Executive Order  13653, which was signed in November 2013, directs federal agencies to,  consistent with their missions, (1) address barriers to the nation’s  resilience to climate change; (2) reform policies that may, perhaps  unintentionally, increase the vulnerability of natural or built systems,  economic sectors, natural resources, or communities to climate change;  and (3) identify opportunities to support and encourage smarter, more  climate-resilient investments. Growth in Federal and Private Sector Exposure Has Increased Losses to Date, and Climate Change May Increase Losses in Coming Decades

Growing federal and private sector exposure since our 2007 report on  flood and crop insurance has increased insured and uninsured losses to  date, and climate change and related increases in the frequency and  severity of extreme weather events may further increase such losses in  coming decades. Specifically, inflation-adjusted federal exposure to potential  insured losses grew from $1.3 trillion to $1.4 trillion (8 percent) from 2007  through 2013. According to our analysis of the most recent data available,  private sector exposure grew from an estimated $60.7 trillion to $66.5  trillion (10 percent) from 2007 through 2012, in 2014 dollars. The 20 scientific and industry studies we reviewed that examined the  historical loss record generally found that the exposure growth in hazard- prone areas has largely driven increased insured and uninsured losses to  date. When combined with the range of climate change  projections, total losses could increase anywhere from about 50 to 340  percent by 2100. Public Insurers Have Begun Taking Steps to Prepare for Climate Change Effects, but Challenges May Limit Their Ability to Manage Future Exposure

Public insurers have commissioned climate change studies, incorporated  climate change adaptation into their planning, and taken other steps to  better understand and prepare for climate change’s potential effects. However, inherent challenges of federal insurance programs, such as  how federal insurers can address policyholders’ long-term risk given the  short-term focus of insurance contracts, may impede NFIP and RMA’s  ability to minimize long-term federal exposure to climate change. Second, given the short-term nature of insurance, public insurers face a  challenge in encouraging their policyholders to reduce their long-term  exposure to climate change risks. Property insurance contracts typically  estimate and communicate risk of property losses for the 1-year term of a  policy. Furthermore, building to community standards that are identical to  existing NFIP standards—which are based on near-term flood risk—may  unintentionally increase policyholders’ long-term vulnerability to climate  change as sea-level rises or erosion increases properties’ flood risk— which does not reflect the direction contained in Executive Order 13653. For example, certain practices, such as conventional  tillage and traditional irrigation methods, may maintain historic crop yields  in the short-term, but they may inadvertently reduce agriculture’s long- term resilience through increased erosion, depleted soil quality, and  inefficient water use. Many Private Insurers and Reinsurers Have Identified and Assessed Climate Change Risks, but Preparing for Long- Term Effects Is Challenging

Many private property and casualty insurers and reinsurers have taken  some steps since our 2007 report on flood and crop insurance to  understand and report on their risks associated with climate change,  including participating in industry climate change surveys, and issuing  reports that identify and assess climate change risks and trends in  weather-related losses. According to several  insurers and industry representatives we interviewed, insurers generally  manage their exposure to weather-related losses associated with climate  change through their underwriting practices, which include charging risk- based premiums, managing coverage options, and sharing exposure to  losses by purchasing reinsurance. However, estimating weather- related risks still includes elements of uncertainty, and catastrophe  modeling information is limited for some weather-related risks. Additionally,  federal law prohibits crop insurance from covering losses due to a  farmers’ failure to follow good farming practices, although some of these  practices may increase the vulnerability of agriculture to climate change,  which may not reflect the direction contained in Executive Order 13653. In its written comments, DHS concurred with our findings that FEMA has  taken action to better understand and prepare for climate change’s  potential effects and that FEMA faces challenges that may limit its ability  to minimize long-term federal exposure to climate change. Appendix I: Objectives, Scope, and Methodology

