    [Senate Hearing 110-147]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 110-147

    DANGEROUS EXPOSURE: THE IMPACT OF GLOBAL WARMING ON PRIVATE AND FEDERAL
                                   INSURANCE
    =======================================================================
                                    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

                                     ------
    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

                                  ----------

                            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.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Stephenson appears in the
    Appendix on page 27.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
        \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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        \1\ Figure 1 appears in the Appendix on page 37.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        \2\ Figure 4 appears in the Appendix on page 44.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Gould appears in the Appendix on
    page 120.
    ---------------------------------------------------------------------------
        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)
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Buckley appears in the Appendix
    on page 127.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Castaldi appears in the Appendix
    on page 131.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
        \1\ The chart referred to appears in the Appendix on page 148
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
        \1\ Charts provided by Mr. Gould in response to Senator Tester
    appear in the Appendix on page 148.
    ---------------------------------------------------------------------------
        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.]

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