<DOC>
[110 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:35525.wais]
S. Hrg. 110-147
DANGEROUS EXPOSURE: THE IMPACT OF GLOBAL WARMING ON PRIVATE AND FEDERAL
INSURANCE
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HEARING
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 19, 2007
__________
Available via http://www.access.gpo.gov/congress/senate
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
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35-525 PDF WASHINGTON DC: 2007
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana TOM COBURN, Oklahoma
BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
Michael L. Alexander, Staff Director
Adam R. Sedgewick, Professional Staff Member
David G. McIntosh, Counsel, Office of Senator Lieberman
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
David E. Hunter, Minority Professional Staff Member
Asha A. Mathew, Minority Counsel
John K. Grant, Minority Professional Staff Member
Trina Driessnack Tyrer, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Lieberman............................................ 1
Senator Collins.............................................. 3
Senator Tester............................................... 18
WITNESSES
Thursday, April 19, 2007
John B. Stephenson, Director, Natural Resources and Environment,
U.S. Government Accountability Office.......................... 5
Eldon Gould, Administrator, Risk Management Agency, U.S.
Department of Agriculture...................................... 7
Michael Buckley, Deputy Assistant Administrator for Mitigation,
Federal Emergency Management Agency, U.S. Department of
Homeland Security.............................................. 10
Andrew Castaldi, Head, Catastrophe and Perils, Americas Division,
Swiss Re America Corporation................................... 12
Alphabetical List of Witnesses
Buckley, Michael:
Testimony.................................................... 10
Prepared statement........................................... 127
Castaldi, Andrew:
Testimony.................................................... 12
Prepared statement........................................... 131
Gould, Eldon:
Testimony.................................................... 7
Prepared statement........................................... 120
Stephenson, John B.:
Testimony.................................................... 5
Prepared statement........................................... 27
APPENDIX
GAO Report entitled ``Climate Change, Financial Risks to Federal
and Private Insurers in Coming Decades Are Potentially
Significant'' submitted by Mr. Stephenson...................... 47
David R. Conrad, Senior Water Resources Specialist, National
Wildlife Federation, prepared statement........................ 137
Charts submitted for the record from Mr. Gould in response to
Senator Tester................................................. 148
Letter sent to Mr. Gould from Senators Lieberman and Collins,
dated May 2, 2007.............................................. 151
Letter sent to Mr. Buckley from Senators Lieberman and Collins,
dated May 2, 2007.............................................. 153
Questions and responses for the record from:
Mr. Stephenson............................................... 155
Mr. Gould.................................................... 159
Mr. Buckley.................................................. 160
Mr. Castaldi................................................. 165
Charts referenced at the hearing by Mr. Stephenson............... 171
DANGEROUS EXPOSURE: THE IMPACT OF
GLOBAL WARMING ON PRIVATE AND
FEDERAL INSURANCE
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THURSDAY, APRIL 19, 2007
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Tester, and Collins.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Good morning and welcome to this
hearing where we will examine the human and economic
consequences of global warming through the eyes of private and
Federal programs that insure tens of millions of American
property owners, including farmers, against weather-related
losses that already result in claims totaling billions of
dollars a year.
On April 6, just a few weeks ago, the United Nations
Intergovernmental Panel on Climate Change (IPCC) issued a
report on the impacts that world scientists projected would
result from unchecked global warming. Here are some of the
impacts that the IPCC finds that the United States will
experience by the middle of this century unless we dramatically
reduce our greenhouse gas emissions: Warming in Western
mountains will decrease the snowpack, causing winter flooding,
reduced summer flows, and increased competition for already
strained water resources; droughts and new invasions of insects
will kill crops as well as forests, leaving forests even more
prone to fires; coastal communities and habitats will be
battered by intensified storms, with the damage compounded by
more erosion.
In sum, we are looking at more floods, intensified floods,
droughts, pestilence, fires, and storms--all carrying dire
economic consequences.
In the United States, a significant portion of the economic
losses from such disasters is covered by private insurance and
by two taxpayer-funded programs--the National Flood Insurance
Program and the Federal Crop Insurance Corporation.
So it is natural to ask: How are the private insurance
industry and the Federal Government insurance programs
responding to the predictions of a sharp increase in financial
liability that they will face as a result of climate changes
they may not have anticipated, probably did not anticipate, a
decade or two ago? How are they responding to the scientific
consensus that the increase in weather-related loss will
accelerate in the decades ahead if global warming remains
uncontrolled? What effect will this response, or lack of one,
have on the tens of millions of Americans who rely on insurance
to protect them from weather-related loss?
In 2005, Senator Collins and I asked the Government
Accountability Office to answer these questions. That report is
now complete, and I am pleased to say that John Stephenson is
here with us as a witness to describe GAO's findings. I want to
highlight briefly three specific conclusions that I think are
important for all of us to understand and face.
First, storm-related economic losses do not increase on a
one-to-one ratio as storm strength increases. Rather, the
losses increase at an exponential rate. For instance, Category
4 storms tend to cause 100 times more economic damage, not just
four times more, than Category 1 storms. In light of the
mounting evidence that unchecked global warming will increase
the intensity of hurricanes and other weather activity, this
conclusion has very serious economic consequences.
Second, one-half to two-thirds of the structures in
America's floodplains do not have any flood insurance at all,
and nearly 60 percent of homeowners in our country carry
insurance amounting to less than the value of their property.
So as we discuss potential losses to insured property from
these weather events, we have to keep in mind that those losses
represent just a portion of the direct, weather-related
economic harm that global warming, if unchecked, threatens our
country with.
Third, the Federal Government has itself grown markedly
more exposed to weather-related losses since 1980. In that
time, for example, the number of policies in the National Flood
Insurance Program has more than doubled, and the total value
covered by the program has increased fourfold.
GAO believes that the two Federal insurance programs it
examined could see their losses grow by many billions of
dollars in the coming decades as a result of climate changes.
In the absence of careful planning and mitigation, the impact
of global warming on these two programs, therefore, could
substantially increase the annual budget imbalance and the
overall deficit of our Federal Government.
In addition to GAO, this morning we are privileged to hear
from Eldon Gould, Administrator of the Department of
Agriculture's Risk Management Agency, which administers the
Federal Crop Insurance Corporation, and from Michael Buckley,
Deputy Assistant Administrator for Mitigation at the Federal
Emergency Management Agency, which oversees the National Flood
Insurance Program.
These are the two Federal insurance programs that GAO
examined. Together, they paid one-quarter of the $320 billion
that public and private insurers together paid on weather-
related claims in the last 25 years.
In 1999, the Agriculture Department's Risk Management
Agency declared, ``The risks of climate change, such as higher
temperatures, changes in precipitation, increased climate
variability, and extreme weather events can result in
significant impacts on agriculture, forestry, and rural areas.
``The risks posed by climate change and the substantial
challenge presented by mitigation and adaptation strategies
require a strong USDA commitment to global change issues.''
A year later, the Director of FEMA said, ``There is no
doubt that the human and financial costs of weather-related
disasters have been increasing in recent years. It is time to
increase our efforts in applying prevention strategies to
reduce the impacts of the changes in weather climates.''
In light of those statements that were made 7 and 8 years
ago, I am going to ask our witnesses today what USDA's Risk
Management Agency and FEMA's mitigation office have done to
prepare for and overcome the increasing weather-related risks
attributable to global warming.
Finally, I look forward to hearing today from Andrew
Castaldi, head of Catastrophe and Perils in the Americas
Division of the Swiss Re America Corporation. We could probably
use a little of that around the Senate, a head of catastrophe
and perils. Swiss Re is the largest private reinsurer in the
world, and I am glad to say that they also have a presence in
the great State of Connecticut. We look forward to hearing from
Mr. Castaldi about how this private insurance company estimates
the costs of global warming if we do not do something about it
soon.
I thank you all for coming today, and I am now pleased to
call on our Ranking Member, Senator Susan Collins of Maine.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman.
