What's Happening?
The expiration of the National Flood Insurance Program (NFIP) on September 30 and pending congressional legislation are set to transform the Federal Emergency Management Agency’s (FEMA) Public Assistance
(PA) program. The Fixing Emergency Management for Americans Act of 2025, which advanced out of a House committee in early September, aims to reduce federal assistance for smaller incidents, allowing FEMA to focus on more severe disasters. This shift could result in state and local governments being responsible for $41 billion in recovery costs over a 16-year period. The legislation proposes increasing FEMA’s per capita indicator (PCI) from $1.89 to $7.56, which would have disqualified 71% of past disaster declarations from federal aid, according to The Urban Institute. Additionally, FEMA’s cost-sharing floor would return to 75% of recovery expenses, down from the 90% or 100% shares sometimes granted in major disasters.
Why It's Important?
The proposed legislative changes could significantly impact state and local budgets, especially as they face more frequent and severe weather events. With FEMA stepping back from smaller and mid-sized disaster recovery, parametric insurance is being considered as a viable alternative to bridge funding gaps. Unlike traditional insurance, parametric policies pay out based on pre-defined triggers, offering faster payouts and more flexible funding. This model has been used successfully in Puerto Rico and could help mitigate financial burdens on federal, state, and local authorities. As the frequency of severe weather events increases, the need for innovative insurance solutions becomes more pressing, potentially reshaping disaster recovery strategies across the United States.
What's Next?
If the proposed legislation passes, state and local governments will need to explore alternative funding mechanisms like parametric insurance to manage recovery costs. Agents and brokers are encouraged to raise awareness about the benefits of parametric insurance and engage with insurers early to build relationships and present credible options. As demand for parametric insurance grows, it could become a key component in disaster recovery strategies, helping communities rebuild more resiliently. The industry must prepare to step forward as FEMA steps back, ensuring that funding gaps are addressed effectively.
Beyond the Headlines
The shift towards parametric insurance could lead to broader changes in how disaster recovery is approached in the U.S. It may encourage more proactive risk management and investment in infrastructure resilience. Additionally, the increased reliance on parametric insurance could drive innovation in insurance products and services, potentially leading to more tailored solutions for different types of disasters. This evolution in disaster recovery funding could also influence public policy, prompting discussions on the role of federal assistance and the responsibilities of state and local governments in managing disaster impacts.
