[Senate Hearing 118-63]
[From the U.S. Government Publishing Office]
S. Hrg. 118-63
RISKY BUSINESS: HOW CLIMATE CHANGE IS
CHANGING INSURANCE MARKETS
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
March 22, 2023
__________
Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-107 WASHINGTON : 2023
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COMMITTEE ON THE BUDGET
SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia MITT ROMNEY, Utah
JEFF MERKLEY, Oregon ROGER MARSHALL, Kansas
TIM KAINE, Virginia MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico RICK SCOTT, Florida
ALEX PADILLA, California MIKE LEE, Utah
Dan Dudis, Majority Staff Director
Kolan Davis, Republican Staff Director and Chief Counsel
Mallory B. Nersesian, Chief Clerk
Alexander C. Scioscia, Hearing Clerk
C O N T E N T S
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WEDNESDAY, MARCH 22, 2023
OPENING STATEMENTS BY COMMITTEE MEMBERS
Page
Senator Sheldon Whitehouse, Chairman............................. 1
Prepared Statement........................................... 33
Senator Charles E. Grassley, Ranking Member...................... 3
Prepared Statement........................................... 35
STATEMENTS BY COMMITTEE MEMBERS
Senator Ron Johnson.............................................. 16
Senator Chris Van Hollen......................................... 18
Senator Alex Padilla............................................. 21
Senator Mike Braun............................................... 23
WITNESSES
Mr. Eric Andersen, President, Aon................................ 5
Prepared Statement........................................... 37
Ms. Nancy Watkins, Principal & Consulting Actuary, Milliman...... 7
Prepared Statement........................................... 161
Dr. Benjamin Keys, Professor of Real Estate, Wharton School,
University of Pennsylvania..................................... 9
Prepared Statement........................................... 164
Mr. Jerry Theodorou, Director, Finance, Insurance, and Trade, R
Street Institute............................................... 11
Prepared Statement........................................... 172
Dr. Judith Curry, President and Co-founder, Climate Forecast
Applications Network, Professor Emeritus and Former Chair of
the School of Earth and Atmospheric Sciences, Georgia Institute
of Technology.................................................. 12
Prepared Statement........................................... 180
APPENDIX
Responses to post-hearing questions for the Record
Mr. Andersen................................................. 197
Ms. Watkins.................................................. 199
Dr. Curry.................................................... 201
Charts submitted by Chairman Sheldon Whitehouse.................. 206
Document submitted to the Record by Chairman Sheldon Whitehouse.. 209
RISKY BUSINESS: HOW CLIMATE CHANGE IS CHANGING INSURANCE MARKETS
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WEDNESDAY, MARCH 22, 2023
Committee on the Budget,
U.S. Senate,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:00
a.m., in the Dirksen Senate Office Building, Hon. Sheldon
Whitehouse, Chairman of the Committee, presiding.
Present: Senators Whitehouse, Van Hollen, Padilla,
Grassley, Crapo, Johnson, Braun, and R. Scott.
Also present: Democratic staff: Dan Dudis, Majority Staff
Director; Matthew Bolden, Climate Policy Advisor.
Republican staff: Matthew Giroux, Deputy Staff Director;
Chris Conlin, Deputy Staff Director; Krisann Pearce, General
Counsel; Jordan Pakula, Professional Staff Member.
Witnesses:
Mr. Eric Andersen, President, Aon
Ms. Nancy Watkins, Principal & Consulting Actuary, Milliman
Dr. Benjamin Keys, Professor of Real Estate, Wharton
School, University of Pennsylvania
Mr. Jerry Theodorou, Director, Finance, Insurance, and
Trade, R Street Institute
Dr. Judith Curry, President and Co-founder, Climate
Forecast Applications Network, Professor Emeritus and Former
Chair of the School of Earth and Atmospheric Sciences, Georgia
Institute of Technology
OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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\1\ Prepared statement of Chairman Whitehouse appears in the
appendix on page 33.
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Chairman Whitehouse. Good morning everyone. Thank you very
much for being here. I'm calling to order this hearing of the
Senate Budget Committee entitled Risky Business, How Climate
Change is Changing Insurance Markets. I will lead with my
opening statement and then turn to my friend Senator Grassley
for his opening statement, and then I'll introduce the
witnesses and we will proceed with their statements. Your full
statements will be made a part of the record, so please keep to
the allotted five minutes, so we can get into a conversation.
Ranking Member Grassley and colleagues, we are here today
for the fourth Committee hearing, examining the budgetary
perils associated with climate change. Today we focus on the
danger to the national flood insurance program and private
insurers, and on the impact the climate related natural
disasters will have on insurance markets.
As we've heard already in earlier hearings, and we'll
hearing again today, climate disruptions upset insurance
markets. And that in turn upsets mortgage and housing markets.
As we have heard, and will again, sea level rise and wildfire
risk can upset property markets so profoundly as to cause
systemic economic damage across the whole economy, similar to
what we lived through in 2008.
You won't have to have property in flood zones or wildfire
country to feel the pain. I heard colleagues say that the true
long-term budget crisis affecting our country is the debt end
deficits. I'm happy to have that conversation. The President's
budget would reduce deficits by almost three trillion dollars,
while adding at least 25 years of solvency to the Medicare
trust fund.
House republicans want to add three trillion dollars to the
debt by extending the Trump tax cuts for the rich. Let's have
that debate, but let's not pretend that economic shocks don't
affect the budget. The 2008 mortgage meltdown added 5 trillion
dollars to the national debt, primarily due to decreased
revenues. COVID added another 5 trillion dollars.
In both crises we were warned, failed to act in time to
head them off, and were engulfed. Today, those trillions have
added shock and debt amounting to 40 percent of our total
national debt. And let's not pretend that global climate
disruption won't create economic shocks. Warnings abound of
what rising seas, droughts, floods and wildfires will do to
American families and businesses, and to our economy.
This is the point. If you're serious about debt and
deficits, you have to be serious about climate change. The
intergovernmental panel on climate change, the scientists
charged with synthesizing the latest science on climate change,
a group sited favorably by previous republican witnesses,
released its latest report Monday warning of severe risks to
agriculture, infrastructure, public health, and coastal and
flood prone communities.
The report states climate change is a threat to human well-
being and planetary health. There is a rapidly closing window
of opportunity to secure a livable and sustainable future for
all. The choices and actions implemented in this decade will
have impacts now and for thousands of years.
That's a pretty clear warning, impacts for thousands of
years, for our children's, children's, children's, children's
children, and on and on into the future.
I ask my colleagues why are we here if not to try and leave
our nation and our planet better off for future generations. We
have the chance now to bend the arc of history, of geophysical
history, of economic history, of national security history,
towards a more livable, prosperous future for generations.
Economic report of the President also came out Monday. Just
like we've heard in these hearings, it warns that climate
change threatens a volatile and cascading economic instability.
Here's a relevant part. Certain financial instruments, such as
insurance contracts and mortgages--I repeat, insurance
contracts and mortgages, that directly or indirectly price
weather related risks are highly exposed to climate change.
Rapid change of an asset's prices or reassessments of the
risks in response to a shifting climate could produce
volatility and cascading instability in financial markets. I
repeat again, volatility and cascading instability in financial
markets. Property insurance against catastrophic natural
hazards is at the forefront of climate change risk exposure,
and is already showing signs of strain.
These latest reports echo statements made by the Treasury
Secretary earlier this month. She declared climate change will
likely become a source of shock to the financial system in the
coming years. If climate change intensifies, natural disasters
and warming temperatures can lead to declines in asset values
that could cascade through the financial system.
And a delayed and disorderly transition to a net zero
economy can lead to shocks to the financial system as well. In
response to rising insured losses, some insurers are raising
rates, or even pulling back from high risk areas. This has
potentially devastating consequences for homeowners and their
property values.
``Developments like these can spill over to other parts of
our interconnected financial system.'' I know there are
powerful interests who don't want these hearings to happen, but
want to change the subject, that want everyone to ignore the
warnings from scientists, from economists, from financial
institutions, from government.
Those powerful polluter interests want us to listen instead
to their noise and nonsense. The denial, the delay, the
obstruction, the obfuscation. And for far too long has halted a
bipartisan defense against the climate threat. It's getting to
be time to choose. What we do here now will not just have
impacts for thousands of years, it will be remembered for
thousands of years. We might do well to consider how we would
like to be remembered because that moment of choice is upon us.
Chairman Whitehouse. Senator Grassley.
OPENING STATEMENT OF SENATOR GRASSLEY \2\
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\2\ Prepared statement of Senator Grassley appears in the appendix
on page 35.
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Senator Grassley. Thank you very much Mr. Chairman. The
audience for today's hearing on private insurance is different
than last week's hearing on the President's 2024 budget. As
such, I would like to recap what we heard last week at our
first, and presumably only budget centric hearing this
Congress.
What we received from President Biden was a budget that
continues this country on a destructive path of deficits and
debt. The budget doubles down on the reckless tax and spending
binge of the administration's first two years. It calls for
nearly 5 trillion dollars in new taxes that will kill jobs, and
punish hard-working Americans.
And despite all the lip service, it does not extend the tax
relief provided to Americans making under $400,000.00 under the
Tax Cuts and Jobs Act, so it increases taxes on just about
everybody. This is a breach of the President's pledge not to
raise taxes on the middle class. Not surprising for an
administration that routinely breaks its promises, as well as
the law.
We saw Democrats try to justify tax increases by pointing
out that the last time we had a budget surplus revenues were 19
percent of gross domestic product. Well that means outlays were
less, at about 18 percent. Does the Democrat majority want that
outcome? The administration surely doesn't, as spending in
their budget will surpass 25 percent of the economy in the ten
year outlook.
Outside of World War II and the pandemic, that would be the
highest spending level on record. Last week before this
Committee, the OMB Director repeated the fallacy that the
President's policies have led to deficit reduction. Now only in
Washington could you claim savings from not continuing
temporary emergency COVID spending. And it would be laughable
if it wasn't so disingenuous.
We saw a continued demagoguery from the administration on
the issue of major trust fund programs. This administration has
no plan, no plan whatsoever, to shore up social security for
future generations. Instead they want to paint us Republicans
as boogeymen for wanting to prevent automatic cuts that will
surely occur, absent action by the President and the Congress.
