How insurers should adjust to FEMA cuts

The Federal Emergency Management Agency is charged with helping people and organizations prepare for and recover from the unexpected. But in the current political environment, it is FEMA itself that might need to brace for an uncertain future, leaving homeowners and insurers alike with questions of what the next post-disaster scenario might look like.

FEMA was founded in 1970s by President Jimmy Carter with the mission of coordinating emergency management and civil defense. As it stands today, FEMAs three responsibilities include post-storm recovery, running the National Flood Insurance Program and risk management.

During his 2024 presidential campaign, then-candidate Donald Trump vowed to eliminate FEMA as it currently existed and instead shift post-disaster responsibilities to the states, while maintaining some responsibility for funding at a national level.

Following the July floods in West Texas, the rhetoric seems to have shifted more toward remaking and reforming FEMA. The group tasked with making recommendations for what FEMA should ultimately look like is the FEMA Review Council. This group was created by a Trump executive order in January and has met a handful of times to begin the process of formulating suggestions for what the future of the agency should look like.

What that future format will look like is still up in the air, but it has significant implications for insurers and property owners alike.

From an insurer’s perspective, FEMA’s main role is in its work with the federal National Flood Insurance Program, where it writes or underwrites policies it sells directly or through the Write Your Own program where a private insurer writes flood policies on behalf of the NFIP.

The NFIP relies on Congress for funding, which was temporarily reauthorized in March, but will come up again for reauthorization at the end of this month. Again, the future of the program will remain cloudy until federal policies become clearer.

What would flood insurance look like without FEMA?

An increasing number of private insurers have been willing to write private flood policies in recent years, driven by better computer modeling and risk assessments. Private policies can have the benefit of larger coverage amounts than the federal policies – but private policies still represent the vast minority of flood policies today and are not available or affordable in every community. If Congress were to fail to reauthorize the NFIP, or if FEMA were to substantially change its role with the program, it is unclear what the future of flood insurance would look like.

In addition to flood policies, FEMA also plays a substantial role helping communities with hazard mitigation programs, aiming to avoid losses in the first place.

Through the Federal Insurance and Mitigation Administration, FEMA works to upgrade infrastructure, develop post-disaster response plans and develop insurance risk ratings for communities.

And all of this is in addition to FEMA’s work coordinating direct post-disaster responses with the affected states, communities, and non-profits, as well as providing direct assistance to homeowners and businesses.

Post-disaster response can range from coordinating search and rescue operations, widespread roof repairs, and distributing aid and supplies to the worst-hit areas.

Insurers should invest in some key areas

If FEMA were to step back and leave all or many of these tasks to the states, insurers might do well to invest in some key areas themselves.

One area worth exploring would be to expand their capacities in flood modeling to fortify their flood insurance offerings beyond standard Write Your Own NFIP policies. Another place insurers could explore would be in potentially investing in catastrophe modeling and risk assessment to identify communities that are more, or less, likely to suffer from catastrophic disasters. From there they could either limit their policy exposure or alternatively look for ways to enhance post-disaster response teams in those areas. With better modeling, insurers could even work with communities to reduce their risk on the front end.

Another area insurers might look would be to potentially double down on state and municipal cooperation and communication, knowing that if FEMA were to go away, so would the centralized post disaster point of contact nationwide.

There is no telling what federal officials will ultimately decide to do with FEMA. It is possible they could declare mission accomplished, leaving much of its structure in place and be satisfied tweaking processes around the edges to improve operations and outcomes. It is also possible that the harshest rhetoric comes to pass, and FEMA is abolished, with its responsibilities getting passed on to states and other areas of the federal government.

Insurers know better than most industries that it is best to prepare for all eventual outcomes as well as is possible, and the most successful players might just be the ones willing to think through worst-case scenarios before they come to pass.

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