With weather-related events costing the nation billions of dollars in damages over the past decade, private insurers have reacted to this increased liability by adjusting policies for many storm-prone areas in the United States. But according to a recent report by the Government Accountability Office, federal insurers have not adjusted their practices based on this increased risk. During today's OnPoint, John Stephenson, director of Natural Resources and Environment at the Government Accountability Office, discusses the report and his recent testimony before the House Select Committee on Energy Independence and Global Warming. Stephenson explains how federal and private insurers' approaches have differed and how changes to the insurance industry will affect consumers.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is John Stephenson, director of Natural Resources and Environment at the Government Accountability Office. John, thanks for coming back on the show.
John Stephenson: Thank you for having me, Monica.
Monica Trauzzi: John, you recently testified before the House Select Committee on Energy Independence and Global Warming to talk about the issue of climate change and the insurance industry. GAO recently wrote a report on this topic and there seems to be a difference between the way that the private insurers and the federal insurers are approaching the issue. How have private insurers responded?
John Stephenson: We looked at, in the course of our work, looked at both the reinsurers and the primary insurers. And found that over the last several years they have been very aggressively looking at the impact of climate change on projected severe weather events in the future, which of course would have a bearing on their financial risk in the future, and very aggressively incorporating that into their models. Similarly, we looked at the two large federal insurance programs, the National Flood Insurance Program and the Federal Crop Insurance Corporation program, which accounted for almost 25 percent of the claims over the past several years, and found that they were very retrospective looking. In other words, they don't think there's going to be anything different with climate change. Or if they do, they're not incorporating that into their models and projecting to the future, which would put them unduly at financial risk, in our opinion.
Monica Trauzzi: But why? Why is there such a disparity between the two?
John Stephenson: I'm not sure. I think that climate change and what to do about it is still being debated. There's still ongoing debate as to the relationship between climate change and severe weather events. And I just think that the government is a little bit slower moving. They don't have the profit motivation that the private sector does. If they misestimate their projections in the future they can simply borrow from the Treasury to settle their claims. The private sector can't do that. They go bankrupt if that happens.
Monica Trauzzi: So is the private sector looking at climate change or weather related risks, more like a general look at that?
John Stephenson: Well, weather related risks are what's critical to them and what's in their models. What's different is the IPCC's projections and others, the leading scientists of the world are saying it's going to make a difference and the past is not representative of the future and we need to be more forward-looking. In climate change things will happen differently in terms of severe weather events in the future than they have in the past.
Monica Trauzzi: So when you testified before the House committee what did they seem to be most interested in? What kind of questions were they asking?
John Stephenson: They seemed to be trying to quantify the risk, not only to the federal government, but to the economy. They see and we see the insurance as, as Chairman Markey put it, the canary in the coal mine. And so we think this is one of the most forward-looking industries there is. So what better way to start looking at economic implications of climate change than to deal with the insurance industry? So most of the questions on the majority side of the aisle dealt with how significant is the risk, how much federal exposure are we talking about; whereas on the minority side of the aisle the Republicans seem to be still questioning the science for the most part. You know, that's a generalization, but in general they -- NOAA just came out with a study recently showing there's not so much of a relationship between climate change and severe weather events. They sort of hung their hat on that. We relied more on the IPCC study, and we saw some conflict between those two studies.
Monica Trauzzi: And when the report was presented before the Senate in April representatives of federal insurers were there and they agreed with the findings of the report. And Senator Collins seemed to think that they were being a little too lax about the whole issue. Are they being too lax?
John Stephenson: I think both Chairman Lieberman and Senator Collins both felt like, based on the answers they were hearing from the administration officials, that they were too lax. So much so that both suggested that they needed to analyze climate change's impact on their programs and prepare a report for the Congress, at sometime in the future, to show how they were going to address those concerns. And that's precisely what we recommended in our report.
Monica Trauzzi: But on the flipside, are private insurers being too reactionary? Homeowners are seeing higher premiums. Some are not able to get insured at all. Is there a middle ground that can be met where the private insurers won't be losing out on profit, but that the consumers can also be insured?
John Stephenson: Well, that's the $64,000 question. The federal insurance programs are very complicated. They're not solely molded by actuarial soundness. They're supposed to improve coverage for as many policyholders as they can, and provide insurance, essentially, that the private insurers won't. But you have to balance that with how much risk they're exposing the taxpayer to. It's the taxpayer who funds these federal programs. Yes, they're made up partially in premiums, but in the crop insurance case it's subsidized by the government, by annual appropriations. And so they need to be concerned if there are going to be some anomalies created by climate change that affect their financial risk.
Monica Trauzzi: The Consumer Federation of America recently released a report saying that the insurance industry is overcharging customers, underpaying claims, and reducing coverage in coastal states. Are private companies price gouging now in the name of climate change with this idea that climate change is going to hurt their industry? Are they using that as a method to price gouge consumers?
John Stephenson: I've heard that. In fact, there was a question in the House hearing that accused the insurers of isn't climate change good for you because you can increase premiums, you can limit coverage, etc.? I think that's a little bit disingenuous and unfair. They are looking at a whole host of things, based on what I heard in the hearing, to look at building codes, their impact on insurance rates and damages; look at their premium structure; look at their deductibles. Look at a whole gamut of things on preventative that you can do to prepare for climate change, not just simply increasing and price gouging their shareholders.
Monica Trauzzi: You previously mentioned before what GAO's recommendations were in the report. Talk more broadly about that.
John Stephenson: Well, the way the insurance programs work, and they're both quite different, and I'm not the insurance expert at GAO. But nevertheless, they are expected to be stewards of the taxpayer dollars. They're not driven, as I said, by actuarial soundness. You don't have to collect in payouts everything from premiums. Having said that, they need to consider if we're going to have more hurricanes like there was in 2005 where the National Flood Insurance Program had to pay out 18 billion more than they had collected in premiums so they had to borrow from the Treasury in order to do that. Now, theoretically, they're going to pay that back, but if they do it will be over a long period of time. So we just think with the situation like that and the potential for more Hurricane Katrinas in the future that we didn't see any evidence that they were considering those kinds of anomalies in their future projections. They simply thought it was good enough to look at what their payouts might be on an annual basis, looking historically. And we're trying to move them a little bit to look more prospectively in the future.
Monica Trauzzi: So what does this all mean for the future of the insurance industry?
John Stephenson: Well, it's going to be complicated. As the private insurers, who are concerned with profit, continue to limit their exposure in natural disasters the national insurers are probably going to pick up the slack. Another point that I made during the hearing was that insurance claims only represent about 40 percent of the economic loss. There are the noninsured, the reinsured, the self-insured. There are direct disaster payouts that FEMA pays that are huge. I mean it spent over $80 billion in the last decade. So all of this has to be considered, and we're just looking at one small aspect of this with the insurance companies.
Monica Trauzzi: All right. We're going to end it right there. Thanks for coming on the show.
John Stephenson: Thank you for having me.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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