Where's the President's plan to protect seniors? We know
that social security is going to get down to no more than 77
percent of what it pays today by 2035. The Democrats have made
their message loud and clear. They don't care about the fiscal
problems facing us right now. Democrats don't have a plan to
deal with inflation, even though their bills substantially
increase inflation.
And what I just said is, according to CBO. From Iowa to
Rhode Island our constituents collectively believe that our
exploding national debt is a major problem facing America. The
last two climate hearings held by the Budget Committee touched
on the impact of sea level rise, hurricanes and wildfires.
We've heard from witnesses discussing costs due to these
climate and weather events.
We've heard the reasons why we're seeing increased costs.
Climate change is important, but it is not the only driver.
Short of the need for better federal forest management, states,
towns, and individuals can take care of most of their own
challenges through smarter land use, and development practices.
While this Committee is the Budget Committee, this hearing
is not focused on the public federal budget. It targets the
private insurance and reinsurance industries with speculative
scenarios in an effort to raise alarm. My Democratic colleagues
want you to believe that insurance and reinsurance companies
are in dire straits due to climate change, and that insurance
will become unavailable and unaffordable.
I just read last week that insurance companies are leaving
California for the simple reason that the government of
California has to regulate every increase that goes into effect
in insurance, and when the government's involved in that you
can't be in business in California.
Well, that's not necessarily the case, and we'll hear from
witnesses dispelling those extreme models. From hurricanes to
wildfires, the insurance and reinsurance markets have shown to
be resilient. Rather than relying on federal intervention in
the insurance markets, or pushing more costs onto taxpayers we
should encourage more solutions from the private sector. I
yield.
Chairman Whitehouse. Thank you very much. Eric Andersen,
who is the President of Aon, and has spent more than 30 years
in the insurance industry. We're delighted to have him here to
hear his perspective.
Nancy Watkins is a Principal and Actuary with Milliman. She
too has spent decades in the insurance industry, and we're very
pleased to welcome her and hear her perspective.
Dr. Ben Keys is a Professor of Real Estate and Finance at
the Wharton School of the University of Pennsylvania. An
economist by training, he has spent a lot of time studying the
2008 mortgage meltdown, and more recently has turned his
attention to climate risk. We welcome his testimony.
Jerry Theodorou is another insurance industry veteran.
After a long career in the industry he is currently the
Director of Finance, Insurance and Trade at the R. Street
Institute. We look forward to hearing from you.
And Dr. Judith Curry, appearing remotely is a Professor
Emeritus. The former Chair of the School of Earth and
Atmospheric Sciences at the Georgia Institute of Technology.
She is currently the President of the Climate Forecast
Applications Network. Mr. Andersen, if you would proceed.
STATEMENT OF ERIC ANDERSEN, PRESIDENT, AON \3\
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\3\ Prepared statement of Mr. Anderson appears in the appendix on
page 37.
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Mr. Andersen. Good morning, and as you said, my name is
Eric Andersen, President of Aon, and on behalf of my 50,000
colleagues at Aon, I would like to thank Chairman Whitehouse,
Ranking Member Grassley, and each member of the Committee for
the opportunity to testify on the role that insurance can play
in mitigating climate risk.
Climate risk is a global, systemic risk, and the insurance
industry is a bridge between public risks and private capital.
At its core, our business is about creating resiliency to
protect the assets of today, and foster the growth of tomorrow.
We do this by spreading the impact of risk across a wide array
of financial participants over time.
This allows people and businesses to withstand volatility,
to have the resources and confidence to invest, and to protect
and rebuild when necessary. Properly managing climate risk not
only protects against the downside, but can also be a catalyst
for growth. Creating the tools to match capital to risk to
ensure the innovation necessary to reduce carbon will create
both climate transition and economic growth.
The two forces, protection and innovation, are required.
Capital will not go where it is not protected, nor will it go
where it cannot expect a return, even when communal benefit is
clear. This is why public-private partnerships are so
important.
The Committee has asked for an overview of global climate
risks, and the role of the insurance markets. And I'm pleased
to provide that this morning. On January 23, 2023, Aon
published the 2023 Weather, Climate and Catastrophe Industry
Report, which I have included in my written testimony.
The study has compiled data on recent extreme weather
events, and provides insight on our ability to rebuild from
them. Claims data shows that 2022 was the most expensive year
on record, with an approximately 50 to 55 billion of the global
insured losses total resulted from Hurricane Ian in the U.S.
That storm alone was the second costliest natural
catastrophe in history from an insurance perspective, surpassed
only by Hurricane Katrina in 2005, which was nearly 100 billion
of insured losses. The report also highlights that over 31,000
people across the globe lost their lives in nat cat events in
2022.
While the total number of fatalities remains below average
for the 12th year in a row, the concentration of the impact has
increased. Nearly 20,000 fatalities were heat related deaths in
Europe alone. As shown in our report, decisions in the
insurance industry are driven by data, giving us a unique
capability to identify challenges and create innovative
solutions across both the public and private sector.
Through public, private partnerships with the government,
Aon, and others in our industry have helped stabilize Fannie
and Freddie and the housing crisis, create insurance market
post-911, and every type of catastrophe in between. Making a
market for risks that are vital to the economy, but seem
uninsurable is our most important duty. Just over a decade ago
in the wake of the financial crisis the mortgage market was
disappearing, undermining one of the pillars of the U.S.
economy.
Just as the U.S. economy was overexposed to mortgage risk
in 2008, the economy today is overexposed to climate risk. But
back then the insurance industry, led by Aon, was able to help.
We developed both analytical and insurance coverage products to
transfer risks away from Fannie Mae and Freddie Mac to private
reinsurance markets.
Ten years on, this public private partnerships exceeds 40
billion in premium. The models and discipline allowed an
orderly transition of the secondary mortgage market that exists
today. We are designing similar risk transfer products to free
up capital today for climate resilience efforts tomorrow. And I
would highlight other private partnerships that we have
undertaken.
In 2021, the World Bank, Aon, and U.S. AID teamed up to
mitigate hurricane risk in Jamaica through catastrophe
coverage. The bonds will deliver 185 million in immediate
liquidity post-event, ensuring not only humanitarian relief in
the case of a windstorm, but facilitating immediate economic
investment pre-event based on the certainty of funds to assure
infrastructure and property rebuild.
Currently, we are pioneering the first employee resilience
bond for a large employer in developing climate volatile
country to procure a bond to provide cash assistance directly
to employees in the event of a disaster to meet recovery needs.
I also want to highlight examples of the industry forging a
better path on its own by facilitating an energy transition,
and providing ways to bring new solutions to market quicker.
For example, cat bonds were created to provide post-event
coverage for traditional risks, but they also encourage pre-
investment in research and development that could help clean
energy transitions by insuring certainty of funds to deal with
the impact of traditional claims.
In other cases, we are developing an industry leading
capability to enable a company to accurately value its
intellectual property, and then use it as an asset to finance
growth. This allows them to bypass traditional funding and
accelerate their time to market. For many green technology
companies this is becoming their best option.
Climate risk proposes substantial challenges to insurers
and insurers alike. While insurance is based on the principal
of diversifying risk, in many cases insurance risk management
becomes more challenging as events become more interconnected
across lines of business, geographical regions and perils. We
are oriented around the philosophy that big problems need to be
solved by collaborating, that is exactly that.
Humanitarian, private and public sectors partnering
together to provide that solutions can be found together. Thank
you.
Chairman Whitehouse. Thanks very much Mr. Andersen. We'll
just continue right across the table, so that would make you
next Miss Watkins, thank you for being here.
STATEMENT OF NANCY WATKINS, PRINCIPAL & CONSULTING ACTUARY,
MILLIMAN \4\
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\4\ Prepared statement of Ms. Watkins appears in the appendix on
page 161.
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Ms. Watkins. Thank you Chairman Whitehouse, Ranking Member
Grassley, and members of the Committee for inviting me here
today.
My name is Nancy Watkins, and I am an actuary and principal
with Milliman, an independent consulting firm. I serve as an
expert on catastrophe risk for insurers, real estate industry
groups, and state and federal government agencies. I also
volunteer to promote insurance availability and affordability,
alongside the National Association of Insurance Commissioners,
Western Fire Chiefs Associations, and the United Nations.
Let's talk about homeowner's insurance and how climate
change is impacting it. First, climate change is not a problem
of the distance future. It's already here. Across the country,
we have insurance protection gaps and crises exacerbated by
climate change.
Flood risk in the U.S. is already very high, increasing
rapidly and unsustainable once you factor in sea level rise.
NOAA reports that about 80 percent of the East and gulf Coasts
are seeing more high tide flood days, and that this spring
about 44 percent of the U.S. is at risk for flooding.
Most flood risk is not covered by the private market. Only
4 percent of U.S. homeowners have flood insurance today,
largely through the government-run NFIP. Unprecedented
wildfires have driven insurers to shed high-risk policies in
Western states like California, Oregon, and Colorado. In
California, homeowners' insurers lost 20 billion dollars in
2017 and 2018, due to wildfire, wiping out two times the
cumulative profits earned over the prior 26 years.
Since 2020, Louisiana has been hit by multiple hurricanes,
tropical storms, tornadoes and excessive rainfall events. After
20 companies folded or exited the state, more than 100,000
policyholders are now in the state-run insurer of last resort.
Insurance market withdrawals can cause ripple effects that
endanger entire communities, and create a downward spiral
that's difficult to emerge from. This could happen gradually,
but it's possible for weakened markets to collapse quickly
through a crisis of confidence triggered by one event.
Second, a broken insurance market is not the problem, it's
a symptom of a larger problem, too much risk for the market to
bear. The risks associated with climate change and catastrophes
are owned by homeowners and the community, not the insurance
industry. Much of that risk can potentially be transferred to
insurers if there's a sustainable private market, which rests
on three pillars, availability, affordability and reliability.
Climate change is interacting in new ways with pother
inherent risks, causing cracks in all three of those pillars.
