleven of the largest private insurers operating in  the U.S. property casualty insurance market, we sought to determine what  key private insurers are doing to estimate and prepare for risks associated  with potential climatic changes arising from natural or human factors. Major Federal Insurers Have Taken Little Action to Prospectively Assess and Disseminate Information on Potential Increases in Catastrophic Risk Associated with Climate Change

NFIP and FCIC have not developed information on the programs’ longer- term exposure to the potential risk of increased extreme weather events  associated with climate change as part of their risk management practices. The goals of the key federal insurance programs are fundamentally  different from those of private insurers. Notably, the federal  insurance programs’ liabilities have grown significantly, which leaves the  federal government increasingly vulnerable to the financial impacts of  catastrophic events. Figure 4 illustrates the growth of both  program’s exposure from 1980 to 2005. The FCIC has effectively increased its exposure base 26-fold  during this period. As one NFIP official explained, the  flood insurance program is designed to assess and insure against current— not future—risks. 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. Accordingly, our report being released today recommends that the  Secretary of Agriculture and the Secretary of Homeland Security direct the  Administrator of the Risk Management Agency and the Under Secretary of  Homeland Security for Emergency Preparedness to analyze the potential  long-term implications of climate change for the FCIC and the NFIP,  respectively, and report their findings to the Congress.
Why GAO Did This Study

Weather-related events in the United States have caused tens of billions of dollars in damages annually over the past decade. A major portion of these losses is borne by private insurers and by two federal insurance programs-- the Federal Emergency Management Agency's National Flood Insurance Program (NFIP), which insures properties against flooding, and the Department of Agriculture's Federal Crop Insurance Corporation (FCIC), which insures crops against drought or other weather disasters. In this testimony, GAO (1) describes how climate change may affect future weather-related losses, (2) provides information on past insured weather-related losses, and (3) determines what major private insurers and federal insurers are doing to prepare for potential increases in such losses. This testimony is based on a report entitled Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades are Potentially Significant (GAO-07-285) being released today.

What GAO Found

Key scientific assessments report that the effects of climate change on weather-related events and, subsequently, insured and uninsured losses, could be significant. The global average surface temperature has increased over the past century and climate models predict even more substantial, perhaps accelerating, increases in temperature in the future. Assessments by key governmental bodies generally found that rising temperatures are expected to increase the frequency and severity of damaging weather-related events, such as flooding or drought, although the timing and magnitude are as yet undetermined. Additional research on the effect of increasing temperatures on weather events is expected in the near future. Taken together, private and federal insurers paid more than $320 billion in claims on weather-related losses from 1980 to 2005. Claims varied significantly from year to year--largely due to the effects of catastrophic weather events such as hurricanes and droughts--but have generally increased during this period. The growth in population in hazard-prone areas and resulting real estate development have generally increased liabilities for insurers, and have helped to explain the increase in losses. Due to these and other factors, federal insurers' exposure has grown substantially. Since 1980, NFIP's exposure nearly quadrupled to nearly $1 trillion in 2005, and program expansion increased FCIC's exposure 26-fold to $44 billion. Major private and federal insurers are both exposed to the effects of climate change over coming decades, but are responding differently. Many large private insurers are incorporating climate change into their annual risk management practices, and some are addressing it strategically by assessing its potential long-term industry-wide impacts. In contrast, federal insurers have not developed and disseminated comparable information on long-term financial impacts. GAO acknowledges that the federal insurance programs are not profit-oriented, like private insurers. Nonetheless, a strategic analysis of the potential implications of climate change for the major federal insurance programs would help the Congress manage an emerging high-risk area with significant implications for the nation's growing long-term fiscal imbalance.