The rapidly mounting evidence of climate change depicts a
threat that extends even beyond vital environmental and social
concerns. Global warming threatens to burden consumers and
taxpayers with billions of dollars in added costs as insured
losses from floods and storms cause increases in Federal
spending and in insurance premiums. The new Government
Accountability Office report that this Committee requested
paints an alarming picture of ``escalating exposures to
catastrophic weather events.'' Between 1980 and 2005, the GAO
tells us, the loss exposure of the Federal flood insurance
program has quadrupled to nearly $1 trillion while the crop
insurance program's exposure has risen by a factor of 26 to $44
billion.
Nearly 5 million Americans depend on the Federal flood
insurance program, whose loss exposures are rising with
population growth and construction in vulnerable areas, such as
the Gulf Coast, with more active hurricane cycles and with the
prospect of additional severe weather effects from human-
accelerated climate change. A prime example of our exposure is
the year 2005--the year of Hurricane Katrina--when Federal
flood insurance claims soared to $16.7 billion.
Given the scientific consensus that climate change will
continue for the foreseeable future, affecting the frequency
and severity of droughts, floods, and storms, our insured loss
exposures will most assuredly grow.
Our Committee's investigation into Hurricane Katrina showed
the catastrophic consequences of being ill prepared for a
natural disaster. We cannot afford to ignore the even greater
risks of climate change. I have had the privilege of visiting
with climate change researchers--including several scientists
from Maine--in Alaska, Norway, New Zealand, and Antarctica, and
I have seen firsthand the striking effects of climate change on
snowfall, ice caps, and glaciers. Important work has been done,
but we must deepen our understanding and improve our
preparations for the new risks we confront.
Some people are already working on that imperative. The GAO
report notes that the private insurance industry, driven by the
discipline of the marketplace, has been paying serious
attention to the increased risks presented by climate change.
Unfortunately, as the GAO observes, ``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.''
Now, it is obviously true that our Federal insurance
programs serve social purposes that do not involve
profitability measures. But taxpayers deserve good stewardship
of their resources just as much as stockholders do. We learned
during the Hurricane Katrina investigation that private sector
entities were often better prepared and quicker to respond to
emergencies than some government agencies. If we fail to learn
from industry best practices, taxpayers could face serious
financial consequences.
Like private insurers, government insurance programs must
not only identify risks, but also determine appropriate pricing
and risk mitigation. If we fail to act prudently in the face of
climate change, we will be exposing the Federal budget--and the
taxpayers who fund it--to unquantified risks and to potentially
devastating financial consequences.
Our actions must include more than more appropriations and
premium increases. We must also consider policy adjustments
after asking some critical questions. Is the Federal Government
subsidizing overdevelopment in areas vulnerable to severe
weather or flooding? Is the Federal Government unnecessarily
placing vital infrastructure in harm's way? Are State and local
building codes taking new risks into account?
Most important for the long run, however, we must ask what
we can do, collectively and as individuals, to reduce climate
change. Last Saturday, in communities in Maine and throughout
the Nation, citizens came together to heighten awareness of
climate change and to urge action.
While we cannot solve these problems overnight, many
actions that we can take now will lead us toward a more stable
climate future. We must take sensible steps today in light of
the knowledge that we now possess.
In January, I cosponsored the Climate Stewardship and
Innovation Act introduced by our Chairman, Senator Lieberman,
and Senator McCain. In addition to backing that far-sighted
bill, I will soon introduce a comprehensive approach designed
to reduce our greenhouse gas emissions and slow climate change.
It will quickly put us on the path of reduced emissions.
I hope this hearing this morning will improve our
understanding of our exposure to the challenges and the risks
of climate change, and I commend our Chairman for his
leadership on this very important issue.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Collins, for that
excellent statement and for your leadership in this critical
cause.
Now we turn to the witnesses. Mr. Stephenson, thanks very
much for your work, which is the basis of this hearing. We
welcome your testimony now.
TESTIMONY OF JOHN B. STEPHENSON,\1\ DIRECTOR, NATURAL RESOURCES
AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Stephenson. Thank you, Mr. Chairman, Senator Collins,
and Senator Tester. You have both done an excellent job in
summarizing the report, so this may seem a bit redundant, but I
will press on.
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\1\ The prepared statement of Mr. Stephenson appears in the
Appendix on page 27.
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Chairman Lieberman. Please.
Mr. Stephenson. I am pleased to be here today to discuss
our report to this Committee on the potentially significant
risk facing private and Federal insurers as a result of climate
change. Copies of this report are being released today and will
be available on GAO's website this afternoon.\2\
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\2\ The GAO report entitled ``Climate Change, Financial Risks to
Federal and Private Insurers in Coming Decades Are Potentially
Significant'' appears in the Appendix on page 47.
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One of the most important aspects of our study was to begin
to show the significant economic implications of climate change
by examining one of the Nation's most important and forward-
thinking sectors--the insurance industry. The uncertain and
potentially large losses associated with weather-related events
are among the biggest risks that property insurers face.
Projections by the Intergovernmental Panel on Climate Change
(IPCC), as you have already mentioned, expect warmer surface
temperatures to increase the frequency and severity of damaging
weather-related events, such as flooding and drought.
As you know, the IPCC is a large international body of
scientists that was established by the World Meteorological
Organization and the United Nations Environmental Program in
1988 to synthesize scientific information on the impacts of
climate change. Products released by the IPCC are thoroughly
reviewed by hundreds of scientists and approved by member
countries.
In addition, IPCC's projections have been endorsed by both
the National Academy of Sciences and the U.S. Government's
Climate Change Science Program. It is also important to note
that both the IPCC and the National Academy have reported that
observed temperature increase during the 20th Century cannot be
explained by natural variability alone, but is largely
attributable to human activities.
GAO is, of course, not a science organization, but what our
report attempts to do is examine past losses associated with
weather-related events together with the implications of the
IPCC's projections for continued and increasing global warming
to get a better understanding of the potential impact on the
insurance industry.
Based on our examination of loss data from several
different sources, we found that insurers paid claims of more
than $320 billion in weather-related losses from 1980 through
2005. As shown in Figure 1 on page 9 of my prepared
statement,\1\ insured losses varied significantly from year to
year, but generally increased during this period from under $5
billion in 1980 to over $75 billion in 2005. And the majority
of these losses were due to the incident and effects of extreme
weather events such as hurricanes, flooding, and droughts.
Private insurers paid about 75 percent of this total, while the
two Federal insurance programs we have already mentioned
account for the remaining 25 percent. So the Federal share over
this time period was about $78 billion--$44 billion in crop
insurance, and $34 billion in flood insurance.
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\1\ Figure 1 appears in the Appendix on page 37.
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While both private and Federal insurers are exposed to the
increases in the frequency and severity of damaging weather-
related events associated with climate change, the two sectors
are responding in very different ways. Many private insurers
are incorporating elements of climate change into their annual
and strategic risk management practices to reduce their
exposure to catastrophic risk posed by these extreme weather
events. You will hear more from Mr. Castaldi from Swiss Re on
this. As a result, some of their exposure is transferred to the
policyholders, for example, by increasing premiums or
deductibles, and, in effect, some exposure is transferred to
the public sector by limiting coverage in specific areas.
Federal insurance programs have similarly seen their
exposure grow significantly, as you have mentioned, largely
from increases in policies, and the IPCC's projections suggest
that weather-related risk will continue to grow. But unlike the
private sector, the Federal programs have not incorporated the
increased likelihood of extreme weather events associated with
climate change into the risk management practices.
As shown in Figure 4 on page 16 of my prepared
statement,\2\ the National Flood Insurance Program's total
exposure has quadrupled to nearly $1 trillion over the last 25
years. Now, this is largely due to increased policies and the
value of property, but, nevertheless, it is a very high
exposure. And the Federal Crop Insurance Corporation's exposure
has increased nearly 26-fold to $44 billion during that same
period.
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\2\ Figure 4 appears in the Appendix on page 44.
