Does/Why would the insurance assume the subsidy is for people rebuilding in the same place? Money is fungible and so it doesn't need to be in the same place, at all. What I'd expect is that insurance for those hard-to-insure places would skyrocket and thus a new balance would be achieved.
Now that the physics of insolvency are starting to overcome political pressure of keeping Daddy Bailout-Bucks around, and people are whispering "managed retreat" without actually being able to say it outloud around polite company, we are starting to see programs like "we'll make you whole in case of a flood, but you aren't allowed to rebuild on the lot if you take our payout". But those buyouts are often met with yells of "government is taking my property!" because again, no one wants to face the stark reality of managed retreat.
I know politics is famous for elites abusing it for their own benefit, but sometimes the population is truly not ready for something that the elites understand is utterly necessary and that's not a bad thing. The risks and benefits of an elite class, I guess.
I have observed new owners do things like build open sided barns (which legally aren’t a building). Other owners live in camper trailers on the property. One just finished building an (illegal, obviously didn’t get a building permit) property up on stilts (which will get washed away if any serious flooding happens).
On the plus side, this is all not insurance and not mortgageable, and also won’t survive being sold to someone else, as no title insurance would cover these structures and a mortgage lender would require they be torn down first.