FEMA is arguably the federal government’s most compassionate agency, helping households when they need it most. It became a 2024 campaign issue when it was reported that it refused help to households displaying Trump political signs. Then, in the wake of the recent massive California wildfires, California’s Governor Newsom recoiled at President Trump’s suggestion that aide may come with strings attached. President Trump has responded by suggesting he may once again attempt to reform FEMA or even abolish it.
FEMA was created by an executive order issued by President Carter in 1979 with a “dual mission of emergency management and civil defense.” It has gone through numerous reforms and restructuring efforts since, growing to over 20,000 employees and an elastic budget of $30 billion, plus supplemental appropriations as needed. In 2001, Congress put this now huge agency into the new Department of Homeland Security, a behemoth with over 260,000 employees – third behind DOD and the VA – with a budget of $108 billion.
FEMA says its current role is to provide “experience, perspective, and resources in emergency management….. to help people and support the Nation’s disaster and emergency management needs.” By 1979 there were multiple agencies of the federal government that responded in one way or another to “national disasters,” so FEMA was created to improve management efficiency. But FEMA’s 52-page mission statement, titled “We Are FEMA: Helping People Before, During and After Disasters” doesn’t define what a “disaster is” (whatever POTUS says) or exactly what people, how and how much. It also does not address the role of state, local and other governments, nor the role and responsibility of households, primary casualty insurers or reinsurers.
How Insurance works
The place to start is with private insurance, which predates our governments. Following the example of Lloyds of London in the 17th Century, Ben Franklin started the first property insurer in the US in 1752. Private citizens are generally responsible for their property, and if it is mortgaged, required to have property and casualty insurance. The first responsibility of property/casualty insurers is to maintain sufficient capital to pay claims. Since 1899 AM Best has been rating the claim paying ability of property insurers in the US. The second responsibility is to minimize the variance (maximize the predictability) of claim losses, which they do by both maintaining a “large number” of diverse customers (i.e., customers whose claims are unrelated). For risks that are highly correlated, e.g., earthquakes, smaller insurers may re-insure with bigger and potentially multi-product-line firms to distribute the risk in the most efficient manner. But first and foremost, they attempt to mitigate the risk on a case-by-case basis, as most property claims result from personal negligence, and monitor the behavior of the insured to safeguard against increasingly risky behavior (moral hazard).
Automobile insurance is a separate policy, but most insurers offer both auto and home insurance. As (almost all) claims involve two or more vehicles, the parties “at fault” for accidents and their insurers are responsible, but the same “at fault” principle applies to property insurance.
The Public Role: Disasters
The most obvious public role is putting out fires. The Water Department provides the infrastructure. In Europe, between 70% and 90% of firefighters are volunteers. In the US, they are public employees, but due to the success of fire prevention methods, in many cities (e.g., San Diego) they have been used as paramedics as less than 5% of their activity involves fires. Whereas the Water Department is often an independent corporatized entity, firefighters are paid out of the city’s general fund.
The second water related activity relates to flooding, requiring the appropriate drainage. While this is obviously a much larger problem in Hurricane prone Florida than, e.g., California, the latter is also prone to flooding if the infrastructure isn’t adequately maintained in the dry season, often leading to massive mud slides.
Natural phenomena such as weather (e.g., hurricanes, tornadoes), earthquakes and even volcanoes are “predictable over time” and therefore privately insurable, assuming the proper risk mitigation with actuarial pricing and public response when they happen. Some risk mitigation, e.g., construction requirements for earthquakes and hurricanes, aren’t necessarily public, but others are. A tower collapsing during an earthquake, for example, will destroy utility infrastructure that can put an entire city at risk. The San Andreas Fault in California, for example, has a 75% chance of rupturing, with a 7% chance of over 8 and 70% chance of over 7 on the Richter scale. Los Angeles developers have been constructing towers over 100 feet tall, supposedly engineered to withstand the shock.
Natural phenomena will always have the potential to cause significant damage, but if the private insurance market is functioning correctly and each level of government is efficiently and effectively implementing the appropriate risk mitigation policies, providing and maintaining the appropriate infrastructure, and responding appropriately, “disaster” should be avoided.
Public “Insurance:” an Oxymoron
FEMA’s mission statement resembles that of the original Interstate Commerce Commission, (ICC, now STB), that regulates interstate transportation. There is much less to regulate or coordinate in response to natural phenomena extending across state borders, but the STB only has 122 employees and a $44 million budget. FEMA is clearly in the retail business of paying damage claims of individuals and governmental bodies, without collecting premiums.
Public insurance is always a bad idea. Take flood insurance, for example. Congress established the National Flood insurance Program in 1968, which resulted in greatly increased construction in flood plains. Now part of FEMA, it describes its mission in the wake of Hurricane Katrina as “insurance to help reduce the socio-economic impact of floods.” Katrina was a natural predictable category 3 hurricane. It was a disaster due to massive mismanagement of the necessary infrastructure at the federal (and mostly) state and local level.
Public entities have large numbers, but taxes (premiums) are mandatory, they are almost never calculated on an actuarial basis, the government is limited in its retail ability to mitigate risk, and public insurers are inherently plagued with moral hazard. But public insurance is often justified as necessary to “fill the void” left by private insurers. There are typically two reasons for the void. First, public attempts to provide “prudential” regulation most often devolve into actuarially unsound populist rate and coverage demands. Second, the public sector fails at both its risk mitigation and response functions. Either or both in combination leads to technical insolvency for private insurers.
The California Wildfires: A Public Policy Disaster
California’s 2024 drought was unusually severe but widely predicted by the state environmentalist lobby (and California’s politicians). The Santa Anna winds were strong, but not unusual. How prepared was public policy and execution? Public and private risk mitigation was not just abandoned but abolished in the affected areas. The water supply infrastructure was not only under-maintained, but four dams were destroyed. Both of these policies were pressed for by the same environmentalists who were predicting the severe drought. Politicians also lit the match. California is home to over a quarter of the nation’s homeless, many immigrants attracted to the sanctuary of Los Angeles. In spite of a $25 billion budget to address the problem, they live outdoors, and light fires to cook and stay warm on winter nights.
California’s climate is a magnet attracting people from around the world, in spite of earthquakes and wildfires. It is politicians like California Governor Newsom who induce California residents to emigrate. He and other California politicians denied any policy culpability, made opposition to the Trump administration’s federal authority their immediate priority — authorizing $50 million for legal challenges — then demanded a FEMA bailout with no strings attached.
The Biden Administration would have provided it. The other 49 states would vote to “throw the bums out” and eliminate FEMA rather than bail California out.
Kevin Villani