Insurers brace for higher CAT burdens as FEMA steps back

For decades, the Federal Emergency Management Agency (FEMA) has been the quiet partner in America's insurance market.

While private carriers underwrote policies and handled claims, FEMA backed the system with disaster grants, flood insurance programs, and billions in post-catastrophe recovery funding. That support allowed insurers to keep writing in floodplains, hurricane zones, and wildfire regions without absorbing the full brunt of losses.

In 2025, however, that partnership is unraveling. The Trump administration has slashed FEMA's budget by $1 billion and pledged to phase the agency out entirely. For insurers, this means higher catastrophe exposures at a time when losses are surging due to extreme weather.

And that's just for starters.

"FEMA is operating on a tighter budget, right now," said Dan Garzella, CEO of Avalon Risk Management in Scottsdale, Ariz. "Cuts hit hazard mitigation grants, the BRIC program, and the admin teams that move disaster relief."

That means fewer levees, drainage, and resilience projects before storms, Garzella noted. "With less NFIP capacity, more high-risk properties shift to the private market, where coverage is harder to get and often more expensive, driving higher premiums, stricter underwriting, and more uninsured properties," he added.

A shifting safety net

For insurance companies handling rising disaster events, the timing could hardly be worse.

Global insured catastrophe losses reached nearly $53 billion in the first quarter of 2025, the second-highest on record and significantly above the $17 billion average lost in yearly first quarters since 2000, according to Aon. In the U.S., hurricanes, flooding, and wildfires accounted for a disproportionate share, which saw FEMA traditionally absorb some of that financial shock through its mitigation grants and disaster recovery funds. Now, without that financial backstop, private insurers and their reinsurers are recalibrating their risk models in real-time.

"FEMA's programs are essential for effective mitigation," said Robert Gordon, senior vice president of policy at the American Property Casualty Insurance Association (APCIA). "The states or private industry cannot easily replicate them."

Premiums climb, capacity shrinks

Facing a disaster of their own, U.S. insurers are already signaling how they will respond.  

"I've managed over $1 billion in Massachusetts property insurance and seen how FEMA cuts directly impact private insurance costs," said Mikhail Kovalev, of Kovalev Insurance Agency Inc. in Newton, Mass. "When FEMA reduces disaster relief funding, insurance carriers immediately recalculate their risk exposure and raise premiums 15-25% in flood-prone areas. We're already seeing this in coastal Massachusetts communities."

Several U.S. carriers, like Allstate and State Farm, have slowed or stopped writing new homeowners' policies in high-risk areas. Others are narrowing coverage definitions or adding exclusions for wind and water damage. Commercial insurers, particularly in real estate and agriculture, are warning that FEMA's federal caps, often set at outdated asset levels, leave carriers exposed to multimillion-dollar risks they can't easily spread.

"Without FEMA's share, private insurers will either raise rates dramatically or exit certain lines," said Casey Love, founder of NY Farm Insurance Company, an independent insurance agency in Honeoye Falls, New York. "That's going to squeeze farmers, businesses, and eventually consumers."

Innovation and lobbying
To adapt, carriers are relying on two key strategies: better data and stronger advocacy.

On the data front, insurers are investing heavily in catastrophe modeling, satellite imagery, and AI-driven climate analytics to refine their underwriting and reduce unexpected losses. Some providers are experimenting with parametric insurance products, which automatically pay out when weather thresholds are met, thereby sidestepping disputes over claims and exclusions.

At the same time, industry groups are lobbying aggressively for alternatives to FEMA's traditional role. Proposals include:

• State-level catastrophe funds modeled on Florida's Hurricane Catastrophe Fund.
• Federal tax incentives that would allow carriers to build pre-tax catastrophe reserves.
• Public-private partnerships that spread disaster risk between insurers, states, and capital markets.

While FEMA's fate is being decided in Washington, D.C., state and local governments are lobbying for increased disaster relief funds from the Federal Government. 
"We're seeing political resistance from high-risk states, like Florida, California, and Texas, where officials are pressuring Congress to shore up FEMA funding," said Christopher Migliaccio, founder at Warren and Migliaccio, LLC, a Richardson, Texas law firm.

Some state legislatures are also exploring the establishment of localized emergency relief funds or public-private partnerships to bridge the gap. "However, success is uncertain," Migliaccio said.  "With a divided Congress and growing federal debt concerns, any meaningful restoration of FEMA funding faces an uphill battle. For consumers, that means potential gaps between what FEMA used to provide and what's realistically available today."

Long-term implications

The long-term outlook is clear: fewer federal dollars mean higher private risk. For insurers, that reality requires a fundamental shift in strategy. FEMA is no longer a reliable backstop; it's a shrinking resource.

"The industry is moving from assuming FEMA is there to assuming FEMA is not," said Kovalev. "That changes everything about pricing, capital and strategy."
For consumers, the effects will be felt in higher premiums, reduced coverage, and, in some cases, a lack of availability altogether. For Wall Street, the risk is that insurers' balance sheets grow more volatile, pressuring valuations and dividends.

For the insurance industry itself, the retreat of FEMA represents both a challenge and an opportunity.
Companies that can innovate through data, new products, or creative partnerships may capture market share even as others retreat. But one thing is sure: the era of FEMA as the quiet guarantor of America's disaster resilience is coming to an end, and insurers must prepare to stand on their own two feet.