The policy actions intended to help can actually backfire and
accelerate the collapse of the insurance market. This generally
happens because these actions don't address the underlying
problem that the risk is too high.
Often, this occurs when land use policies and building
codes don't keep up with risk, resulting in a mismatch between
actual vs. perceived risk by homeowners. Because we aren't all
actuaries, one way to effectively communicate the actual risk
to consumers is to build the true cost of risk into insurance
pricing.
Risk-based pricing drives behavior. If you can buy low-cost
insurance, or you aren't even required to insure your home
against flooding, you expect this to be a safe place to live.
If you can't get affordable insurance, you may act to mitigate
the home's risk and reduce your premiums, or you may decide
it's too risky to live there at all.
The obvious down side is that premiums maybe unaffordable
for some homeowners. The government could decide that it's good
policy to subsidize premiums, with the costs ultimately borne
by others. Generally, current and future policyholders or
taxpayers who live in lower-risk areas, often in other states.
To reduce premiums and the cost of subsidization, the only
effective action we can take is to drive down the risk. Third,
the cost of driving down climate risk is much lower than the
cost of inaction. The choice to ignore climate change and
manage from crisis to crisis puts more families in harm's way,
with low-income communities likely to be hit the hardest and
suffer the most. Failure to act early reduces the number of
options available and drives up the costs of reaction at
various government levels.
To avoid this, we need to work collectively to bend down
the risk curve. We need to have better data, better modeling,
higher prioritization of mitigation versus disaster response,
better stakeholder coordination, and resource assistance to
those areas most in need.
The sooner our society chooses to face the risks associated
with climate change, the more options we will have to drive
down those risks, and the lower the cost will be. Climate risks
are complex, and difficult to understand. The actuarial
community is leveraging science and technology and working with
other experts to measure these risks and communicate them to
important stakeholders like this Committee.
We aim to give you the best information available, so that
you can make informed decisions. Thank you.
Chairman Whitehouse. Thank you very much, and we turn now
to Dr. Keys.
STATEMENT OF DR. BENJAMIN KEYS, PROFESSOR OF REAL ESTATE,
WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA \5\
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\5\ Prepared statement of Dr. Keys appears in the appendix on page
164.
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Dr. Keys. Chairman Whitehouse, Ranking Member Grassley, and
members of the Committee. Thank you for inviting me to address
how climate change is affecting insurance markets. My name is
Ben Keys, and I am an economist and Professor of Real Estate
and Finance at the University of Pennsylvania's Wharton School.
My research agenda examines how households interact with
the financial system, and how the financial system manages
risk. Today I'd like to highlight how issues in property
insurance markets affect household well-being.
First, rising insurance costs are having a direct effect on
household's pocketbooks. Across the country, average
homeowners' insurance premiums rose by 40 percent from 2010 to
2019. In addition, private insurers are exiting certain
markets. The number of enrollees in state-backed insurer of
last resort plans rose by 29 percent between 2018 and 2021.
With rising climate-related risks, and the rising costs of
reinsurance, insurers will continue to increase premiums and
exit markets, leaving homeowners with fewer choices, less
protection, and more financial distress.
Family budgeting is difficult as it is. With insurance
premiums changing every year it's nearly impossible for
households to accurately forecast their expenses. For instance,
this January state-backed Louisiana citizens increased their
rates by 63 percent. Costs are also rising in the National
Flood Insurance Program.
In the first year of the Risk Rating 2.0 reform, 75 percent
of premiums increased by the statutory limit of 18 percent.
Half of all NFIP policyholders will see their premiums more
than double after five years. Sadly, these increases will lead
many households to choose to go without insurance.
Rising insurance costs directly affect housing markets.
Each additional dollar of premiums decreases the demand for a
home, affecting the amount its owners can expect to receive
when they sell. In more dire situations where homeowners cannot
find insurance, lenders will not be willing to accept uninsured
homes as collateral.
These concerns are not merely theoretical. Economic
research shows that higher flood insurance premiums lower home
prices, and make it harder to get a mortgage. My own research
shows that the threat of future sea level rise lowers home
prices today, as buyers don't want to be left with an
uninsurable home down the road.
In short, home prices have already started reacting to
climate risk, even as we've realized only a fraction of the
higher premiums and sea level rise expected in the coming
decades. I want to briefly highlight why climate risks are so
difficult to insure.
After a massive fire in the City of Hamburg, Germany in
1842, local insurers failed. Reinsurance markets arose for fire
insurance because fires are idiosyncratic events, allowing
providers to create a diversified risk pool and spread these
risks widely and effectively.
Unlike the chance of a fire in a given city, however,
climate risk is better described by the title of the latest
Oscar winner, ``It's Everything, Everywhere, All at Once.''
Climate change is simultaneously inducing a heightened risk of
flood, storm damage, chronic inundation, drought, excessive
heat, and wildfires.
These risks are inherently difficult to diversify. While
reinsurance and the catastrophe bond market will continue to
play a role in maintaining functioning insurance markets, there
is no avoiding the fact that the increasing risk of large loss
events will mean higher costs for consumers.
The limitations of private insurance markets for insuring
against these climate risks points to a larger role for the
government. State and federal insurance entities will bear more
of these risks going forward as private insurers pull back.
If we do not take action on climate adaptation and
mitigation, then we can expect private markets for wildfire and
wind coverage to increasingly resemble the NFIP and rely on
public support.
Further costs will be borne by Fannie, Freddie, and the
FHA, who make up two-thirds of our 13 trillion dollar mortgage
market, and by FEMA and other post-disaster aid sources. Topics
surrounding insurance often feel remote, or difficult to
digest, but they impact everyday households. Far too many
Americans are currently unprotected from climate risks.
Only one third of households in flood zones have flood
insurance. And the First Street Foundation estimates that 6
million households are at significant flood risk, but lie
outside of FEMA's outdated floodplain maps, making them likely
unaware of their danger.
Private insurers' aim to price their risks accurately, so
we should pay close attention to the choices that they make. No
matter your views on climate science, insurers are responding
to the increased frequency of high-cost disasters and the
latest scientific forecasts.
The departure of insurers from property markets has serious
implications for home values, the dominant store of wealth for
the average household, and for communities that rely heavily on
property taxes to provide basic services, as well as defend
against further climate related change.
Now is the time to identify policy solutions to reduce
American families', businesses', and taxpayers' exposure to
climate risk. Thank you again for the opportunity to testify.
Chairman Whitehouse. Thank you very much Dr. Keys. Next Mr.
Theodorou.
STATEMENT OF JERRY THEODOROU, DIRECTOR, FINANCE, INSURANCE, AND
TRADE, R STREET INSTITUTE \6\
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\6\ Prepared statement of Mr. Theodorou appears in the appendix on
page 172.
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Mr. Theodorou. Chairman Whitehouse, Ranking Member
Grassley, esteemed members of the Committee, thank you for the
opportunity to testify on how climate change is changing
insurance markets. I am Jerry Theodorou. I'm the Director of
the Finance, Insurance and Trade Program at the R Street
Institute, where as earlier in my career I conduct independent
research on insurance markets and what drives their
performance.
Today's issue is important for insurance providers and
buyers because climate change alters historical patterns of
severe weather. It adds uncertainty to an industry whose role
is to provide stability and protection from loss. There is
broad consensus among insurers that the climate is changing in
ways aggravating extreme events.
My comments summarize more extensive written testimony and
address three questions at the heart of today's hearings. What
is the impact of climate on insurance markets? What is the
financial condition of insurance markets? And how do insurance
markets respond to climate change?
Insurers are in the business of providing protection from
severe weather events when wind, fire, hail, and flood release
their fury, causing billions of dollars in property damage,
insurance is the economy's financial first responder, paying
claims, getting customers back on their feet.
Property insurance covers severe weather events, and
insurer's are capitalized sufficiently to meet those claims
obligations. When such weather costs billions, or tens of
billions of dollars, insurers are cushioned with financial
protection from reinsurance, the industry's shock absorber.
Reinsurance enables insurers to limit their losses,
maintain financial stability, while providing stability to
customers. The insurance industry is highly competitive with
over 3,000 insurers, ranging from large national giants to
small county mutuals. Reinsurance markets are also competitive,
with hubs in Continental Europe at Lloyds in Bermuda and in the
U.S.
And just as primary insurers limit their losses with
reinsurers, reinsurance companies buy retrocessional cover to
protect their balance sheets. So the broader insurance industry
thus provides three protective layers, primary insurance,
reinsurance, and retrocessional reinsurance, making insurance
markets exceptionally durable.
To illustrate, in 2010, in the wake of the Great Recession,
there were 157 bank failures, but only eight insurance company
impairments. The low failure rate of insurers is due to their
focus on capital management, dedication to shepherding their
capital has enabled the longevity of insurers and reinsurers.
Many mutuals were founded in the early 1800's and are still
going on strong today.
The income statement of the insurance industry is solid. In
only one of the past five years was there an underwriting loss.
In 2022, from automobile repair cost inflation, and the
insurance industry's balance sheet has strengthened in recent
years, it's surplus, the extent to which assets exceed
liabilities, rose from 750 billion dollars in 2018, to over 1
trillion dollars in 2021.
And reinsurers also delivered healthy results through 2022.
Insurance markets respond to climate change in two broad ways,
by encouraging buyers to mitigate losses, and with new
products. Loss mitigation measures to improve resilience,
include discounts for hardening their structures and credits
for communities that establish natural barriers, such as
mangrove forests and marshes between bodies of water, and
buildings that are constructed.
Other ways that insurers respond to climate change include
named peril, rather than all risk policies, parametric covers,
rebalancing of investments, attracting third party capital, and
offering private market alternatives to government programs.
Ignoring climate change is not acceptable. Climate skeptics are
not to be found in the fundamentally conservative insurance
industry, whose job after all is to restore things to the way
they were.
We acknowledge those who call for waking up to the reality
of climate change. Insurers have acknowledged it for many
decades. Insurance markets have an appetite for climate risk,
are in the business of dealing with it, and will continue to
play a key role in absorbing and mitigating its risk to our
economy. Thank you for the opportunity to testify, and I look
forward to your questions.
Chairman Whitehouse. Thank you very much. And our final
witness, remote, is Professor Curry.