To determine how federal and private sector exposure to losses has  changed since our 2007 report on flood and crop insurance and how  climate change has or may affect insured and uninsured losses, we  analyzed federal and private sector exposure data from 2007 through  2013. Specifically, we collected  agency data on the total value of property insured under the National  Flood Insurance Program (NFIP) and the federal crop insurance program. To determine how public insurers are preparing for climate change, we  reviewed agency documents related to climate change.
Why GAO Did This Study

The May 2014 National Climate Assessment indicates that the frequency and/or severity of many weather and climate extremes may increase with climate change. Public and private property insurers can bear a large portion of the financial impact of such weather-related losses. In the public sector, federal insurance includes NFIP, managed by FEMA, and the federal crop insurance program, managed by RMA.
GAO was asked to review climate change's effect on insurers. This report examines (1) how federal and private exposure to losses has changed since GAO's 2007 report on the subject, and what is known about how climate change may affect insured and uninsured losses; (2) how public insurers are preparing for climate change, and any challenges they face; and (3) how private insurers are preparing for climate change and any challenges they face. GAO reviewed 20 studies, examined federal and private sector data on exposure to losses from 2000 to 2013, reviewed agency documents, and interviewed agency officials and a nonprobability sample of eight insurers and reinsurers.

What GAO Found

Since GAO's 2007 report on flood and crop insurance, exposure growth in hazard-prone areas has increased losses, and climate change and related increases in extreme weather events may further increase such losses in coming decades. Scientific and industry studies GAO reviewed generally found that increasing growth and property values in hazard-prone areas have increased losses to date and that climate change may compound this effect. From 2007 through 2013, data from the Federal Emergency Management Agency (FEMA) and the Risk Management Agency (RMA) show that exposure to potential losses for insured property grew from $1.3 trillion to $1.4 trillion (8 percent). According to industry data, private sector exposure to such loss grew from $60.7 trillion to $66.5 trillion (10 percent) from 2007 through 2012. Federal exposure to uninsured loss also increased by 46 percent over this period, based on a 2013 analysis by the Congressional Research Service. According to the studies GAO reviewed, climate change may substantially increase losses by 2040 and increase losses from about 50 to 100 percent by 2100.
FEMA and RMA have taken some steps to better understand and prepare for climate change's potential effects under the National Flood Insurance Program (NFIP) and the federal crop insurance program by, for example, commissioning climate change studies. However, both agencies face challenges that may limit their ability to minimize long-term federal exposure to climate change. For example, because of the short-term nature of insurance (i.e., contracts typically estimate and communicate risk of property losses for the 1-year term of a policy), FEMA and RMA face a challenge in encouraging policyholders to reduce their long-term exposure to climate change risks. Specifically, flood insurance policyholders who build to NFIP standards—which are based on current flood risk and not on long-term risks—may unintentionally increase their vulnerability to climate change as sea-level rises. Also, while federal law prohibits crop insurance from covering losses due to a farmers' failure to follow good farming practices, such as various irrigation methods, some of these practices maintain short-term production but may inadvertently increase the vulnerability of agriculture to climate change through increased erosion and inefficient water use. A recent executive order directed federal agencies to reform policies that may, perhaps unintentionally, increase the vulnerability of economic sectors or communities to climate change. Without encouraging NFIP and crop insurance policyholders to adopt building and agricultural practices that reduce long-term risk, FEMA and RMA may send policyholders signals that unintentionally encourage their vulnerability to climate change, counter to the direction of the executive order, which could exacerbate federal exposure to losses.
Many private insurers and reinsurers have taken steps since 2007 to better understand and prepare for climate change effects and related challenges, including participating in industry climate change surveys, and issuing reports that identify and assess climate change risks and trends in weather-related losses. According to industry officials, they can manage their exposure to climate change and related challenges through risk-based premiums, reinsurance, and other practices, although estimating weather-related risks still includes elements of uncertainty.

What GAO Recommends

GAO recommends that FEMA and RMA take additional steps to encourage flood and crop insurance policyholders to adopt building and agricultural practices that reduce long-term risk and federal exposure to losses. FEMA agreed with GAO's recommendation, and RMA neither agreed nor disagreed with GAO's recommendation.