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We believe that in light of the projections of the IPCC,
the prospect of escalating exposures to catastrophic weather
events are putting the Federal Government at ever increasing
financial risk. We are concerned because the Federal insurers'
retrospective approach to estimating future exposure may not be
appropriate in this case. Federal insurers need to develop and
disseminate to the Congress and other key decisionmakers
information needed to understand climate change's impact on the
increased financial risks their programs will face in the
future.
We acknowledge in our report that the mandate and operating
environment of the major Federal insurance programs is
significantly different from that of the private sector. The
flood insurance and crop insurance programs, for example, are
not expected to turn a profit. Quite the opposite. They are
directed in statute to prioritize broad participation over
financial self-sufficiency. However, the programs are expected
to be sound stewards of the taxpayers' money. Accordingly, we
believe that better information about the Federal Government's
exposure to potential changes in weather-related risk would
help the Congress and the Federal agencies responsible for
these programs identify and manage this emerging risk area, one
that potentially has significant implications for the Nation's
growing fiscal imbalance.
Accordingly, we recommend in our report that the Department
of Agriculture, which operates the Federal Crop Insurance
Corporation, and the Department of Homeland Security,
responsible for the National Flood Insurance Program, each
analyze the potential long-term fiscal implications of climate
change on their respective programs and report their findings
to Congress. Both the Departments of Agriculture and Homeland
Security in commenting on our draft report raised several
points about how we characterize the operation of their
programs, but both generally agreed with our recommendation.
Mr. Chairman, that concludes my summary. I will be happy to
answer questions at the appropriate time.
Chairman Lieberman. Thanks very much, Mr. Stephenson. That
gets us off to a good start. Mr. Gould, thanks for being here.
TESTIMONY OF ELDON GOULD,\1\ ADMINISTRATOR, RISK MANAGEMENT
AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. Gould. Mr. Chairman, Senator Collins, and Senator
Tester, I am Eldon Gould, the Administrator of the Risk
Management Agency (RMA). I am a lifelong farmer from northern
Illinois with a 1,500-acre corn, soybean, and wheat farm and a
700-sow farrow-to-wean hog operation. I appreciate the
opportunity this morning to explain the role of the Federal
crop insurance program as it relates to the financial risks to
the Federal and private insurers covering production
agriculture.
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\1\ The prepared statement of Mr. Gould appears in the Appendix on
page 120.
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First, I would like to provide you some background about
the Risk Management Agency and its objectives.
Some of you may know our structure and mission very well,
while others may have only limited knowledge of our role with
crop insurance. As a vital part of the USDA, the Risk
Management Agency plays an essential role in American
agriculture by promoting, supporting, and regulating sound risk
management solutions to preserve and strengthen the economic
stability of America's agricultural producers.
RMA oversees and administers the crop insurance program via
the Federal Crop Insurance Corporation, which is often referred
to as the FCIC, which is led by its Board of Directors. The
FCIC reinsures the policies sold to American farmers by private
insurance companies approved to participate in the delivery of
the Federal crop insurance program. The agency has a unique
partnership with 16 private insurance companies that are
responsible for the sales, service, and loss adjustment of the
various insurance policies.
Crop insurance is the government's principal means of
helping farmers survive a major crop loss. It is also extremely
useful to agricultural producers even when it is not paying
losses. More and more, we see that crop insurance enables
producers to secure approval of their operating loans,
aggressively market a portion of their crop, and allow them to
plan more reliably for their future.
Regarding the recommendations contained in the GAO Report,
RMA agrees with the need to analyze the long-term implications
of climate change for the crop insurance program. We are
particularly interested in the Intergovernmental Panel on
Climate Change Assessment Report, which was released on April
6, and a report of the U.S. Climate Change Science Program that
is expected to be released in December of this year. This IPCC
report provides a rigorous assessment of what is known with
regard to climate change impacts, adaptation, and
vulnerability. As William Brennan, Director of the U.S. Climate
Change Science Program, stated, ``This is a valuable report
that our Nation has contributed to in important ways through
investments in observations and research.''
With regard to agriculture in North America, the IPCC
report concludes that ``moderate climate change in the early
decades of the century is projected to increase aggregate
yields of rainfed agriculture by 5 to 20 percent, but with
important variability among regions. Major challenges are
projected for crops that are near the warm end of their
suitable range or depend on highly utilized water resources.''
The Department of Agriculture is also an important
contributor to the U.S. Climate Change Science Program. The
USDA is the lead agency for a CCSP Synthesis and Assessment
Report on the Impacts of Climate Change on Agriculture, Land
Resources, Water Resources, and Biodiversity that is expected
to be completed in December 2007. A primary goal of the report
is to enhance our understanding and ability to estimate impacts
of future climate change on these systems and resources in the
United States. This report is being prepared by the
Department's Global Change Program Office.
As RMA proceeds in its analysis of climate change, it is
worth noting that any analysis will be complicated by the fact
that agricultural technology is continually progressing,
resulting in a decrease in risk from weather events. Although
the USDA agrees with GAO's recommendations, we caution that
much of the focus of this report is with losses related to
coastal weather events, especially hurricanes. However, the
main causes of catastrophic losses for the crop insurance
program are drought, excess moisture, and freezes in the
Nation's interior. This is why the loss experience of the crop
insurance program is distinct from the loss experience
described in the report for the National Flood Insurance
Program and property and casualty losses for private insurers.
Much of the increase in crop insurance indemnities over
time reflects the rapid growth of the crop insurance program
rather than an increase in either the frequency or the severity
of catastrophic weather events. In 1980, for example, the total
liability of the Federal crop insurance program was $3 billion.
By 2006, total liability had reached almost $50 billion.
USDA does take prospective actions to assess the potential
increases in program risk associated with changes in weather
and production agriculture. RMA continually analyzes available
information to look for ways to improve its rating and program
assessments. Currently, RMA tracks total program liability, a
definitive measure of the total value at risk from climatic
weather events, and updates this information on a weekly basis
available on our public website. RMA also estimates expected
changes in liability up to 10 years ahead through RMA's
budgetary baseline projections. In addition, RMA can assess the
long-term as well as current exposure of the crop insurance
program to catastrophic weather events, as GAO has pointed out
with regard to a recurring 1993 flood loss.
When GAO surveyed private insurers about what they were
doing to estimate and prepare for the risks of climate change,
it found that insurers were using catastrophe models that
incorporate the hurricane cycle. RMA also incorporates
hurricane risk into premium rates for several of its insured
commodities. However, rather than focusing on short-term
fluctuations in the hurricane cycle, RMA uses historic
hurricane data that spans several cycles, which is not
dissimilar to how predictions centers, like Colorado State
University, make use of such data.
Obviously, changes in weather patterns play a role in the
Federal crop insurance program. Recognizing this role, FCIC is
moving the Federal crop insurance program forward in adopting
new technologies. For example, the FCIC recently introduced a
pilot insurance program for pasture, rangeland, and forage that
relies on weather station data and satellite imagery to monitor
plant growth and determine insurance payments.
In conclusion, let me reiterate that RMA agrees with the
GAO recommendation with regard to the need to analyze the long-
term implications of climate change for the crop insurance
program. We view the inclusion of the new information and
analysis as an opportunity to strengthen and improve the
Federal crop insurance program. As I have stated, Mr. Chairman,
I am a producer myself, and one of my goals as Administrator of
the Risk Management Agency is to ensure that RMA is doing
everything it can within its legislative authority to assist
the farmer and rancher and to keep rural America and its
critical agricultural industry competitive and sound. We
recognize that RMA is a critical component of the safety net
for the business of agriculture in this country.
RMA continues to evaluate and provide new products and to
promote the adoption of crop insurance as a risk management
tool so that the government can further reduce its need for ad
hoc disaster payments to the agricultural community. The growth
and effectiveness of the crop insurance program is dependent on
a reliable delivery system; insurance products that meet the
needs of producers; investment in information technology to
ensure the delivery system is timely, accurate, and dependable;
and adequate funding to support compliance and program
integrity, maintenance, and administration, product evaluation,
and new product development.
In 2007, we will continue to strive toward providing a
useful, practical safety net for America's farmers and
ranchers. We thank you for the opportunity to participate this
morning, and at the appropriate time I would be happy to answer
any questions.