STATEMENT OF DR. JUDITH CURRY, PRESIDENT AND CO-FOUNDER,
CLIMATE FORECAST APPLICATIONS NETWORK, PROFESSOR EMERITUS AND
FORMER CHAIR OF THE SCHOOL OF EARTH AND ATMOSPHERIC SCIENCES,
GEORGIA INSTITUTE OF TECHNOLOGY \7\
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\7\ Prepared statement of Dr. Curry appears in the appendix on page
180.
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Dr. Curry. Good morning. I would like to thank the
Committee for this opportunity to present testimony. I'm Judith
Curry, President of Climate Forecast Applications Network, and
Professor Emeritus at Georgia Tech. My expertise is on climate
dynamics, uncertainty and risk science.
Insurance markets are influenced by our perceptions of
climate risk. Referring to climate change as a crisis is at
odds with professional judgments of climate risk. The so-called
climate crisis isn't what it used to be. In 2013, in the IPCC
Fifth Assessment Report.
The extreme emissions scenario, RCP8.5 was regarded as a
business as usual scenario. With expected warming of four to
five degrees Centigrade by 2100, now there is general
acceptance that this extreme scenario is implausible. The
baseline warming currently used by the UN Conference of Parties
has been reduced by half, to 2.5 degrees by 2100.
This is an additional 1.3 degrees above current
temperatures. It's difficult to overstate the importance of the
shift in expectations for extreme weather events associated
with rejection of the extreme scenario. Rejecting an extreme
scenario has rendered obsolete much of the climate impacts
literature and assessments of the past decade that are focused
on this scenario. Landfalling hurricanes incur the greatest
property and casualty losses among extreme weather events.
Recent international assessment reports have low confidence
that there have been detectable changes in the long-term record
of hurricane activity beyond natural variability. The insurance
industry's perception of a substantial future risk from
increasing hurricane damage is enforced by three recent reports
from the insurance sector.
These reports infer misleadingly high damages by 2050, by
using the implausible extreme emissions scenario. They also
assume substantial increases in the number of major hurricanes,
which is at odds with recent assessment reports. Further, these
reports neglect the major modes of multi-decadal natural
variability. These have had a dominant influence on the
Atlantic hurricanes in the historical record.
Implausibly high projections of U.S. landfalling hurricanes
by 2050 result in inappropriate notes of insurability,
inappropriate pricing of insurance, and misguided confidence
levels of investors. Not only have we been misled about the
amount of warming to expect and its impacts, we have also badly
mischaracterized the nature of the risks from climate change.
We have conflated the slow, incremental risks from warming
with the emergency risks associated with extreme weather events
that have little to do with the warming. This mistaken
conflation of risk is driving the stated urgency for emissions
reductions and the rapid transition of our energy systems.
A key element in insurance losses from extreme weather
events is the reliability of the electric utility system,
extended power outages contribute to loss of life. During
extreme cold events outages can result in substantial property
damage from burst water pipes. This is what happened as a
result of the extreme cold event in Texas last year.
And worse winter problems are associated with continental
scale high pressure systems, which produce very cold
temperatures and weak winds over most of the U.S. Now, many
coal and nuclear power plants have shut down. A lack of onsite
fuel storage contributed to the Texas outage, and the recent
Christmas blackouts in areas served by the Tennessee Valley
Authority.
Near term risk associated with the rapid transition of
electric utility systems to wind and solar, we can reduce the
transition risk by reducing the urgency of the transition to be
commensurate with the slow incremental risk from emissions
driven warming. This would allow time for evaluating and
incorporating newer technologies that do not reduce electric
power reliability.
Climate change and its perceived threats, provide an
opportunity to broaden the relevance of the insurance sector to
risk mitigation. Adaptation provides new opportunities to
underwrite climate exposure risks. Insurance companies can help
prevent customers from incurring damage.
They can also work with the public sector to improve their
base standards and land use policies. Climate variability and
change with the attendant extreme weather events is best
regarded as an ongoing predicament. This will require continued
adaptation by communities and businesses, plus mechanisms to
share and transfer financial risk. Thank you.
Chairman Whitehouse. Thank you Miss Curry. If I might Mr.
Andersen, ask you for a more practical and common place
definition of the phrase you used, global systemic risk. We've
heard a considerable number of our witnesses talk about
systemic risk. It has a rather bland quality to it, but it
describes something that is anything but bland. What would be
your description of systemic risk?
Mr. Andersen. So what we mean by systemic risk is the
interconnectedness of these types of risks, and a number of the
other panelists also mentioned that ultimately one event has
implications on supply chains, physical damage, displacement of
people. And so, history, you know, as people have looked at
those risks over time they've often looked at them very
separately.
But with climate change the effect that it is having on the
size of the storms, the wildfires, the effects of it, are
actually creating risks that are so interconnected they had to
be dealt with in totality as opposed to just by individual
factor.
Chairman Whitehouse. The way that I have described this is
that climate change causes weather anomalies, and those
anomalies make events harder to predict. And that added
difficulty of prediction compromises insurability, and as
insurers either withdraw or raise prices, that has an effect in
mortgage--in property markets because it's very hard to buy a
mortgage property if you can't ensure it.
And of course, without mortgages, demand for properties
collapses, because you're only selling to all cash buyers at
that point. And when demand collapses, values collapse, and
that can cause severe economic harm across the entire economic
landscape. Is that a fairly accurate description of how this
cascades through to from weather discrepancies to a general
property value's problem?
Mr. Andersen. I think your underlying hypothesis that the
models of old that have been used looking backwards are not as
valuable to the models that need to be developed for a changing
climate. So that is the underlying premise. If you're looking
to match risk and capital together, the inherent sort of
assumption in that is confidence that the risk that's being
transferred is predicted, and therefore can be priced
appropriately for the risk that's assumed.
Chairman Whitehouse. You can't insure what you can't
predict.
Mr. Andersen. You can't insure what you can't predict
because the capital will not be protected.
Chairman Whitehouse. You made a comparison in your
testimony between climate risk today and mortgage risk in 2008.
Why did you make that comparison?
Mr. Andersen. It was designed to be an example of where
using the information that Freddie and Fannie had on mortgage
default risk, the ability of the insurance and reinsurance to
bring modeling capability to do the predictability, actually to
understand that risk, and then bring new sources of capital
into the market. That's essentially what we're talking about
with climate.
Ultimately, the size of the capital pools that need to be
brought to bear to help manage and transfer these risks to a
broader financial sort of pool of capital is ultimately our
strategy in helping clients deal with this issue.
Chairman Whitehouse. And to perhaps state the obvious, as
the President of Aon Corporation, you have a fiduciary duty to
your shareholders and to your employees, and to your customers,
to try to get this right. And that requires that you pursue and
obtain reliable forecasting, not just for the business reasons
of making money, but also for the fiduciary reasons of not
misleading anyone.
Is that a fair description of accountability that you
operate under?
Mr. Andersen. We take a very strong position that our
opportunity to help our clients manage this risk, that when you
talk about it as a client, it's not just a corporation, it's a
community, it's people that live and work in that community.
Our efforts around understanding and trying to predict the
effects of climate change, and then developing products and
solutions that actually allow people to transfer that risk as
best they can, so that they have the funding available to
either rebuild, or support those displaced individuals, we view
as one of our most important roles going forward.
Chairman Whitehouse. And you can't just say what you
please. You're bounded by the fiduciary duty to be truthful and
accurate, and operate on the best information you can find.
Mr. Andersen. Of course.
Chairman Whitehouse. Ms. Watkins, in your testimony you
talk about the ripple effects of insurance withdrawals, which I
think I tried to explain in my questioning to Mr. Andersen,
that it can endanger entire communities and create a downward
spiral that's difficult to emerge from, and in which collapse
can happen quickly, often to a crisis of confidence triggered
by one event.
Could you elaborate a little bit on that scenario, and how
that plays into the problem of systemic risk and economic harm?
Ms. Watkins. Yes sir, and I do agree with your description,
and I would extend it a little farther to when real estate
values start dropping. Also, this is accompanied by quality of
life issues. In my current home state of California, we're
having power outages, smoke that can make it hard to go outside
all summer long. A day where we never saw the sun because of
smoke. Those sorts of things, the need to evacuate frequently,
which happens a lot of times in hurricane prone areas. That
kind of uncertainty can combine together to cause people to
want to leave.
At that point you have a disincentive for businesses to,
you know, establish new roots in a community. You have a
reduction of the tax base. Concurrently, you know, real estate
investors and you know, municipal bond investors, they're also
looking at climate change and making their long-term decisions.
And so, the influx of investment into a community that's
not resilient to climate can be reduced as they're competing
with communities in other areas for that kind of investment.
So, the tax base goes down, the cost of borrowing can go up. It
can be harder and harder for a community to try to deal with
the risk even if it stayed the same.
But if it's increasing, they just get squeezed. So that's
what I'm talking about in terms of the downward spiral. The
crisis of confidence, I mean I think in a non-insurance example
in the recent news we have Silicon Valley Bank. The kind of
last man at the bar syndrome, where the people involved in the
risk who felt like they were at risk, decided they were going
to pull out.
And that pull out could actually not only endanger that
bank, but other banks that others thought were in similar
situations. Whether or not they had actually made the same
kinds of decisions that led to Silicon Valley Bank's collapse.
So what we have, just for example, California, we have the
California Fair Plan, which is growing unsustainably high as
the insurance market withdraws, the Fair Plan increases.
It's supposed to be a crutch for the market. It's supposed
to prop up the market while the market heals itself. But the
problem is when the policymakers decide to turn the crutch into
a leg, and start paying attention to protecting the crutch, and
making it more of a long-term solution, it's no longer an
effective crutch, and it's not a very good leg either.
So, we're not healing the broken system and the process.
Right now in California, the Fair Plan is running at a 332
million dollar deficit. That was about a year and a half ago.
The rates are 72 percent inadequate at last report. They're
only reinsured for a 1 in 31 year return period at last report.
If the Fair Plan, whose total insured value has gone up by
over four times in five years were to have a multi-billion
dollar loss, which is very possible, there's an unlimited
assessment on the California insurers who stay in the market.
