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Friday, 16 September 2016

Average Annual Cost of Federal Disaster Assistance due to Weather Events

(Rod Story, Financial Advisor/Analyst, Financial Advisor-Analyst at the Parliamentary Budget Office)

The Disaster Financial Assistance Arrangements (DFAA) program, created in 1970, reimburses the provinces and individuals (via the province) for expenses and damages resulting from disasters, natural or manmade. The program shares costs with the provinces on an increasing proportion up to the level reached at $15 multiplied by a province’s population. Above this amount, the DFAA program pays 90 per cent of the costs.

For this report, PBO obtained historical DFAA payment data directly from Public Safety Canada (PSC) rather than using PSC’s public disaster database. The public database is missing some disaster payments and some other listed payments are incorrect due to payment changes not being updated in the database. Therefore, the DFAA numbers used in this report are not the same as those found in the disaster database.

As shown in Figure 1, over the past five years DFAA’s liabilities have increased substantially because of a number of weather events that have caused heavy damage. As a result, DFAA’s annual transfers to the provinces have been much higher than its nominal appropriation of $100 million (Figure 2).

It is important to note that when a disaster occurs, DFAA in general books the liability in the year of the disaster recognizing its financial obligation. Yet, the actual transfers to the provinces for disasters can take place upwards of eight years after the event. This explains the large estimated transfers shown in Figure 2 going out to fiscal year 2017-2018.

Figure 1: DFAA liabilities
Source: Public Safety

Figure 2: DFAA annual transfers
Source: Public Safety
Note: *Public Safety estimates

In the fiscal year 2012-2013, DFAA transferred $280 million to the provinces; by 2013-2014, this had increased to $1.02 billion and $305 million in 2014-2015. DFAA estimates its transfers resulting from previous events will be higher in subsequent years ($848 million in 2015-2016, $590 million in 2016-2017, and $580 million in 2017-2018).

This report estimates the expected additional average annual cost to the DFAA program resulting from anticipated weather events (floods, hurricanes, convective storms, and winter storms) over the next five years.

PBO used data from numerous sources, including the Insurance Bureau of Canada (IBC), DFAA, Swiss Re, and Risk Management Solutions Inc. (RMS), to determine its estimate. For losses due to hurricanes, convective storms and winter storms, PBO used estimates provided by RMS. For losses due to flooding, PBO used estimates from IBC. RMS had Canadian specific models for hurricanes, convective storms and winter storms. The IBC flood estimate used a Canadian specific flood model based on Canadian flood extent and flood risk.

PBO estimates that over the next five years, on average, DFAA can expect annual costs of $229 million per year because of hurricanes, convective storms and winter storms. Using the IBC estimate for flood losses, PBO estimates that on average, DFAA can expect annual costs of $673 million for floods. Therefore, the total annual costs to the DFAA for weather events are estimated to be $902 million.

The results are listed in Table 1 and Figure 3 below. It is important to stress that these values are averages; in any given year, the losses can be much higher or much lower.

Table 1: Estimated DFAA annual weather event costs
Sources: PBO; RMS; IBC; DFAA and Swiss Re

Therefore, based on the estimated annual DFAA payments for future weather event shown in Table 1, the DFAA will continue to require more than its nominal $100 million appropriation.

Table 1 also shows that the DFAA costs resulting from floods are the largest of the weather events at $673 million and represent 75 per cent of DFAA’s weather expenditures. This high value is partly due to the lack of flood insurance in Canada, as well as regulatory challenges in the Prairie Provinces. Over the past 10 years (2005-2014), Manitoba, Saskatchewan, and Alberta have accounted for 82 per cent of all DFAA weather event costs, almost all of which are a result of flooding.

The Prairie Provinces face regulatory challenges of reduced enforcement and compliance when floodplain management is the responsibility of municipalities.

Figure 3: Estimated DFAA annual weather event costs
Sources: PBO; RMS; IBC; DFAA and Swiss Re

Furthermore, Saskatchewan has unlicensed drainage of wetlands that increases peak flows during floods and Alberta appears to have inaccurate flood maps. Furthermore, in creating flood maps, Alberta does not take into account rising groundwater and debris floods on steep mountain creeks.

One last consideration is interprovincial co-ordination of flood management. This currently does not exist in Canada even though it has been shown to be effective at reducing damages in other countries. This is particularly important in the Prairie Provinces where rivers such as the Saskatchewan and its tributaries span all three provinces.

To read the full report, click here.

This blog post has been written by Rod Story, who is a Financial Advisor-Analyst on the Expenditure and Revenue Analysis team at the Parliamentary Budget Office (PBO). Rod has a PhD in Management (Finance) and an MBA from Carleton University as well as a BASc from the University of Waterloo.

Rod Story is a panelist at CatIQ’s Canadian Catastrophe Conference (C4 2017) on the Disaster Assistance session during the conference.

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