Chairman Lieberman. Thanks, Mr. Gould. I look forward to
asking you some of those questions. Mr. Buckley, thank you for
being here.
TESTIMONY OF MICHAEL BUCKLEY,\1\ DEPUTY ASSISTANT ADMINISTRATOR
FOR MITIGATION, FEDERAL EMERGENCY MANAGEMENT AGENCY, U.S.
DEPARTMENT OF HOMELAND SECURITY
Mr. Buckley. Good morning, Chairman Lieberman, Senator
Collins, and Senator Tester. I am Michael Buckley. I am the
Deputy Assistant Administrator for FEMA's Mitigation
Directorate, and I appreciate the opportunity to appear today
to discuss the potential impact of climate change on the
National Flood Insurance Program (NFIP)
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\1\ The prepared statement of Mr. Buckley appears in the Appendix
on page 127.
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The NFIP is predicated on planning for a changing
environment. The program has an inherent ability to readily
recognize, plan for, and respond to gradually changing
environmental conditions, whether caused by human activity or
natural variability. Consequently, with respect to climate
change research, studies, estimates, and ongoing discussions,
the NFIP's daily operations are unlikely to be dramatically
affected. This does not mean that the NFIP should ignore the
warnings associated with climate change. On the contrary, it
means that the program already effectively accounts for gradual
environmental changes, regardless of their cause.
To explain, I would like to give a brief description of the
NFIP and some related activities.
As a vital component of Mitigation's mission to help
communities reduce their vulnerabilities to natural hazard
events, the NFIP is straightforward. FEMA identifies flooding
risk through its floodplain mapping program. Communities join
the program and adopt building codes and land-use policies to
mitigate flood risk. Residents in these communities can then
purchase flood insurance, which standard homeowner policies do
not cover. Residents pay premiums, and the Federal Government
provides insurance coverage to those policies after a loss is
suffered. With over $1 trillion in insured assets and more than
5.4 million policies, the National Flood Insurance Program
floodplain management standards and building codes help
communities reduce their vulnerability to flooding, protect
lives, prevent property loss, recover faster after floods,
protect their investment with a financial backstop, and also
help to reduce the cost to the Federal Government when a
disaster does happen.
FEMA pushes communities to go beyond the minimum standards
for the program to further reduce their vulnerabilities. As an
example, the community rating system offers insurance rate
discounts in the communities that go beyond the minimum
standards, adopt higher standards. We feel that this has been a
successful program, and many communities are participating.
Understanding that the landscape is in a constant state of
flux, the NFIP also develops, uses, and provides extensive
current and historic data, Flood Insurance Rate Maps, the best
available state-of-the-art information and technologies to help
people and communities understand their flood risks, take
action to reduce those risks, and insure against such risks. We
are well on our way to completing a 5-year initiative to update
and modernize the Nation's flood insurance mapping inventory
where we are combining historical and current data with state-
of-the-art technology to compile modern digitized maps with
updated flood risk information. These new digital FIRMs can
clearly depict faster and more accurately than ever before the
dynamic landscape conditions that affect important flood
insurance and floodplain management decisions.
With continued adequate funding, FEMA's map modernization
program will give the NFIP and the Nation's communities a
reliable planning and floodplain management resource for years
to come. Just as important, FEMA will be able to update the
flood maps to clearly reflect the gradually changing landscape
and climate conditions that affect flood risk, providing a
valuable support to the program's continuing effort to
accurately and fairly set flood insurance rates.
Also, in relation to changing climatic conditions that may
affect the frequency and intensity of future storms, it is
important to note that Congress intended the National Flood
Insurance Program to strike a balance between the long-term
goal of fiscal accountability and the near-term objective of
making sure that affordable flood insurance is available to
residents and businesses located in flood-prone areas. The
unique factors that help the NFIP offer affordable flood
insurance coverage for everyone--discounts on structures built
before the National Flood Insurance Program came into being, a
10-percent cap on annual increases in rates, our Federal
obligation to provide coverage to all applicants, regardless of
the degree of risk--tend to impede our ability to strengthen
the program's financial condition.
Finally, it is important to remember that the NFIP's risk
management strategies are designed to assess and insure against
current risks and to respond to changes on flood risk data as
appropriate when it becomes available. During an average
historic loss year, for example, the NFIP covers claims with
policyholders' premiums and related fees. However, as climate
change evaluations and discussions consider a future of more
extreme weather activity, it should be pointed out that the
NFIP is not always self-supporting and was not designed to
handle a catastrophic event without the authority to borrow
from the Federal Treasury.
That said, the NFIP operates on the premise that Hurricane
Katrina cannot be viewed as an anomaly, and we stand ready to
work with Congress and others to strengthen the program's
effectiveness.
In conclusion, the Mitigation Division and the NFIP respect
the warnings associated with climate change, and we believe our
program effectively accounts for gradual environmental changes,
regardless of their cause or origin. This way, no matter how
frequently storms strike in the future and no matter how
increasingly violent they may become, fewer communities will be
declared disaster areas, lives will be saved and damages
reduced, recovery will be faster, and more homes and businesses
will be protected with the financial safety net of flood
insurance.
Thank you for this opportunity to appear before this
Committee, and I will be happy to answer your questions at the
appropriate time.
Chairman Lieberman. Thank you, Mr. Buckley. Mr. Castaldi,
all yours.
TESTIMONY OF ANDREW CASTALDI,\1\ HEAD, CATASTROPHE AND PERILS,
AMERICAS DIVISION, SWISS RE AMERICA CORPORATION
Mr. Castaldi. I would like to thank Chairman Lieberman and
Ranking Member Collins for holding this hearing on the impact
of global warming on private and Federal insurance. My name is
Andrew Castaldi, and I am representing Swiss Re, the largest
reinsurer in North America and the world. Over the next 10
minutes, I would like to share with you Swiss Re's view
regarding climate change, how climate change may impact weather
and natural catastrophes, how reinsurers model these natural
catastrophes, and, finally, a few words about how we
incorporate this information into our business.
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\1\ The prepared statement of Mr. Castaldi appears in the Appendix
on page 131.
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Swiss Re's core property business includes mitigating the
financial consequences of natural catastrophes such as
hurricanes, earthquakes, and floods. We provide life and
property casualty reinsurance and products, which facilitate
the convergence of the insurance and capital markets. Our
business is to assume the liabilities from others onto our
balance sheet. Or to put it more simply, we take other
companies' risk off their hands. As risk experts, our time
horizon stretches out 50 to 100 years.
Our interest in climate change began almost 20 years ago,
and it has become an important component of our long-term risk
management strategy. We believe unequivocally that climate
change presents an increasing risk to the world economy and
social welfare. There is now indisputable scientific evidence
that the Earth's temperature is rising at an alarming rate and
that this rise is due mainly to human activities. According to
the Intergovernmental Panel on Climate Change, also known as
the IPCC, it can be concluded now with a 90- to 95-percent
probability that human-produced greenhouse gas increases from
fossil fuel use, agriculture, and land-use changes have caused
most of the observed increase in global average temperatures
since the mid-20th Century. To put it simply, global warming is
a fact, and a robust response is required.
Climate change over time will affect weather and weather
patterns. How it will affect severe weather events varies and
depends upon the region of the world and the natural hazard
being evaluated. As an example, global warming suggests more
extreme events, such as more intense rainfall or prolonged
drought, which may lead to localized inland flooding or, in the
case of flood and drought, agricultural problems. Combining
intense rainfall with rising ocean levels from melting polar
land-ice and warming sea water will place much of our coastal
properties at greater risk.
More to the interest of this panel, will global warming
affect the annual frequency and severity of tropical cyclone
activity? After the record-setting experiences of 2004 and
2005, this question is often asked.
In 2005, we had more named North Atlantic storms and
hurricanes than ever--27. It was also the costliest hurricane
season ever. The economic cost of Hurricane Katrina alone was
an estimated $135 billion. Hurricanes Rita, Wilma, and Katrina
were the first, third, and sixth strongest North American
tropical cyclones or hurricanes on record.