So every insurer who wants to stay in California--maybe they've
pulled out of high risk areas, but they're insuring low-risk
areas.
They are on the hook for the Fair Plan's potential
insolvency in case of a large event.
Chairman Whitehouse. I've got to stop you there since other
Senators are asking to wait their questions, but--ask the
questions, but thank you very much. And Senator Johnson is
next.
STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you Mr. Chairman. Dr. Curry, let me
start with this statement. I'm not a climate change denier, I'm
just not a climate change alarmist. I get a feeling from most
of your testimony maybe you're a little bit more on that scale
with me than more of alarmist.
But as you've stated in your testimony you talked about
when you look at the real history of occurrences of hurricanes.
I've certainly looked at the history of wildfires, but there's
really nothing out of the ordinary in terms of long-term
perspectives on this. Can you expand a little bit more on what
you're talking about? You're just referring to that in general.
Can you get a little bit more specific?
Dr. Curry. Sure. Looking back in the historical record
extreme events, you know, in the first half of the 20th
Century, particularly the 1930's the weather and climate
extremes were much worse than anything we've seen so far in the
21st Century, in terms of the worst landfalling hurricane, the
worst heatwaves, the worst droughts, the worst fires, and on
and on it goes.
And if you looked at the paleo climate records you can
extend even further back, and you see evidence of even, you
know, greater extremes. But the worst atmospheric river event
in recorded history occurred in the 1861 to 1862 winter in
California. I mean we think it's bad this year, but it was much
worse back in the 19th Century.
And even worse events that you can see in the paleo climate
records. So, we need to temper our perception of what's
actually going on right now with the extreme events.
Senator Johnson. So I appreciate that, and you know, we
mentioned an earlier witness talked about Silicon Valley Bank,
and what's happening there, but she has a lack of confidence.
And so if we have all these hail and fire predictions it's
going to reduce confidence, and it's going to be a self-
fulfilling prophecy, so lets' talk about the reality.
You just talked a little bit about the reality of extreme
events not being out of the ordinary. Mr. Theodorou, again, I
don't deny the loss in property, but isn't that more related to
the fact that we are building incredibly expensive properties
in highly vulnerable areas, where there's been mudslide areas
in California, or wildfire areas, where we're not doing proper
forest management to prevent wildfires.
You know, what we're building out into the Gulf Coast in
the Atlantic shoreline, unbelievably expensive properties, so
when a hurricane does occur, yeah, there's going to be a lot of
property damage. So isn't the real issue here properly pricing
the insurance, and quite honestly, making the owners pay for
the risk that they are taking?
And we don't do that. We subsidize that risk, and so
there's more risk taking. Can you kind of speak to that?
Mr. Theodorou. Yes. Thank you Senator Johnson for the
question, and it's both. And indeed there are more values now
that are at risk. There is more unsound development on coastal
areas, and on flood plains. There's more impervious surfaces as
you have asphalt instead of dirt to observe the water.
So you have higher values, and that's the driver of the
higher losses, but also there are more of these extreme events.
The 1861-1862 ARK storm in California that led to Governor
Elect Leland Stanford going to his inauguration in a rowboat in
Sacramento was considered a one in a 1,000 year event. That's
why it was called an ARK storm, ARK, atmospheric river K for
1,000.
Research has shown that it was actually happening every 200
years, with more recent research from NOAA is now saying that
this can happen every 40 or 50 years. So there are more of
these extreme events, and as you said.
Senator Johnson. That's contrary to what Dr. Curry's
talking about, but go on. By the way, do you have the insurance
industry, have you calculated the property value in these
vulnerable areas today versus let's say 50 years ago? I mean do
you have a sense of how much more property is at risk?
Whether or not we have more extreme events, I mean when an
event occurs, we're going to have a lot more property damage.
Mr. Theodorou. The industry does tabulate this, and there
are modelers that look at that, but indeed the values have gone
up because of population growth and building, and building,
which is not sound is on the coastal areas, and on flood
plains, not built to code, so that's an important factor, and
we should discourage this sort of bad behavior, and have
protections, mitigation.
But the evidence, the facts are looking at the events and
the severity of the events that have been more frequency of
severity.
Senator Johnson. So my point is that's something we can do
something about, not building in vulnerable areas.
Mr. Theodorou. Yes.
Senator Johnson. We can do something about building to
code. I don't think we can hold back the tides, so why don't we
address what we can actually do versus scare the you know what
out of everybody, reduce confidence. That doesn't help either.
So thank you Mr. Theodorou.
Mr. Theodorou. Okay. Thank you.
Chairman Whitehouse. Senator Van Hollen, and then the
distinguished Ranking Member.
STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you Mr. Chairman. Thank you to
all our witnesses. I think the goal here is to really
understand the risk. It's not to scare anybody, but it's to
make sure people understand the reality that when you have a
climate crisis and you have more extreme weather events, and
you have increase in sea level rise, we have to understand what
it's impact is, and plan ahead, so that we can avoid a crisis
when it comes to the financial piece.
We obviously have to address the climate piece, and the
Chairman and I and others have been working on that, but we do
need to understand what's happening here. So and Dr. Keys, in
recent weeks we have seen a number of very high profile bank
failures. I understand fully that the insurance markets are
regulated differently, but they still need to be adequately
capitalized.
So do you perceive a risk today with respect to insurance
companies being prepared as a matter of capital to deal with
the ongoing risks from climate change?
Dr. Keys. Well thank you for the question. Senator, I think
others on the panel may have more expertise on this than I do,
given that they manage a balance sheet more directly. But I
think this is an absolute cause for concern.
And when we look at the failures of insurers in Florida,
and decisions to pull out of Florida in particular, I think
that speaks to some of these concerns directly in that there
are worries that they don't have the balance sheets directly,
and they can't obtain sufficient reinsurance to protect
themselves, that they're leaving risky markets.
And so one of the explanations for the shift in their
choice of which markets to insure and which to not insure, is
in part a function of their balance sheet.
Senator Van Hollen. Well let me just pose the same question
to Mr. Andersen, and picking up on what Dr. Keys just said,
right there are two ways that insurance companies could respond
if they wanted to address the risk. One is to increase rates,
and that's true also in the reinsurance market, and that
obviously increases rates for consumers. Or they can decide
just to pull out of insurance markets in certain areas, like
parts of Florida.
Can you talk about what we're seeing right now and its
impact on consumers?
Mr. Andersen. Sure. The crisis of confidence that's
happening in the reinsurance market that's leading into the
insurance market is essentially a crisis of confidence around
the ability to predict loss, which is going to be your
question, is climate changing the confidence level that these
insurers and reinsurers have around providing products to
consumers or businesses.
And the short answer is the reinsurers today have been
withdrawing from high risk areas around wildfire, around flood
in particular. Some of the other natural catastrophes, like
earthquake, less susceptible to this topic, and so not as much
dynamic change.
And so the question of is there enough capital to handle
the transition today? The answer is no. The fact that how do
you create more capital is better transparency around predicted
losses. That's where a lot of the working the industry is going
today because private capital will not join the market unless
they expect a return, and they will not be able to expect a
return if they don't know the risk they're taking.
And so, the answer to that is they essentially trim their
offerings. They pull out of high-risk areas, they drop certain
products, they get out of certain states. This is happening by
the way around the world, it's not just a U.S. issue, but the
underlying facts of the decision-making are the same, which is
they don't understand the risks they are taking, and therefore
they won't take them.
Senator Van Hollen. Right. And Ms. Watkins just to follow-
up on this conversation, it seems that there are actually three
possibilities here. One is that we don't do enough in advance,
and you have a meltdown in the ability of insurance companies
to make coverage, or that you increase price, and obviously
that means consumers are paying more, or insurance companies
pull out entirely, as we're seeing in Florida and other places.
When insurance companies pull out entirely it's the
taxpayer that ends up picking up the bill. Isn't that right?
Ms. Watkins. That's exactly right, Senator.
Senator Van Hollen. I mean those are the options. Can you
talk a little bit about what's going to happen to homeowners in
coastal communities? It seems to me there are really just two
options for folks who are not--don't have any more coverage.
One is that they're on their own and they have huge risks, and
you know, their nest egg just goes under.
Or, the public sector provides a bailout. Are those the two
options there?
Ms. Watkins. As of right now, yes sir, I do believe those
are the options. And so, I mean we do have federal disaster
aid, which will come in if there is like an event that creates
a loss, and they have no insurance. That would help them
somewhat, but it won't really restore them to, you know, a
resilient position for their home.
I think that to get in front of that, and to try to give
people better information when they're making the decision to
live in a place, having the insurance risk signal would help
avert both of the situations that you mentioned.
Senator Van Hollen. Thank you. Well we see what happens
when people don't get in front of a banking situation. The same
would hold true when it comes to the insurance market. Thank
you Mr. Chairman.
Chairman Whitehouse. Thank you Senator. Senator Grassley.
Senator Grassley. Yeah, I'd like to go to Mr. Theodorou,
and follow-up a little bit where Senator Van Hollen's subject
was brought up. You spent 30 years as a leader in the insurance
industry, however you are now an outside analyst with no
financial ties to the industry I understand.
Could you explain how the insurance industry is designed to
withstand hits and manage risk and has done so consistently?
Should we be worried that the sky is falling on top of the
insurance and reinsurance industries because of climate change?
Mr. Theodorou. Thank you Senator Grassley for the question,
which is actually two questions. Is the insurance industry
designed to take the hits, and should we be worried that the
sky is falling? If I can address the second one first, is if we
put it in context, the stresses on the insurance industry
historical context. There have been crises and problems that
the insurance industry has faced before. Just go back to the
pandemic a few years ago.
Early in the pandemic there were voices saying that
workers' compensation losses would be so great because of
essential workers contracting the virus, going to the emergency
rooms and dying, that it would be too big a loss on the
insurance companies for workers' compensation.
That did not happen. Workers' compensation insurance did
quite well, and rates have come down in most states. Dial back
a few more years to the subprime mortgage crisis. There were so
many bank failures, but the insurance industry did not have
more than its long-term average of failures, so it withstood
that crisis as well, which was systemic as it affected many
aspects of the economy.
