New GAO Report on Climate Change and Insurance

April 20th, 2007

Posted by: Roger Pielke, Jr.

At the request of Congressman Joseph Lieberman (ID-CT), the U.S. Government Accountability Office, a research arm of Congress, has just released a report on climate change and insurance (PDF). The report is excellent and well worth reading for anyone with interest in the subject. Now whether or not an excellent report makes a positive difference in policy making is another matter . . . Here are a few excerpts and my commentary:

On trends in losses:

Taken together, private and federal insurers paid more than $320 billion in claims on weather-related losses from 1980 through 2005. In constant dollars, private insurers paid the largest part of the claims during this period, $243.5 billion (about 76 percent); followed by federal crop insurance, $43.6 billion (about 14 percent); and federal flood insurance, $34.1 billion (about 11 percent). Claims varied significantly from year to year—largely due to the incidence and effects of catastrophic weather events such as hurricanes and droughts—but generally increased during this period. In particular, the years with the largest insured losses were generally associated with major hurricanes, which comprised well over one-third of all weather-related losses since 1980. The growth in population in hazard-prone areas, and resulting real estate development and increasing real estate values, have increased federal and private insurers’ exposure, and have helped to explain the increase in losses. In particular, 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. Due to these and other factors, federal insurers’ exposures have grown
substantially. Since 1980, NFIP’s exposure has quadrupled, nearing $1
trillion, and program expansion has increased FCIC’s exposure nearly 26-fold to $44 billion. These escalating exposures to catastrophic weather events are leaving the federal government at increased financial risk. FCIC officials told us, for example, that if the widespread Midwest floods of 1993 were to occur today, losses would be five times greater. [p. 4]

How much would that be? The 1993 Midwest floods resulted in $1.3 billion in federal flood insurance costs (Source: PDF). Five times this amount is $6.5 billion, in 1993 dollars. Adjusting for inflation to 2005 dollars gives a total of $8.5 billion, which is about half the costs of Hurricanes Katrina and Rita in 2005, and more than four times the premiums taken in by the program annually (Source: PDF).

The conclusion? Regardless of climate change federal flood insurance is of questionable financial sustainability without an expectation of major and frequent subsidies. So perhaps greater attention to adaptation might be needed:

Federal insurance programs, on the other hand, have done little to develop the kind of information needed to understand the programs’ long-term exposure to climate change for a variety of reasons. The federal insurance programs are not oriented toward earning profits like private insurers but rather toward increasing
participation among eligible parties. Consequently, neither program has had reason to develop information on their long-term exposure to the fiscal risks associated with climate change.

We acknowledge the different mandate and operating environment in which the major federal insurance programs operate, but we believe that better information about the federal government’s exposure to potential changes in weather-related risk would help the Congress identify and manage this emerging high-risk area—one which may not constitute an immediate crisis, but which does have significant implications for the nation’s growing fiscal imbalance. Accordingly, GAO is recommending that the Secretary of Agriculture and the Secretary of Homeland Security direct the Under Secretary for Farm and Foreign Agricultural Services and the Under Secretary of Homeland Security for Emergency Preparedness to analyze the potential long-term fiscal implications of climate change for the FCIC and the NFIP, respectively, and report their findings to the Congress.

Another factor not mentioned here is the bias against adaptation in climate policy. For example, in yesterday’s Wall Street Journal (by subscription), Senator Lieberman (mis)used the report to justify changes in energy policies, saying that it:

presents another strong argument — this one fiscal — for adopting an economywide, cap and trade, anti-global-warming law.

But the report offers absolutely no information on how changes in energy policies will affect disaster losses. The report certainly offers no recommendations on energy policies. In fact, to the contrary, it cites our Hohenkammer workshop which clearly explained that the most effective responses over coming decades will be adaptive in nature. And as we’ve discussed on occasion here, there is good reason for concern not just in the public sector about adaptive capacity — the so-called “catastrophe models” used by private insurers may not leave them as prepared to manage risk as they might think.

Finally, there is this very interesting nugget found in the response by the USDA (Appendix 5, p. 59), which runs the federal crop insurance progam:

The increase in crop insurance indemnities over time reflects the rapid growth of the crop insurance program, not an increase in either the frequency and/or severity of catastrophic weather events. In fact, the severity of loss for the crop insurance program, as measured by the loss ratio, has been generally lower in the 1990’s and 2000’s than in the 1980’s. Thus, if anything, the frequency and severity of catastrophic loss events for the crop insurance program appears to be decreasing.

Interesting, huh?

One Response to “New GAO Report on Climate Change and Insurance”

  1. Lab Lemming Says:

    There was an interesting article in EOS a while back on corn crops and a recent midwestern drought (2004, maybe?). It stated that although that year was unusually dry, increases in drought resistance for corn strains meant that a good harvest was still possible. So adaptation is alive and well.