[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.
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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\
---------------------------------------------------------------------------
    \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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