Go back another ten years, Lloyds of London, Lloyds had its
crisis in the 1990's when asbestos risk from U.S. asbestos
liability almost brought Lloyds to its knees, but it went to
work with reconstruction and renewal, reformation, they fixed
their underwriting practices, and now Lloyds is a strong
player.
Ten years before that in the 1980's the great liability
crisis when lawsuits were going up from medical malpractice
product's liability, and there were voices there saying that
this is going to destroy the industry, but it did not. So, it's
withstood many crises before. It's a durable industry. We look
at companies that have been around for 200 years.
Chairman Whitehouse, Providence Mutual, founded in 1800, so
it's been around for 223 years, Vermont Mutual, early 1800's.
We mentioned Cologne Reed, 1846, which is now part of Berkshire
Hathaway. So, to be in business for 200 years, to face these
kinds of crises, you've got to be doing something right for
your customers.
Senator Grassley. Okay. I want to go now to Dr. Curry. Many
risk assessment firms use extreme hypothetical data when
evaluating climate risk for commerce. We've heard several,
especially wild figures today. Could you explain how the data
from these models are transformed into these alarming
statistics, and what incentives do companies have in using
these apparently flawed metrics, and how does it affect the
public?
Dr. Curry. Okay. Thank you. Well it's a challenge to keep
up with all the latest scientific publications. Extreme
projections of climate risk from risk assessment firms are
largely driven by focusing on the extreme and implausible
emission scenario, RCP 8.5. These firms may be unaware that RCP
8.5 is now regarded as implausible.
Mr. Theodorou mentioned a recent publication that predicted
an increase in frequency of extreme atmospheric river events to
every 40 years. However, the climate model simulations used in
this paper was driven by the extreme implausible emissions
scenario, RCP 8.5. So, continued use of those extreme
implausible emissions scenario, is misleading both the public
and investors about what kind of extreme events we might expect
in the coming decades.
Senator Grassley. Dr. Curry, how have sensationalized
emissions scenarios come to dominate the discourse of climate
change risk, and why has it taken so long to realize that these
scenarios are implausible?
Dr. Curry. Okay. The extreme RCP 8.5 scenario was
originally formulated to provide an upper limit to possible
climate outcomes. RCP 8.5 has been misleading, and referred to
as a business as usual scenario, which it is not. Climate
scientists find that the extreme scenario helps understand how
the climate system might respond to a big poke.
Scientists working on climate impacts, prefer the extreme
scenario, since it gives the most dramatic results. Such
research receives a lot of media attention, and supports a
political agenda of urgently reducing emissions. For the most
recent IPCC assessment, a more advanced approach to developing
scenarios was used.
These new scenarios were derived from socioeconomic and
technological trajectories that the world might follow in the
21st Century. However, energy economists found it extremely
difficult to develop trajectories to achieve the 8.5 forcing
without making implausible assumptions, such as increasing coal
use by 600 percent.
But by this time, the IPCC had already issued its
assignments to the climate modeling community, with a continued
focus on the extreme 8.5 scenario.
Chairman Whitehouse. Thanks very much. Senator Padilla.
STATEMENT OF SENATOR PADILLA
Senator Padilla. Thank you Mr. Chairman. I was glad to
participate in a recent hearing on wildfires to highlight the
importance of investing in climate and disaster mitigation,
especially since the costs pale in comparison to the costs of
inaction.
That's why today we must also consider the importance of
these preventative efforts. This includes the California
Wildfire Mitigation Program, which is the state level
partnership with FEMA to provide grants for home hardening, and
other proactive measures.
Not only do these actions protect homes and save lives, but
they also provide confidence to insurers, which can help bring
down costs for families. However, many of these programs
require a federal cost share, which can be difficult for low-
income and tribal communities to afford. And we simply cannot
afford to further compound the issue by only protecting those
who can afford it.
My first question is for Ms. Watkins. Could you discuss the
importance of ensuring that the communities of greatest need,
greatest vulnerability often, are able to access these
preventative resources, and maybe discuss briefly, whether we
should consider modifying insurance premiums for families who
need that flexibility?
Ms. Watkins. So, just to clarify, you're asking me how to
get communities of greatest need access to federal grants?
Senator Padilla. How do we address the accessibility, vis-
a-vis affordability concern?
Ms. Watkins. Thank you for asking. Yes. I believe that the
best way to help the communities--lower income communities
especially, is to give them information first, realistic
information of what they can expect, and then assist them. And
that really starts with the best view of risk possible, and
then an understanding of what are the most effective ways to
drive down the risk.
Wildfire is really complicated because it often starts in a
place that's outside the community, so it's not under their
control. PG&E, of course, you know, has been associated with
many of the ignitions. There's lightning, but it can start in
other lands, and then burn into a community.
So in my work with the Western Fire Chiefs Association,
what I've been told is that our coordination between the Forest
Service, and then inside the communities, and the insurance
industry, and the different areas responsible for fire
management is not where it should be.
So, what I believe they're saying is that we should
prioritize WUI community fuel mitigation, and then have more
resources devoted to the communities that need the most
resources.
Senator Padilla. Okay. Just because time flies around here.
Ms. Watkins. Sure.
Senator Padilla. Same question, to follow-up with you on
the affordability concern. There ought to be some flexibility
to recognize the ability to pay in some communities, and some
households. You touched on the dynamic of where fires start.
There's the dynamic is where fires impact as they grow. I won't
rattle off all the statistics of the series of wildfires
California has experienced this last decade.
Worst on record in a nearly 13 percent of land area
California has burned, et cetera, but needless to say every
community has some level of fire risk. What I'd ask, and I
invite all of you to jump in here, what the crisis that we've
seen, the wildfires in the west have meant for access to
insurance policies in the west, particularly for rural
communities, or the communities in this, you know, wild land
interface areas.
Mr. Theodorou. Thank you Senator Padilla for your question.
Other states have made available grants for strengthening, for
hardening homes, for having the roofs such attached so that
there wouldn't be embers going through the ventilation.
Alabama initiated a program about ten years ago which was
copied recently by Louisiana. And in my written testimony on
the record we do discuss California and Florida. They're
offering incentives in the form of premium discounts. And to
the affordability question, first the prudence, or the
imprudence of building in areas where you have the urban wild
interface, needs to be addressed.
You need to have the standards, such as the IBHS, the
Insurance Institute for Building and Home Safety. Business and
Home Safety that has the specifications, what are the codes to
limit wildfire. And as for the affordability, as with other
programs means testing should be available for those that are
indigent, or otherwise can't afford the insurance, or the costs
of doing the hardening.
Chairman Whitehouse. If you want to go ahead Senator. You
can take another minute. Oh, I'm sorry, Senator Brown is here.
I apologize.
Senator Padilla. (Off mic). Better modeling with wildfire
risk, and identifying mitigation tools, and other potential
solutions. Thank you Mr. Chair.
Chairman Whitehouse. Thank you very much Senator Padilla.
Senator Braun.
STATEMENT OF SENATOR BRAUN
Senator Braun. Thank you Mr. Chairman. This is a
complicated discussion in the sense that there's so much
variability in terms of what the future does look like. It
looks like the science is starting to zero in on some
particularity. In the actuarial business that you're in, it
seems like it would be probably one of the hardest topics to
get in some type of way that you feel comfortable with what the
future looks like.
I think--I'm a republican that believes that we need to be
in the discussion. I mostly interface with farmers because I've
been involved in agriculture, and they think something is
afoot. I think that if it's as bad as me, it may be forecast to
be, and I'd love to hear your opinion on it because that's
where premiums and risk management are all going to have to
come in, and I think you're at the forefront of how we finally
crystalize, you know, what this discussion is about in general.
So I would like anyone that wants to weigh in on it. Have
you actuarily gotten your hands around what this is going to
look like, and should this be something that we're trying to
prevent in terms of mitigation ahead of the calamity? Are you
going to just kind of take each year of further information to
do a better job at kind of making sure that the financial risks
are covered with fairer premiums, based upon the magnitude of
the underlying risk?
That sounds like a complicated formula to come up with, and
I'd like your honest opinion if you think that you'd be having
huge risks that you couldn't really cover adequately, and that
maybe some of the solution would be to mitigate ahead of the
problem, since it especially looks like the world is maybe not
buying in collectively to do the things that might even be
prescriptive.
When I look at the CO2 that's being put into the air by
other parts of the world, there are only a few countries headed
in a place where it might make sense if in fact the science
looks like that's where we're actually headed. It's kind of a
sprawling question, but I think it hits the heart of the
matter.
Mr. Andersen. So maybe I'll bravely jump into the first
part of that. And the one thing that stuck me that I wanted to
add to your question is the timing is a real issue for us, for
the insurance industry in that these are decisions that get
made, and money that changes hand, so there's an immediacy to
understanding the current risks that a risktaker is assuming.
And so when people talk of climate change, they will talk
about the effects of climate change today, and what does the
industry have to do, and how do they better understand the
impacts today on farms and businesses, or consumers? And then
what is the impact over 20, 30, 40, years which gets harder to
assess if you are in our seat.
Senator Braun. Well in the short run, where the rubber
meets the road, are premiums covering the amount of risk out
there, and being able to pay the claims in a sustainable way?
Mr. Andersen. So the short answer is no.
Senator Braun. And how long has that been the case?
Mr. Andersen. I would say over the last four to five years
based on the losses that have come through the industry, the
confidence of the capital providers that they have a full
understanding of the risks that they are taking has been
weakening over time.
And so, this year in particular, was a pretty dramatic
repricing of risk that happened in the reinsurance industry
that is now coming through to the insurers, and then ultimately
to the consumers. They don't trust the models. They don't quite
understand what the impacts are going to be.
And since these contracts happen today, and they deal with
issues of today, their focus is today, and what are the impacts
financially. But ultimately they do recognize that they need a
truer sense of risk and the changing nature of it in order to
attract the capital that they need to perform.
Senator Braun. Are you spreading that risk over a broader
segment than just the places that seem to have the highest
claims?
Mr. Andersen. Absolutely. I mean the whole nature of the
business is to diversify it across various financial pools of
capital over time as well, so not just location, but time.
