FEMA Phase-Out? Catastrophic Extremes Limit Decentralization of U.S. Flood Insurance

Adam Nayak , Mengjie Zhang , Pierre Gentine , Upmanu Lall 

The U.S. National Flood Insurance Program (NFIP) faces growing solvency and affordability pressures amid proposals to decentralize FEMA and shift disaster management to states. Many catastrophic floods span state boundaries, exposing multiple decentralized insurance pools simultaneously. Using a path-independent simulation framework that integrates risk-based premiums, hydrometeorologically-clustered flood losses, and current reinsurance contracts, we evaluate the stability of national and state-level pooling. National pooling markedly reduces systemic insolvency through cross-regional diversification, while many state pools exhibit structural fragility. State-level deficits are dominated by hyperclusters—coherent spatiotemporal losses with common atmospheric drivers—indicating that correlated loss governs failure. Since states must balance budgets and cannot borrow to cover large losses, pool liquidity constrains decentralized systems. Existing reinsurance offers limited buffering due to its misalignment with the clustered, spatiotemporal nature of hydroclimatic risk. A resilient and affordable NFIP will require hybrid financial design aligning risk-based premiums and reinsurance to balance chronic and catastrophic risk.