Were the 2004 and 2005 seasons attributable to global
warming? We do not know for sure. One or 2 years of experience
is not enough to confirm a trend. But here is what we do know.
On a worldwide basis, CO2 levels are up significantly and sea
surface temperatures are higher also.
Hurricane severity is impacted by warmer waters. One recent
study by Webster and Holland indicates a trend, since about
1970, toward more intense tropical cyclones. In the early
1970s, 17 percent of all tropical cyclones were Category 4 or 5
hurricanes. That number has increased to 35 percent--an
increase two times higher than it was 35 years ago.
Today there are open questions. But given the potentially
catastrophic implications, the precautionary principle should
be applied consistent with prudent risk management. It is quite
clear that, if left unchecked, CO2 emissions will alter the
natural variations of climate change and will affect U.S.
weather patterns and some natural catastrophes. Preventative
action, therefore, must be taken today. If we wait until we
have achieved absolute certainty, we will run the risk of
acting too late.
In many areas outside the Atlantic, we see indications of
global warming's impact on atmospheric hazards that are
presently easier to quantify. In Europe, there is already
enough evidence today to demonstrate that European winter
storms have and will continue to increase with climate change.
Swiss Re, and perhaps others, have incorporated these findings
into our risk and loss models for the European regions.
Throughout the world our scientists continually monitor new
studies on the subject, and once we are convinced, we
incorporate the new science into our models.
Presently, Swiss Re is collaborating with various research
initiatives on the topic of how climate change will impact us
here in the United States and around the world.
In general, risk modeling varies depending upon the peril
we study. For tropical cyclone wind and storm surge, Swiss Re
starts with the historical database of the last 100-plus years
of storm activity and then considers the climate factors
coinciding with each of those years. We use these historical
records as a base and then apply current climate conditions in
order to estimate the frequency and severity of tropical
cyclones for future years. Very short-term climate conditions,
such as El Nino, are recognized too late to be incorporated
into the models that the industry uses. Moderate-term climate
variability, such as the Atlantic Multi Decadal Oscillation and
other oscillations, cause a definite swing in the Atlantic sea
surface temperatures and do correlate with hurricane intensity.
The scientific community has not yet reached a consensus
regarding the extent to which these oscillations are either
natural or exaggerated by human activities. Regardless of the
cause, it is expected that the warm phase, which we are
currently in, correlates with increased hurricane activity.
This warm phase is expected to last for the next 10 to 20
years. This means we could be in for some bad weather for some
time to come.
Consequently, industry models have been adjusted to bring
them in line with the changing hazard and risk assessments. As
a result, expected losses for natural peril covers in the
United States rose markedly. Modelers factored in a general
increase in hurricane activity in the North Atlantic,
regardless of cause, and quantified some other factors. These
other aggravating factors include the following: Increased
values and complexities associated with concentrations of risk
in coastal regions, increased vulnerability of assets and
production processes, and increased insurance penetrations.
These changes in risk assessment have prompted insurers and
investors to take a more cautious look at the risks they take.
Some insurers have greatly limited their market participation
in the Gulf States. It is also true that Florida property
owners are paying more for coverage than they did before. In
light of these developments, some have suggested that natural
catastrophes are not insurable in the private market and that a
government backstop is required. This is not Swiss Re's view.
Because these risks can be modeled by the private sector and
are random in nature, they are insurable. The largest events
can and have been adsorbed by the industry. We believe,
therefore, that a government backstop for such risks is
inappropriate public policy.
There are steps the public sector can take to mitigate
future damages including better zoning and building codes.
These are key components to reducing our natural catastrophe
vulnerability. We must all grapple with this new weather
environment. We must recognize that we can no longer always
build what we want or where we want.
Recognizing the importance of climate change, Swiss Re is
deploying a broad strategy to confront the challenges including
the following: Working to understand the risk and adapting
pricing and risk models accordingly; developing products and
services for mitigation and adaptation; increasing risk
awareness, especially with governments--we believe governments
must provide leadership by passing legislation to limit CO2
emissions and passing stricter and enforceable zoning and
building codes' and finally, addressing our own environmental
footprint by pledging to be greenhouse neutral by 2013.
Swiss Re looks forward to sharing our knowledge and working
with the Congress and other policymakers to develop workable
and innovative ideas to bring more private capital to the
insurance market. Thank you for the opportunity to testify on
these critical issues, and I look forward to any questions that
you may have.
Chairman Lieberman. Mr. Castaldi, thanks very much for that
testimony. I am struck by the fact that the three of you, Mr.
Gould, Mr. Buckley, and Mr. Castaldi, have referred to the U.N.
IPCC conclusions and have accepted them, which is that climate
change is occurring, and it is caused by humans.
I am very appreciative--and obviously I am acting as an
advocate here--that Swiss Re as a matter of business, not as a
matter of ideology, is calling for governmental action to limit
the emissions of greenhouse gases that are causing the climate
to warm. I appreciate that very much.
Mr. Gould and Mr. Buckley, I want to ask you to clarify
your reaction to the recommendation that Mr. Stephenson makes
from the GAO that both of your programs, crop insurance and
flood insurance programs, analyze and report to Congress on the
consequences of climate change to your activities, including
particularly the increased cost to the Federal Treasury. Mr.
Gould, I think you specifically said you accepted that
responsibility. Mr. Buckley, I did not hear it or see it in
your written statement. Does FEMA agree with the recommendation
of Mr. Stephenson about this and intend to comply with it?
Mr. Buckley. Yes, FEMA has no issue with the recommendation
in the GAO report. We did provide some informal comments, and
we do not object. In fact, we think it would be good to analyze
the impacts, and we would move forward on that.
Chairman Lieberman. I appreciate that, and we will be
following it and monitoring it closely. To me, we have now
reached a state of scientific consensus about what is happening
that it would be irresponsible not to have you make this kind
of analysis and report to Congress. I would compare it to the
way in which the administrators of the Social Security trust
fund--it is a bit different, but not that different--use
demographic projections to determine what requirements the
Social Security fund will have to meet the obligations that law
gives it to pay benefits to people. In the same sense, we have
assumed a responsibility through these two Federal insurance
programs. I think it is clearly important for Congress and, of
course, you who run the programs to have your best estimate
about what the potentially significant changes in climate and,
therefore, losses from climate events will have on your
programs and on the Federal Treasury.
Mr. Gould, I want to give you a chance to clarify
something. In your testimony, you said at one point, ``Although
the USDA agrees with GAO's recommendations, we caution that
much of the focus of this report is with losses related to
coastal weather events, especially hurricanes. However, the
main causes of catastrophic losses for the crop insurance
program are drought, excess moisture, freeze, etc., in the
Nation's interior.''
Mr. Stephenson, isn't part of what you are saying to us
that one of the potential impacts of climate change in the
United States is not just on the coastal events, but also on
some of the inland events that this statement of Mr. Gould
refers to, such as drought, particularly?
Mr. Stephenson. Absolutely. If you look at the IPCC report,
both the third one and the fourth one that is coming out now,
we may have highlighted hurricanes a little more in our report
because they are such a money drain, on the one hand. But, yes,
certainly drought and flooding will affect croplands and
absolutely will affect the Federal crop insurance program. And
that is what we are talking about, which should be considered.
Chairman Lieberman. So, Mr. Gould, let me give you a chance
to respond to that because I do not want anybody to come away
with the conclusion that the Department of Agriculture feels,
because there will be a lot of coastal events, that there
probably will not also be significant climate-related increases
in drought as a result of global warming.
Mr. Gould. No. We recognize that, and as I said in my
testimony, over time drought has been our major cause of loss.
And, obviously, that is caused by weather events, and most of
the crop production and our insured liability is in the
interior of the United States. Our second cause of loss, major
cause of loss, is what we call excess moisture. It may or may
not be to the degree of flooding, but it is more related to
preventive planting claims or there is excess moisture in the
spring when producers should be planting their crops.
So obviously those are weather-related events, and they
come and go over time and could very well be caused over a long
period of time by climatic weather changes.