Senator Braun. So everybody will pay the price, even for
something that might be localized or regional?
Mr. Andersen. Yes.
Senator Braun. Anybody else want to weigh in?
Mr. Theodorou. Senator Braun, to the first part about the
difficulties in pinpointing what will be the amount of the
losses and when, it is difficult indeed because actuarial
science is mainly backward looking. Now we're talking about a
moving target because the exposure level is changing, and I
guess there are models, as Mr. Andersen mentioned, but it said
that all models are wrong, but some are useful.
So we know that directionally it is getting worse, but we
do have to do something. And to your point on mitigation and
resilience, that's really where the industry is going because
once you do have better behavior you don't have buildings on
the coasts, and the flood plains, that will send a signal--a
price signal, when there are losses and the rates go up for
people not to build in ways that exacerbate the risk.
So you have the positive incentive for product price
signals.
Senator Braun. Mr. Chairman, could I have one more brief
question? So, in the extrapolation of what has been extra
normal, it sounds like, over the last four to five years, and
compared to the past when you just have weather incidents that
were more sporadic, is the insurance industry now extrapolating
based upon a new model that's based on what has had some
consistency over at least the last four or five years, or are
you still waiting to do that to where you'd fully price the
risk into your premiums?
Mr. Theodorou. The models are recalibrated on a regular
basis, so the industry is not sitting on outdated models that
don't take into account what's happening in California, and in
other parts of the country. So they're trying to keep up. But
it's like hitting a moving target because the denominator is
changing.
Senator Braun. And in the area of the highest claims will
this be priced into those localities in a way that that would
cause the mitigation, maybe not living where whatever the
climate impact is that's having the greatest effect?
Mr. Theodorou. It is, because you have many of the national
insurance companies have separate companies that are focused on
a particular state.
Senator Braun. Okay.
Mr. Theodorou. That's just Florida, for example, which is
problematic not so much because of catastrophes, but because of
mitigation which has gotten out of control with 86 percent of
the nation's homeowners insurance litigation, although Florida
only has about 7 percent of the nation's homes, so that's a
separate issue there.
Dr. Keys. I was just going to very briefly add that I
think, and thank you for the question. I think one of the
nuances here is that insurance policies are written on an
annual basis. We have mortgages that are written on a 30 year
basis, and we have home ownership decisions, which are written
maybe on a lifetime basis, or even longer passing on a home in
a generational way.
And so, we see the insurance markets responding very
rapidly because they're repricing.
Senator Braun. You're the true variable cost in the
equation.
Dr. Keys. Exactly. And so they're going to be the ones who
are most flexible in a lot of ways, and that means that these
other markets should be taking a lot of signals from what the
insurance markets are doing.
Senator Braun. Ms. Watkins did you have?
Ms. Watkins. You had asked about modeling, and the
insurance industry is definitely recalibrating their models as
Mr. Theodorou said. They are also building a track forward into
the future, looking at different climate scenarios. And so,
they are becoming able to predict this out in the future, but
that hasn't historically been a focus.
These models are also being used by long-term investors,
and you know, Fannie Mae just had an article where they're
looking at these models as well. But to your main point,
mitigating ahead of the calamity I think that was my focus, is
finding the money, and aligning the stars to start reducing the
risk, which isn't traditionally in the purview of others.
Senator Braun. Thank you. I think your industry is going to
be on that leading edge of what actually takes an amorphous
conversation into something with a few particularities that we
can look to, to guide us in the future. Thank you.
Ms. Watkins. We'd like to be.
Chairman Whitehouse. Thank you Senator Braun. I will do a
second round, and I guess I'd like to first start by asking the
witnesses who are here present in the room, whether any of you
endorse the proposition that there is nothing going on here
that is out of the ordinary for climate related risk.
No, no, no, no. Okay. Do any of you doubt that unusual risk
is being caused by emissions from fossil fuel combustion? No,
no, no, no, everybody accepts that that correlation exists,
okay. Thanks. Miss Curry, I've got a few questions for you if
you don't mind. First, do you recall how many times you've
testified before Congress on the subject of climate change?
Dr. Curry. I'm sorry, I didn't hear the first part of the
question.
Chairman Whitehouse. Do you recall how many times you've
testified before Congress on the subject of climate change?
Dr. Curry. This would be my 13th time.
Chairman Whitehouse. Thank you. And on those occasions has
your message essentially been that there's a lot of
uncertainty, we don't really know what's driving observed
warming, the model is unreliable, and the IPCC models are not
to be trusted?
Dr. Curry. No. That's not what I would summarize my
statements as.
Chairman Whitehouse. All right. Well let's revisit one of
the previous times that you testified before Congress. In 2014,
before the Senate Environment and Public Works Committee, and I
was your interlocutor then. I don't know if you recall that
among your 13 episodes of testimony.
But let me prompt you. In your written testimony for that
hearing you wrote that several key elements of the IPCC's Fifth
Assessment Report point to your language here, ``a weakening of
the case for attributing most of the warming to human
influences relative to the previous assessment.'' And to
support that, you listed the following assertions.
The first was a lack of warming since 1998, and growing
discrepancies between observations and climate model
projections. The second was sea level rise from 1920 to 1950,
being of the same magnitude as 1993 to 2012. And the third was
increasing Antarctic sea ice. Do you recall that?
Dr. Curry. Yes.
Chairman Whitehouse. Okay. Let's look at those assertions
and see how they've aged. And let's start with the alleged lack
of warming since 1998. Let me propose first that 1998 was an
exceptionally strong El Nino year, so picking it as a start of
end date for a period builds in an anomaly. Is that correct?
Dr. Curry. Yes. Do you want me to explain my perspective on
the----
Chairman Whitehouse. I'll give you time at the end, but I'd
like to get to my questions to you first if I may. So, is it
true that the last years 2015 to 2022 have been the eighth
warmest years on record? Is that true?
Dr. Curry. Yes. Yes.
Chairman Whitehouse. That is true. So is it still your
testimony that there actually is a lack of warming?
Dr. Curry. There is if you read the fine print in my 2014
testimony, my main point was that there was a great deal of
natural internal variability that influences this decadal
scale----
Chairman Whitehouse. It was you who used the phrase lack of
warming, and I'm asking if you would still describe what's
going on as a lack of warming?
Dr. Curry. No. We've seen a big super mega El Nino in 2016,
which remains the high point, and since 2016 we haven't seen
any----
Chairman Whitehouse. Lack of warming.
Dr. Curry. Increases beyond 2016.
Chairman Whitehouse. So let's go to your next point about
modeling discrepancies, that there are growing discrepancies
between observations and climate model predictions. I'd like to
show you a review that was done of models that were run by the
IPCC back in 2004. And for those of you who are not familiar
with the graph, the blue part defines the range of the
different models that were run for the IPCC.
And the black line that runs through the middle of that
range is the mean of those models. And the red goes back and is
actually observed temperature information, so the first two,
the blue and the black are the prediction range and the
prediction mean, and the red is what actually happened.
And it strikes me that it looks like it's tracked pretty
well, so let me ask you Dr. Curry, is it still your testimony
that climate modeling has not proven accurate?
Dr. Curry. Okay. This is the diagram you are showing is a
flawed analysis. Let's pay attention to what the most recent
IPCC assessment report has to say. They found a number of
global climate models running too hot. In fact they even
changed their way of making projections for the 21st Century
that relies less on climate models.
Chairman Whitehouse. Dr. Curry, doesn't the blue range
imply that there are some models that ran too hot, but also
others that ran too cold, and that's why there's a range?
Dr. Curry. Yeah. On average. On average.
Chairman Whitehouse. Got it. Thank you. And then the
average is the mean, which is the black line, which tracks
extremely well with the red data.
Dr. Curry. That particular graph that you have is a flawed
analysis.
Chairman Whitehouse. Okay. Well let me go on. You disagree
with the analysis, I get it.
Dr. Curry. The assessment report I should say.
Chairman Whitehouse. You talk also that there's been no
increase in sea level rise rate. According to IPCC sea level
rise has more than doubled from the 1901 to 1990 period, to the
1993 to 2015 period, and that since 2015 it has accelerated
further beyond the doubling. Do you dispute those
determinations?
Dr. Curry. The point I made in my 2014 testimony is that
there is a great deal of multi-decadal variability in sea level
wise, which we saw a sharp increase in the first half of the
20th Century. I'm not saying that sea level wise isn't
increasing.
Chairman Whitehouse. Okay.
Dr. Curry. I'm not saying.
Chairman Whitehouse. Are you saying that this rate of seal
level rise is not increasing? Or do you consider that both seal
level rise is increasing, and the rate of seal level rise is
also increasing?
Dr. Curry. It depends on the time scale you look at, and
the causes that you attribute to it. It's yes it has been----
Chairman Whitehouse. I'm talking the history of the
industrial revolution, the period in which emissions have begun
to have an effect. I'm not talking about paleo history.
Dr. Curry. Okay. Sea level rise, the modern sea level rise
started increasing in about the mid-19th Century. This is
coming out of the little ice age, and at that point had little
to do with fossil fueled warming.
Chairman Whitehouse. Is that still the case today, or does
it now have to do with fossil fuel warming?
Dr. Curry. Fossil fuel warming is certainly contributing to
the slow creep of sea level rise. I've never questioned that.
Chairman Whitehouse. Okay. And you say it's a slow creep,
but it's also an accelerating upward rise is it not?
Dr. Curry. The how to infer acceleration in sea level rise
is disputed among experts.
Chairman Whitehouse. Okay. You've accused the IPCC of
corruption. Do you stand by that term?
Dr. Curry. The IPCC is a highly politicized organization.
The recent synthesis and assessment report for the Sixth
Assessment that was just released this week, I mean that is a
very highly politicized.
Chairman Whitehouse. Do you stand by the very use of the
term corruption regarding the IPCC?
Dr. Curry. It has to be qualified as a highly politicized
organization.
Chairman Whitehouse. How about the IPCC's definition of
anthropogenic climate change being a hoax? Do you stand by that
term?
Dr. Curry. I've never used--I've never used those words.
