Catastrophic risk and the impact of FEMA insurance regulations on communities

As natural disasters grow in frequency and severity, the financial burden on communities continues to rise. In the first quarter of 2025 alone, insured catastrophe losses globally reached $50 billion—marking the second-highest Q1 total on record.

In the U.S., the Palisades and Eaton wildfires in California caused over $53 billion in damages, with more than $30 billion covered by insurance. These figures underscore the urgent need for local leaders to understand and engage with the evolving insurance landscape.

What community leaders need to know

The catastrophe (CAT) ratio for U.S. property and casualty insurers has climbed to an estimated 10%–12%, reflecting the growing share of claims tied to extreme weather events. Despite these pressures, the insurance industry remains financially strong, with 2024 earnings nearly doubling to $171 billion. This growth is largely due to premium increases and more disciplined underwriting practices. In 2025, premium growth is expected to continue at 8%–9%, with insurers maintaining a combined ratio near 100%, indicating a break-even point on underwriting.

For community leaders, these trends have direct implications for them. Wildfire activity alone has affected over 1 million acres across the U.S. this year, and replacement costs for insured properties have risen by 5.5% nationwide—up to 10% in some states. These increases are driving up insurance premiums and making coverage harder to obtain, especially in high-risk areas.

State-backed FAIR plans, which provide insurance for properties that private insurers deem too risky, now cover nearly 3 million properties and over $1 trillion in exposure. However, these plans often offer limited coverage and are not a long-term solution for community resilience.

While some property owners with strong risk profiles are seeing rate reductions of 5%–30%, many others—particularly those in flood zones, wildfire-prone areas, or with aging infrastructure—are facing rising costs and reduced access to coverage.

What this means for your community

As a local leader, you play a critical role in preparing your community for the financial realities of disaster recovery. This includes:

• Ensuring public assets are adequately insured and meet FEMA’s “obtain and maintain” requirements for those communities who have received federal funding in the past.
• Educating residents and businesses about the importance of insurance and the risks of underinsurance.
• Advocating for risk mitigation investments, such as fire-resistant infrastructure, flood control systems, and updated building codes.
• Partnering with experts to explore innovative risk financing tools, including parametric insurance and other financial risk transfer strategies.

By staying informed and proactive, you can help your community not only recover from disasters but emerge stronger and more resilient.

The critical role of insurance in disaster recovery

While federal assistance plays a vital role in disaster response, it is not designed to be the primary source of recovery funding for assets that can be insured. That responsibility lies with the asset owner and the support of the insurance market. FEMA’s mission is to supplement—not replace—financial assistance from other sources. Federal aid is intended to fill gaps, not serve as the foundation of recovery.

This distinction is especially important for state and local governments. Effective disaster recovery requires a coordinated approach involving individuals, businesses, and public agencies, with insurance serving as the financial backbone of resilience.

Key federal disaster regulations every community should understand

President Jimmy Carter created the Federal Emergency Management Agency (FEMA) in 1979, but it was the Robert T. Stafford Disaster Relief and Emergency Assistance Act that established the system by which a presidential declaration of emergency triggers financial and physical aid from FEMA.

The Stafford Act: Authorizes the president to provide disaster assistance

The Stafford Act, which was signed into law on November 23, 1988, makes FEMA responsible for coordinating government-wide relief efforts. It is designed to bring order to chaos—helping state and local governments carry out their responsibilities to aid citizens via an organized and systemic approach to federal disaster assistance.

In addition to establishing federal assistance programs for disaster-related losses, the Stafford Act was created to encourage states and localities to develop comprehensive disaster preparedness plans, invest in insurance coverage, and boost intergovernmental coordination—so that they’d be ready when the storms hit.

Businesses and communities are expected to have insurance coverage that will fund property damaged by a catastrophic disaster. The Stafford Act makes this insurance coverage requirement explicit—and constitutes the statutory authority for most federal disaster response activities, especially those that pertain to FEMA and FEMA programs. In other words, if you hope to receive federal disaster relief funds for your state or local government, you need to make sure your insurance coverage meets the requirements, or else FEMA will deny your request.

2 CFR Part 200 provides administrative regulation for grant management

When federal disaster funds are awarded under the Stafford Act, recipients (states, local governments, nonprofits) must comply with 2 CFR Part 200 for how those funds are managed. 2 CFR Part 200, also known as the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, ensures that federal disaster assistance—such as funds provided under the Stafford Act—is used efficiently, transparently, and in compliance with federal standards. The regulation outlines rules for procurement, financial management, internal controls, and audit requirements, helping to prevent fraud, waste, and abuse. By standardizing these requirements across all federal agencies, 2 CFR 200 promotes accountability and consistency, which is especially vital when billions of dollars are distributed rapidly in response to emergencies. Its role is foundational in ensuring that recovery efforts are legally and fiscally sound.

Duplication of Benefits: Section 312 of the Stafford Act

FEMA cannot provide aid for disaster-related losses that duplicate benefits available to an applicant from another source, including insurance. This requirement impacts all FEMA-eligible categories of work. To clear the duplication of benefits hurdle as a funding applicant, you will need to provide FEMA with information about any actual or anticipated insurance settlement or recovery you are entitled to for the property at stake. FEMA will then reduce your assistance by the amount of the actual or anticipated insurance proceeds. In the immediate aftermath of a disaster, FEMA will adjust the project amount based upon what your insurance should pay.

Once a settlement with insurance is reached, FEMA will review the settlement for reasonableness, which is not readily defined in the regulations. Assuming the settlement is “reasonable,” FEMA will adjust the project amount based upon the actual amount received by your insurance company. While FEMA will reduce funding based upon anticipated or actual insurance proceeds, the good news is that FEMA will fund a retained risk, such as a deductible or self-insured retention, but will only do that once for a similar loss.

There is one basic exception which relates to facilities located in a Special Flood Hazard Area. FEMA will reduce assistance by the lessor of 1) the value of the property at the time of the disaster, or 2) the maximum amount of insurance proceeds that a Standard Flood Insurance Policy would provide for a building and its contents.

Obtain and Maintain: Section 311 of the Stafford Act

Also spelled out in the Stafford Act are the Obtain and Maintain provisions. These provisions are based upon the peril (flood or non-flood) that causes the loss, often referred to by FEMA as Type. FEMA further defines how much insurance a sub-recipient will need to meet the Obtain and Maintain insurance requirements. For those communities that have received federal funding in prior disasters, it is critical to evaluate your insurance coverage to make certain that it complies with the Obtain and Maintain insurance amounts imposed by FEMA.

Practical implications for communities

Proactive risk assessments and strategic planning are essential. Communities should evaluate their unique risk profiles and implement tailored strategies to manage those risks. This includes:

• Transferring risk through insurance.
• Retaining risk where appropriate.
• Segregating assets to limit exposure.
• Avoiding high-risk projects when feasible.

Comprehensive strategic disaster recovery services

At ICF, our risk management and insurance professionals help clients navigate the complexities of federal regulations and maximize disaster recovery funding. We provide strategic guidance to empower communities to recover stronger and build resilience for the future.