Chairman Lieberman. I saw a story recently that relates to
the subject of this hearing, and I believe this will be of
interest to Senator Collins. It happened to be about Vermont
and the health of the maple trees there and the concern
expressed by the farmers there that the season was shorter or
coming earlier, and the trees were beginning to weaken. And
there was some suggestion that there was a danger that the
maples, if this continues, would actually die and no longer
produce the maple syrup, which is not only part of the history
of Vermont--and Maine--but a staple of the economy. There would
be maple trees, but they would be north, in Canada. That is a
reminder of the potential impact.
Mr. Castaldi, just one question. Has Swiss Re tried to
quantify at all in dollars the potential impact of changes in
the climate in the time ahead?
Mr. Castaldi. The way that we do it is we just look at
certain events and what they could be, based upon if we see
increased activity and also the increases of population. At
this time we do not have enough information to say is it 5
years, 10 years, 15 years down the road, but we could see what
happens if we have more Category 4 or 5 hurricanes, what
happens if we have extensive periods of drought and increased
flooding. We do know what potentially the loss dollars might
be, but we do not know when that will occur.
Chairman Lieberman. What is the potential? Have you tried
to quantify it?
Mr. Castaldi. We do not have any statistical--I mean, I
could probably get some of that information, what the
probability is in the next 5 or 10 years of going from, let's
say, an average loss of $35 billion a year to $50 billion. I do
not have those numbers in front of me.
Chairman Lieberman. I would appreciate hearing that. What
you have concluded, without regard to specific numbers, is that
the great probability is that the losses that you will have to
cover as a result of climate related incidents in the years
ahead are going to be greater than they are today,
significantly greater.
Mr. Castaldi. Absolutely. When I talk to people, I always
mention that we base all of our studies off the past 100 years
of activity.
Chairman Lieberman. Right.
Mr. Castaldi. And it is not going to be your grandfather's
hurricanes or climate anymore. It is going to be something
significant. And we might be looking at the last 10 years and
projecting that forward, and climate change might exaggerate
the normal cycles of climate activity that we see. And every
time we do it, we take two steps forward, perhaps one step
back, as the cycles go.
Chairman Lieberman. Thanks very much. My time is up.
Senator Collins.
Senator Collins. Mr. Gould and Mr. Buckley, as I listened
to your testimony this morning, I was struck by a lack of any
sense of urgency.
For example, Mr. Buckley, you said that the respective
risks of bankruptcy accounts for much of the differences in
approach to climate change on the part of private insurers
compared to public insurers, such as RMA.
Mr. Gould, you also, in discussions with my staff, said
that the agency you administer would have adequate time to
adjust its rates and its procedures. And I contrast that,
another comment, Mr. Buckley says that the NFIP's day-to-day
operations are not likely to be affected by current climate
change estimates.
There seems to be a very relaxed attitude on the behalf of
both of your agencies toward what many of us view as a looming
crisis. And I contrast it to Mr. Castaldi's testimony where he
ticks off a litany of actions that his company is already
taking, both within the company and also with respect to its
exposure to future losses.
It concerns me that there seems to be an assumption on both
of your parts that because the taxpayers stand behind your
agencies and its programs, you do not have to do the kind of
analysis that the private sector is doing, and the statement
that our different approaches reflect the difference in not
having to worry about going bankrupt, it really distresses me
because ultimately it is the taxpayers that are going to be on
the hook.
So I guess I would like both of you to give me more
assurance than I am hearing in your oral testimony and in
reading your written statement that you are taking this
seriously and are taking actions. Mr. Gould, we will start with
you.
Mr. Gould. OK. Thank you for the opportunity to respond. I
think I can alleviate some of your concerns. We do not take our
responsibility lightly. We are mandated by Congress to have a
loss ratio of not over 1.075, but we, in fact, rate for a loss
ratio of 1.0, which means we take in as much dollars in premium
as we spend in dollars for indemnities. And, in fact, over
recent years, in the last decade or so, we have been well under
1.0, which I think reflects the job the agency is doing in its
rating for its various products in various parts of the
country.
So we not only legislatively are mandated to be good
stewards of the taxpayer dollars; I think the people in the
agency would do that even if they were not directed by the
Congress to do so.
The other thing that is important is that we look back over
time, look and see what has been the results of our losses, and
adjust our losses for various crops, various products, and
actually on a county-by-county basis, and that is done
rigorously on an ongoing basis. So, again, I wish to assure you
that we do take our job seriously and will continue to do so,
and as we can look at new information and available
information, that would only enhance our process.
Senator Collins. Mr. Buckley.
Mr. Buckley. Thank you for the opportunity to respond,
Senator Collins. The goal of the National Flood Insurance
Program is really to be self-supporting--in other words,
collect enough premium to pay the losses. Since 1986, and prior
to Hurricane Katrina, that was the case, that we were able to
pay the losses without excessive borrowing, or when we did have
to borrow, we were able to pay it back--and, I might add, with
interest.
Prior to the hurricane season in 2004, which was a
significant season, the balance in the fund was over $1
billion. The 2004 hurricanes that hit Florida caused at that
time the greatest single loss year the program had experienced.
Those losses were slightly over $2 billion. We were able to pay
those claims with only minimal borrowing. I believe that we
borrowed $300 million, and we were able to pay back $75 million
before Hurricane Katrina hit. And, obviously, Hurricane Katrina
was an extreme event for the National Flood Insurance Program.
We are constantly monitoring data associated with flooding.
Flooding is a very site-specific issue, and through our mapping
program, we continually update the maps when there is an
indication that the risk is changing. And in terms of the
seriousness that we take the predictions for climate change, as
I said, we are in full agreement with the GAO report that we
should conduct a study, take a look at it, and we are prepared
to do that.
Senator Collins. Thank you, Mr. Chairman.
Chairman Lieberman. Thank you very much, Senator Collins,
for those excellent questions.
Senator Tester, thanks for being here this morning.
OPENING STATEMENT OF SENATOR TESTER
Senator Tester. Thanks for having this hearing, Chairman
Lieberman and Ranking Member Collins, and I thank you four
gentlemen for being here and the job that you folks do.
I guess I will start with Mr. Stephenson, and you will just
have to help me out here a little bit. If your charts are
correct, in 2005 in the flood insurance area, there was $78
billion of taxpayer liability, in other words, to support
there, out of a $321 billion loss year. Did I read the chart
right?\1\
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\1\ The chart referred to appears in the Appendix on page 148
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Mr. Stephenson. That was over a period of time.
Senator Tester. How many years?
Mr. Stephenson. I think it was 1980 through 2005.
Senator Tester. Oh, so it is a cumulative chart.
Mr. Stephenson. Correct.
Senator Tester. And for crop insurance during that time, it
was $44 billion, if I read it right. And what was the total
loss? I assume it is still a 20-year period or so.
Mr. Stephenson. Correct.
Senator Tester. And what was the total loss on that?
Mr. Stephenson. I do not have that. I think the crop
insurance program is relatively close to the premiums that it
is taking in right now.
Senator Tester. OK, so it is about 100 percent taxpayer
liability.
Mr. Stephenson. Yes.
Senator Tester. Is that the way you see it, too, Mr. Gould?
Mr. Gould. I am not sure I understood your question.
Senator Tester. Well, the question is there was $321
billion of losses in the flood--in the crop insurance program
and $78 billion of that was taxpayer liability. In that same
period there was a $44 billion payout, if the chart is right,
through crop insurance?
Mr. Gould. Over that 27-year period?
Senator Tester. Yes, the 27-year period. I am just trying
to get the figures right. Basically what I am really looking
for, as a percentage of loss, what is the taxpayer liable for?
Mr. Gould. Well, probably your numbers--I do not have those
numbers in front of me.
Senator Tester. Actually, they are not mine.
Mr. Gould. Obviously it distorts the numbers quite a bit
when you talk about what has happened over a 27-year period,
particularly when our program has grown so dramatically in the
last few years.