Chairman Whitehouse. Okay. let me take you into the--I'm
actually reading off a blog. ``With these definitions in mind,
here are two examples that qualify as hoaxes that I've
previously written about. The UNFCCC definition of climate
change arguably qualifies as a hoax.'' So I refer you to that,
and with unanimous consent we'll make that a part of the
record.\8\
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\8\ Document submitted by Chairman Whitehouse appears in the
appendix on page 209.
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Dr. Curry. Do you want me to clarify that statement?
Chairman Whitehouse. I think it needs a lot of
clarification indeed. And I'll let you clarify it for the
record. Okay. We have a--you'll have all the time in the world
to write whatever you want, and add that in a response to the
record. So let's look for a moment at the other models if the
IPCC is potentially corrupt, and if it's definition as hoax.
Exxon----
Dr. Curry. The IPCC--can I clarify before we go much
further? The IPCC--the UN framework convention on climate
change now defines climate change to be only human caused
climate change. The definition does not include natural climate
variability, and this flies in the face of all the
understanding of geology, of atmospheric science, and all the
other scientific fields.
It's a political definition.
Chairman Whitehouse. Fair enough. And if you want to expand
on that you're welcome to do so in your response for the
record. But let me take my time here and show you the graph
that Exxon scientists developed to model climate change, both
CO2 concentration, and observed temperature change.
And for those of you not familiar with the graph, the
original black lines are the ones that are developed by the
Exxon scientists. The blue line is the actual measurements, and
the red line is the actual measurements. The blue being CO2
concentration, and the red being observed temperature.
Do you concede that Exxon's models prove to be pretty
accurate just like the IPCC models?
Dr. Curry. No. That model is a toy model that Exxon used,
and----
Chairman Whitehouse. All right.
Dr. Curry. It's a useful contribution to the dialogue.
Chairman Whitehouse. In 1968 the American Petroleum
Institute commissioned a report on climate change from
scientists at Stanford. And those scientists concluded, I'll
read from the report language here, ``Significant temperature
changes are almost certain to occur by the year 2000, and these
could bring about climate change.
If the earth's temperature increases significantly, a
number of events might be expected to occur, including the
melting of the Antarctic ice cap, a rise in sea levels, warming
of the oceans. It is clear that we are unsure as to what our
long lived pollutants are doing to our environment, however
there seems to be no doubt that the potential damage to our
environment could be severe.''
Do you doubt the scientists hired by the American Petroleum
Institute, or their statement?
Dr. Curry. Our knowledge of climate change was in its
infancy in the 1960's. The first assessment report by the IPCC
published in 1990 or 1991, found that there was no evidence of
human cause warming beyond natural climate variability at the
time of the early 1990's.
Chairman Whitehouse. So the API scientists got it wrong too
when they presented that conclusion?
Dr. Curry. No. They had a weakly justified argument, and a
weak knowledge base at the time.
Chairman Whitehouse. And events have proven them wrong in
some fashion do you believe?
Dr. Curry. It's not something that's useful. So it's not
something that's useful.
Chairman Whitehouse. Okay.
Dr. Curry. To consider at this point.
Chairman Whitehouse. So the other thing you cited was
increasing Antarctic sea ice. And the last eight years have
seen below average summer minimum ice for the Antarctic, with
this year being a record low. Do you still stand by the
proposition that Antarctic seal ice is increasing?
Dr. Curry. There's a great deal of interannual and decadal
scale variability. The IPCC does not make any assessment that
human caused warming is contributing with confidence to a
change in the Antarctic sea ice beyond natural climate
variability.
Chairman Whitehouse. But do you think that the Antarctic
sea ice was increasing, just as a measurement. Is that still
correct?
Dr. Curry. There's like I said, there's a great deal of
year to year and decadal variability in the Antarctic sea ice,
which is what I was commenting on.
Chairman Whitehouse. Okay. Let me refer you back to an
article that you wrote in the Washington Post in 2007, and I'll
read your words then. ``If the risk is great, then it may be
worth acting against, even if its probability is small. Think
of risk as a product of consequences and likelihood. What can
happen, and the odds of it happening. A 10 degree rise in
global temperatures by 2100 is not likely, the panel gives it a
3 percent probability.
Such low probability high impact risks are routinely
factored into analysis, and management strategy.'' And I'll
interrupt your quote to say probably by the kind of folks who
are here sitting in the room with me today, the experts and the
executives of major risk bearing enterprises.
``Whether on Wall Street, or at the Pentagon,'' you
continue. ``The rationale for reducing emissions of cardon
dioxide is to reduce the risk of the possibility of
catastrophic outcomes, making the transition to cleaner fuels
has the added benefit of reducing the impact on public health
and ecosystems, and improving energy security, providing
benefits even if the risk is eventually reduced.
I have yet to see any option that is worse than ignoring
the risk of global warming and doing nothing.'' Has your view
changed since that 2007 article?
Dr. Curry. My notions of risk for naive circa 2007, in the
intervening time I have educated myself very substantially in
risk sciences. And I have a book in press entitled Climate
Uncertainty and Risks that has been extensively reviewed, peer
reviewed, by an academic press.
And that book outlines my current understanding of how we
should think about climate risk. Some of my understanding I was
able to include in my written testimony submitted to this
Committee.
Chairman Whitehouse. In 2014, I asked you if you thought
there was real risk from climate change, and should we figure
out how to deal with it, and you replied, ``We may decide to do
nothing and see what happens.'' Do you still recommend that
strategy?
Dr. Curry. I never--I didn't recommend that strategy. I
said that is an option.
Chairman Whitehouse. Do you still consider it to be a
realistic or plausible or prudent option?
Dr. Curry. I think we should actively work to adapt to
extreme weather events and sea level rise. I think we should--I
think we need new energy infrastructure for the 21st Century,
with more abundant, cleaner, more reliable energy.
Chairman Whitehouse. And in your testimony here today you
suggest that one of the things that can save us from climate
change, and reduce the risk is volcano eruptions. Is that
correct?
Dr. Curry. No. I'm saying that climate models do not
include severe--simulations for the 21st Century do not include
scenarios of extreme explosive volcanic eruptions, such as
occurred in the early 19th Century. If those were to occur, we
could see a half a degree Centigrade cooling over several
decades.
The point of that is to emphasize that natural climate
variability can be very substantial, and this isn't properly
taking into account in our considerations of how the climate
might play out in the 21st Century. That's the point that I'm
making.
Chairman Whitehouse. Let me close out with a question for
the witnesses who are here in the room. And that is to offer
your view on the diligence, integrity and reliability of the
modeling that you count on in doing your planning and
projections. Starting, I guess, with Mr. Andersen, we'll go
across the four of you and conclude the hearing.
Mr. Andersen. That's a great question. I would say one of
the special things about the models that the insurance industry
uses is that it actually money changes hands over the
interpretation of those models. So the confidence around them,
and the need for those models to be as up to date and
insightful is critical.
Chairman Whitehouse. It's a powerful incentive to get it
right.
Mr. Andersen. To get it right. So, I think it's a, you
know, as I think Mr. Theodorou said, it is something that we
are continuing to work on as new information becomes available
because it has--it moves markets, and so it's critical that we
continue to improve it.
Chairman Whitehouse. Ms. Watkins?
Ms. Watkins. The risks that we're modeling are complicated,
and so the models need to be complicated to be useful. They
don't agree. They do evolve. The question is can they be used
safely and appropriately, and that does require expertise, and
I think that upping the level of expertise in terms of risk
aware, climate aware planning, is going to help an awful lot in
demystifying these models.
Chairman Whitehouse. But you count on the models and
they're valuable to use in doing the planning and the work that
you do.
Ms. Watkins. They're definitely a state of the art for
actuaries in getting the risk accurately priced and evaluated,
and that's what we do.
Chairman Whitehouse. Yeah. And one of the reasons that this
is a difficult enterprise is because things are in fact
changing, is that not the problem.
Ms. Watkins. That's right. But we are trying to use the
models to evaluate what the changes are and what that means for
the potential outcomes.
Chairman Whitehouse. Dr. Keys?
Dr. Keys. Thank you for the question Senator. The data that
we use as researchers often comes from the government, and
we're especially thankful for the scientists at NOAA, and
elsewhere who make their data available, and make regular
improvements to their data. So they're doing outstanding work.
I think there is room for improvement in terms of sharing
data between the private sector and the public sector, and
understanding what the difference is, or discrepancies might be
between the different models. I think there's also a role for
the democratization of this data to make it more accessible to
households, so that they can better understand the risks they
face.
I think one of the asymmetries is that the insurance
markets often know a lot more about the risks than the
households or the businesses do.
Chairman Whitehouse. Mr. Theodorou, reliability of models?
Mr. Theodorou. Thank you Chairman Whitehouse for the
question. The modeling industry has really advanced by leaps
and bounds since it was essentially borne in 1992 in the wake
of Hurricane Andrew. And since that time there have been three
main models that are used and licensed by risk practitioners.
Typically, large insurers and reinsures use all three, and
they may have their own proprietary as a fourth model, which
has now entered the fray.
Chairman Whitehouse. And Mr. Andersen is correct that a lot
of money rides on getting it right, in addition to potential
fiduciary reliability if you really blow it. Correct?
Mr. Theodorou. Yeah. Licensing in the models is not an
inexpensive proposition. So, as I said earlier, they're not
capable of getting a point estimate exactly, how much loss are
we going to have at this particular time, but directionally is
what we look at to give the headlights into where we're going.
Chairman Whitehouse. I love hearing you use the word
headlights. That's my phrase. I say science is the headlights
that drives us forward, and let's us see what's coming. And
with that let me call the hearing to an end. I thank you all
for your testimony. I want to state that questions for the
record from colleagues are due by noon tomorrow.
And we ask the witnesses to respond to any questions that
they may receive within 7 days of receipt. And in addition to
responding to any questions received by or for Professor Curry,
the opportunity to elaborate on her answers to my questioning
in any way that she sees fit, so she feels she's had a full and
fair chance to respond.
And with that the hearing is concluded. Thank you.
[Whereupon, at 11:51 a.m., Wednesday, March 22, 2023, the
hearing was adjourned.]
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