Climate Change Risks 'Potentially Significant,' Says U.S. Report

April 23, 2007

The actual costs of future catastrophes and other weather events linked to climate change are unknown but a new U.S. government report warns that both private insurers and the public sector are likely to pay a hefty price.

The report urges the federal government to follow the lead of the private insurance industry and take climate change factors into account in its risk assessments and future planning for the federal flood and crop insurance programs.

The Government Accountability Office (GAO) report, requested by Congress, is entitled "Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades are Potentially Significant." (available at: http://www.gao.gov/cgi-bin/getrpt?GAO-07-760T).

The GAO points out that catastrophic weather events have generally increased between 1980 and 2005 - the period the study examined. It also cites growth in population and increased real estate development in hazard prone areas, concluding that these factors have combined to raise the exposure of the National Flood Insurance Program fourfold to nearly $1 trillion in 2005 and increased the Federal Crop Insurance Corporation's exposure 26-fold to $44 billion.

That, however, is history. The future may be a lot worse for these government programs and the public insurers may not be preparing, the report warns.

According to the report, despite the fact that major private and federal insurers "are both exposed to the effects of climate change over coming decades," the two sectors "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," GAO reports.

"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."

Weather related events were the primary cause of insurance losses from 1980 to 2005, amounting to about $321.2 billion, according to the GAO. Private insurers paid over $243.5 billion. Only 1994 (the Northridge earthquake) and 2001 (the World Trade Center attacks) saw a greater loss percentage from non-weather events.

Weather-related losses varied significantly from year to year, ranging from just over $2 billion in 1987 to more than $75 billion in 2005, according to the report, but overall accounted for 88 percent of all property losses paid by insurers during this period.

The GAO recommends that the federal government agencies responsible for the flood and crop insurance programs should "analyze the potential long-term implications of climate change" and report their findings to Congress. This analysis should "establish sound estimates of expected future conditions," the report advises.