Senator Tester. I am just looking as a percentage of loss
what the taxpayers--if it was $1 million, I would ask the same
question. Is the taxpayer liability on the loss to agriculture
100 percent? It is about 20 percent in the flood insurance. Is
it 100 percent?
Mr. Gould. The charts are exposure, so we are not saying
this is taxpayer liability. A lot of these payments are made
from collecting premiums for both programs.
Senator Tester. OK.
Mr. Gould. We are talking about--we are trying to describe
how big the risk to the Federal Government is.
Senator Tester. How big of a check did the Federal
Government have to write out for flood insurance over the last
27 years?
Mr. Gould. I am sorry. I was getting the information here.
Actually, since we have the private insurance companies
involved, a lot of that money comes from the private industry
as well, so it is not all taxpayer dollars.
Senator Tester. I understand that. I thought I heard
testimony today that said that there was a $78 billion taxpayer
check that was written out, and I did not know if it was 2005
or over 27 years, because of flood loss. Is that correct? Go
ahead.
Mr. Buckley. Yes, I would like to respond to that. Prior to
Hurricane Katrina, the National Flood Insurance Program paid
out I believe on the order of $14 billion since the beginning
of the program. These were claims that were paid with premiums
that were collected. On occasion, we did have to borrow from--
--
Senator Tester. So there has been no taxpayer liability?
Mr. Buckley. That is correct. And since Hurricane Katrina,
we have had to increase the borrowing quite substantially. The
program is obligated to pay that borrowing back with interest.
Senator Tester. So those losses due to flood, the $321
billion, taxpayers did not pay a nickel of reimbursement on
that?
Mr. Stephenson. Until 2005.
Senator Tester. Until Hurricane Katrina.
Mr. Stephenson. Right.
Mr. Buckley. The way the program was set up was where there
was not sufficient reserves in the fund, the program could
borrow from the Treasury. Obviously, we did borrow quite
significantly because----
Senator Tester. But you have been paying it back.
Mr. Buckley. So far this year, we have paid interest to the
tune of about $700 million.
Senator Tester. Now, I know for a fact that the same cannot
be said about crop insurance, so is there some way you can give
me some sort of idea about what the liability is to the
taxpayer per dollar of loss? I am just curious. Actually, this
was just a forerunner to a series of other questions. I was
just trying to get this straight in my mind what the taxpayer
liability is. And the reason is this is a huge issue. We are
tasked here with putting out some long-term policy that
business can work with and depend upon that deals with climate
change. What we are dealing with here is specific areas that
are the impacts of those climate changes, whether it is flood
or whether it is crop loss. And I happen to be a farmer, as you
are, Mr. Gould, and I can tell you things have happened on my
farm in the last 10 years that I have not seen and I do not
think my folks saw and I do not think my grandparents saw
either. Things are changing, and it is not increasing my
production. So we have some problems.
Let me run down some more specific questions. Mr. Castaldi,
is fire part of what you reinsure?
Mr. Castaldi. When we reinsure, we are reinsuring--
basically our property product is large-scale catastrophes. So
most of the fire losses that you see are never going to be
catastrophes unless it is a brush fire or something like that.
And those will penetrate the reinsurance program, but the
losses there are so insignificant to those from wind, flood,
and earthquake that it is not really worth even measuring.
Senator Tester. The change in exposure is due somewhat--you
said it is due to drought and excess moisture and frost, but it
is also due to increased acres enrolled in the program.
Mr. Gould. Right.
Senator Tester. Have you guys done any analysis to see if
those percentages of losses--now we are comparing 20 million
acres to 242 million acres. Have those percentages of losses
increased per acre?
Mr. Gould. Well, yes, we monitor that closely, and I think
the important thing is to look back--and it may even be in a
chart in my testimony. But up until about 1993, prior to that
our loss ratio was high, it was around 1.5. Since that time,
there were things done within the program by Congress to
increase the participation so we have a broader base of
support, less adverse selection. We do not only have producers
that are likely to have crop problems, but all producers
involved in the program. And probably we have done a better job
of rating since 1993. So since 1994--I am sorry. That is kind
of a magical year when there was more participation. Since
then, our loss ratio has been 0.88. And if you look over time
across the country and because we have such a huge program that
covers the width and breadth of the United States, our loss
ratios do not change dramatically, nor do the causes of loss
change dramatically from year to year.
Senator Tester. So your loss ratio is at 0.88. I am not an
insurance person. I do not know what that means. But let's just
assume if the number goes up, it is a bad thing, and if the
number goes down, it is a good thing.
Mr. Gould. That is correct.
Senator Tester. And it has not changed----
Mr. Gould. You are almost an insurance agent. [Laughter.]
Senator Tester. All right. Well, I do not want to go there,
but that is OK. That 0.88 has not changed since 1994? That 0.88
loss ratio--and you have not----
Mr. Gould. Well, it varies from year to year, but I think
with the exception of 1 year in there, it has stayed under 1.
Senator Tester. That would indicate to me that global
warming has had no affect on your loss payments.
Mr. Gould. That may not be an accurate conclusion. It means
that the program is accounting for changes in crop losses,
whatever those losses may be caused by.
Senator Tester. OK.
Mr. Stephenson. Senator, if I could offer one comment?
Senator Tester. Yes.
Mr. Stephenson. We are not suggesting anything about the
management of these programs.
Senator Tester. Nor am I. What I am trying to do with these
questions is get my hands around what the taxpayer liability
is, if that taxpayer liability is increasing because of climate
conditions or if it is increasing because of governmental
decisions that have been made potentially in the Legislative
Branch, or if it has been made by administrative decisions. And
if it has been increased by environmental conditions, we have a
problem that we have to deal with. And if it has no effect on
the taxpayer liability, let the private sector handle it. If it
does, then we have to deal with it.
Mr. Stephenson. We are only suggesting that with the size
of the exposure and the potential of climate change, history
may not be a good predictor of the future and you have to
incorporate that into your out-looking modeling to make sure
that the taxpayer is not unduly liable in the future. That is
really what we are concerned about.
Senator Tester. I understand. Being in production
agriculture myself, though, I see things that have happened
over the last 10 years that would indicate to me that the
future--that we need to do some planning, if you know what I
mean. Now, 10 years is nothing in the overall scheme of this
Earth. There is no doubt about it. It is the blink of an eye,
if even that much. But the concern is that when we--in Montana
right now, the western part of the State is so dry that if you
dropped a match on it, it would burn right now. Glacier Park is
losing its glaciers. The snowpack was gone in February,
probably, in the State. Where I am at right now, I am getting
great rain. The last 8 years before that, we did not cut a
crop. And we cut every crop during the 1930s.
So things are happening out there, and the programs that
you have focus around the edge of the impacts of global
warming. I am talking about crop insurance and flood insurance.
We have to do something more globally here from an
administrative standpoint. But in the meantime, we still need
food, we still need wood products, we still need places for
people to live. And so it is a big issue, and I do not mean to
take 10 minutes. Sorry. At any rate, you guys go ahead, and if
I can come back, I will ask some more questions.
Chairman Lieberman. Go ahead because we are probably going
to move toward summarizing. Your experience as a farmer is
really important here. You add a lot to the discussion from
personal experience. Also, your questions have been very good
and direct. So if you have one or two more.
Senator Tester. I do. [Laughter.]
Chairman Lieberman. It is always a danger to open that
door.
Senator Tester. Well, I guess that we depend a lot on local
land-use planning, and if local land-use planning is not done
right, particularly in the area of flood insurance--but now in
our State, in the area of fire insurance, we have a huge
landowner in the State of Montana that is going to sell off
some acres in the forest, places where you have to bring light
in through a tube because it is forest. And my question is--and
it probably goes to Mr. Castaldi. If folks build their house in
a forest, it is kind of like building it in a floodplain. Does
the Federal Government as a firefighting entity have any
liability if they choose not to fight that fire and there are
houses there?
Mr. Castaldi. I am not the expert on that, but I know that
if there is a fire there, the insurance company is going to
pay. We might look to subrogate against somebody, but we cannot
subrogate against the government. So we are going to wind up
being liable for the loss. I mean, there would be selective
criteria and rating recommendations upon the inspections or
suggestions to that homeowner, if the company deems them
insurable, to try to mitigate any losses.
