Disaster Financial Assistance Arrangements

Study guide: Exam 6C

The Disaster Financial Assistance Arrangements (DFAA) is the federal cost-sharing program under which Ottawa reimburses a province for a share of its response and recovery costs after a large natural disaster. It is not insurance: there is no premium, no contract, and no defined benefit — a province applies after the event, and the federal share rises with the per-capita size of the disaster.

$\text{Federal share increases in steps with provincial cost per capita}$

How it works. The province designs and delivers the assistance; the federal government reimburses eligible costs on a sliding scale, with the federal share rising toward $90\%$ for the largest events. Eligible costs include emergency response, restoration of public infrastructure, and assistance to individuals and small businesses for uninsurable losses.
The insurability boundary is the key rule: DFAA does not reimburse losses for which insurance was reasonably and readily available. As overland flood insurance became available in Canada, this boundary moved — losses that DFAA once covered are now expected to be insured, which is a deliberate policy shift of cost from taxpayers to policyholders.
The Moral Hazard criticism. Reliable post-disaster assistance reduces the incentive to buy insurance, to mitigate, or to avoid building in hazardous locations — and because assistance is decided after the event, it cannot be conditioned on precautions taken before it. Repeated rebuilding of the same flood-prone properties is the standard illustration.
Fiscal exposure. DFAA payments have grown by an order of magnitude over recent decades, driven by climate-related events and by exposure growth in hazardous areas. The federal liability is effectively an uncapped, unfunded catastrophe exposure — the actuarial characterisation candidates should be able to give.
Reform direction: tie assistance to mitigation and relocation, tighten the insurability test, and replace ad hoc payments with a structured flood insurance program in which the subsidy is explicit and priced.

Insurance or Assistance? A province suffers a flood causing $\$1.2$ billion of damage: $\$400$ million to private homes in an area where overland flood coverage is available and affordable, $\$300$ million to homes in a high-risk zone where no insurer will write, $\$350$ million to public infrastructure, and $\$150$ million of emergency response cost.

How does the cost divide, and what is the policy problem?

Answer

$\$400$ million — insured homes. DFAA does not apply; insurance was reasonably available. Uninsured homeowners in this group bear their own loss, which is the intended incentive.

$\$300$ million — uninsurable zone. DFAA-eligible, because coverage was not available. Provinces deliver assistance and the federal government reimburses its share.

$\$350$ million infrastructure and $\$150$ million response. DFAA-eligible; this is the program's core purpose and is not controversial.

So roughly $\$800$ million falls on the public purse and $\$400$ million on the insurance market.

The policy problem is the middle category. The $\$300$ million goes to properties in a zone so hazardous that no insurer will write it — the properties that should not be there. Reimbursing them after each event funds their continued occupation of the floodplain, and the payment arrives regardless of whether the owner elevated the building, installed a backflow valve, or did nothing.

The structural fix is to move that category into a priced program: a public high-risk flood pool with a premium the homeowner sees, an explicit subsidy voted in a budget rather than paid invisibly after each event, and eligibility conditioned on mitigation or on a buy-out for the worst locations. That converts an unpriced, unfunded and uncapped exposure into a priced one — which is the whole actuarial argument.