Senator Tester. This will be my last one. Thank you, Mr.
Chairman.
Mr. Gould, you talked about that the RMA FCIC has a 10-year
projection. They have looked into that. What does that 10-year
projection tell you as far as that 0.88 number goes, if
everything is left the same?
Mr. Gould. I do not have those numbers in front of me, but
I suspect that we have looked ahead and projected what that
would be. That is part of our normal budget process so that we
can provide some input to the Congress on what should be
budgeted to the FCIC. But we will have to get back to you with
that actual number.\1\
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\1\ Charts provided by Mr. Gould in response to Senator Tester
appear in the Appendix on page 148.
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Senator Tester. That would be great. One last point. Does
it take congressional action to change the way it is rated? And
let me give you an example. Crop insurance works really well if
you have a loss every 5 years or 10 years. It does not work
really well if you have a loss--you have heard this before--3,
4, or 5 years in a row.
What does it take to change that? And what kind of input
could you give us long term as to how we could change that to
make it more workable for the farmers? I do not want anybody
getting rich. I just want them to be able to stay in business
until things square themselves around.
Mr. Gould. Well, that comes under the term of what we call
``declining yields.'' Obviously, the program is based off of
average yields over a 10-year period of time, and we are pretty
well locked into statute as to what we can do with that.
Senator Tester. So it is a statutory thing.
Mr. Gould. Yes, but we have had two different studies out
looking at ways that we can address the declining yield
problem. Again, we have not liked either one of those. We have
not made any changes, but to make any dramatic changes, it
would take legislative change. And in Montana and the Dakotas,
that has been a problem.
Senator Tester. The only other thing I need, along with
that 10-year projection, is what percentage the taxpayer is
liable for, for FCIC losses.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks very much, Senator Tester.
Excellent questions. And it strikes me that your last one
really raises a point that we are potentially, as a result of
climate change, going to see a very different kind of weather-
related loss.
For instance, if drought settles into some areas, it is not
just going to be for 1 year if it is a result of climate
change. So there is going to be a different kind of meaning to
the notion of declining crop yields because it is going to be
longer term and, therefore, the cost may be much more
significant.
I appreciate, first, the report that you have done, Mr.
Stephenson. Thank you and your colleagues at GAO. It provokes a
response. And I must say, Mr. Gould and Mr. Buckley, I share
the restlessness that Senator Collins expressed, it is really
important to us. I was troubled, Mr. Gould, in your statement
where you said that--and you are speaking the truth, but it
could be disconcerting to us, which is, ``RMA does not face the
risk of insolvency, as do private insurers, should an
unexpectedly large loss event occur. The respective risks of
bankruptcy account for much of the differences in approach to
climate change on the part of private insurers as compared to
public insurers, such as RMA.'' That is the truth. The Federal
Government will hopefully--not without limit, but will stand
behind these two insurance programs. But we need you now to
approach the programs in the face of this unusual probable
threat of global warming.
I think it is a definite threat, but the consequences that
we can now say are probably going to happen, they will impact
both the occurrences that activate your respective crop
insurance and flood insurance programs over a longer term with
much greater costs than ever before. So we need you to go at
it--although you will not go bankrupt, as Swiss Re potentially
could, we need you to examine this as if it was possible.
Mr. Gould. Well, I think you have to look at those numbers
and that statement in the light that, because of the way the
program is structured, we do not have to build additional
reserves into the program to be prepared for upcoming
catastrophic losses. We, again, continue to rate that at an
expected loss of 1.0, and based on history, if we have to
change our rating to achieve those goals, we can and will.
Chairman Lieberman. In other words, because you are an
insurance program, not an insurance company.
Mr. Gould. That is correct.
Chairman Lieberman. You are backing up the insurance
companies. I appreciate that. I would really urge you to
consider some of the unusual losses that are possible here as
both agencies' programs do the report that Mr. Stephenson has
called for and as you have said you would do.
Can you give a ballpark estimate as to how long it will
take you to submit that kind of report to the relevant
committees of Congress?
Mr. Gould. Well, we submit a report on an annual basis.
Actually, it is about a 2-year lag time. We just submitted the
2004 report. That seems like a terribly long time, but it is
because it takes time for our losses to get settled, the claims
to get settled. So by the time we get that done and the data
comes forth, it is about a 2-year lag time, but it is an
ongoing event that we do.
Chairman Lieberman. Here is what I would like you to do,
and I think this is what Mr. Stephenson has in mind. This is a
unique report to make, apart from your regular reporting to
Congress. And unless you are ready to give me an answer now, I
would urge you to go back to your agencies, talk to your
colleagues, and then communicate with us, if you would, giving
yourselves a deadline for when you hope to give us a report in
response to Mr. Stephenson's recommendations.
Mr. Gould. OK.
Chairman Lieberman. I thank you for a very important and
helpful morning. Again, in our ongoing discussion and attempt
to adopt legislation that will reduce the greenhouse gas
emissions that contribute to global warming, the very cold, no
pun intended, calculations that Swiss Re has done about the
probability of billions and billions of dollars of extra losses
as a result of climate change to me is another very compelling,
non-ideological, non-political, non-partisan argument for
adopting economy-wide controls on greenhouse gas emissions. I
thank you for bringing that perspective to the table.
Senator Collins, do you have final questions or comments?
Senator Collins. Thank you very much, Mr. Chairman, and
thank you for holding this hearing and focusing our attention
not only on the environmental and social impacts of climate
change, which are often discussed, but on the financial
implications. I just want to make a couple of closing comments.
Discussion of climate change usually focuses on the impact
on coastal communities' rising sea levels, but, in fact, as
your comments and the comments of Senator Tester remind us, the
consequences for agriculture are potentially enormous in this
country and around the world.
In addition, people often talk about climate change as if
it only produces warming. In fact, it will produce most likely,
the models tell us, extensive droughts in the interior of the
United States, perhaps a deep freeze in Western Europe if the
Gulf Stream changes because of rising sea levels.
The consequences are very different for different parts of
our globe. It is not always warming. And that is why I think we
need to look at the consequences for these two Federal
insurance programs, which I believe the consequences are
potentially enormous, and that is why I urge a sense of
urgency. And I am still troubled by the statement, Mr. Buckley,
that you made that day-to-day operations are not likely to be
affected by current climate change estimates.
The University of Maine is doing some fascinating research
which suggests that climate change could happen abruptly and
indeed that over the centuries there have been periods where
climate change has happened within a space of years rather than
decades or centuries.
So I think we need to take a really hard look at this
issue, and, Mr. Stephenson, I thank you for the excellent work
the GAO has done. I think it is a call for action and for us
not to be complacent and not to think that we have a long time
to factor in the implications of global climate change into our
insurance programs.
It was very helpful to hear of Swiss Re's projections
analysis and planning for climate change, and I think we have
to bring that same approach to public sector programs and to
public sector planning, not only at the Federal level but at
the State and local level as well. The policy and financial and
fiscal implications are indeed enormous.
So thank you, Mr. Chairman, for holding this excellent
hearing today to help us broaden our thinking about the
implications of climate change.
Chairman Lieberman. Thanks, Senator Collins. Your reference
to the research being done at the University of Maine in some
sense clarifies the challenge that we have, which is whether,
if I can put it this way, our political system reaches the
tipping point to get something done about global warming before
the climate reaches the tipping point where something sudden
and disastrous happens. And that is our challenge.
Senator Tester, do you want to have a final word?
Senator Tester. I just want to thank you, Mr. Chairman and
Ranking Member Collins. I want to thank the witnesses for your
testimony here today. I really do appreciate the work that you
folks do. Thank you.
Chairman Lieberman. Thanks. My thanks to all of you.
The record for the hearing will be kept open for 15 days in
case we have any further questions for you to answer in writing
or you have any statements you would like to add to the record.
I thank you again. The hearing is adjourned.
[Whereupon, at 10:28 a.m., the Committee was adjourned.]
A P P E N D I X
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