'Where's that money going to come from': Insurers, government back away from disaster relief

With the federal government looking to play a smaller role in covering the costs of natural disasters, and private insurers declaring some homes built in some high-risk areas are uninsurable, the question of who will pay for storm damage is becoming a more pressing issue.

In the U.S., which continues to be pounded by powerful hurricanes and storms, the government will be spending billions on recovery. In Texas alone, the government has estimated the financial toll of the floods caused by Hurricane Harvey could be between $150 billion and $180 billion.

But with bigger and more intense storms hammering Canada because of climate change, it too faces increasing financial pressures. Provinces that in the past relied on Ottawa to cover those costs may find it more challenging to receive disaster assistance.

'Not going to be forthcoming now'

"That's not going to be forthcoming now to the extent it was because the government is backing out of it. So the question is where's that money going to come from," said Blair Feltmate, who studies the risk of flooding and other extreme weather events as the head of the University of Waterloo's Intact Centre on Climate Adaptation.

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For damage sustained in a natural disaster that's not covered by private insurance, the federal government provides financial assistance to homeowners via the provinces through the Disaster Financial Assistance Arrangements (DFAA) program. 

The budget for the program is $100 million annually, but spending has increased over the years. According to the Insurance Bureau of Canada, federal disaster relief spending rose from an average of $40 million a year in the 1970s to an average of $100 million a year in the 1990s. And In the first six years of this decade, spending rose even more to an average of over $600 million a year.

It's no wonder, then, that in 2015, the government changed the formula for disaster assistance. It reduced the financial responsibility for the federal government, meaning the province would bear more of the costs, and so too would municipalities and homeowners.

In its 2016 report, the Parliamentary Budget Office estimated that, with larger and more intense weather events, the DFAA faces costs of around $902 million annually.

Glenn McGillivray, managing director for the Institute for Catastrophic Loss Reduction, said the government should look into passing off its risk to the private market, just as insurance companies buy reinsurance to protect them from catastrophic loss.

'Pass off disaster assistance'

"Why doesn't the government buy reinsurance, or why don't they just pass off disaster assistance to insurance or reinsurance companies completely and walk away from it totally?"

McGillvray said it's done elsewhere in the world. 

"There's really no reason for the government to be in this business when the private market can pick it up."

Flooding remains the number one cause of damage, with the PBO estimating that of the total expenses for the DFAA,  $673 million will be needed to cover damage from floods.

Part of the problem is that Canadians are often unaware that they live in an area at high risk of flooding. A poll conducted by the University of Waterloo in 2016 found that only six per cent believed they live in such an area. 

Nearly two years ago, Canadian insurance companies began offering overland flood insurance, which covers flooding that comes over the door or windowsill, as opposed to flooding that bubbles up from a drain. Up until then, Canada was the only G8 country not to offer the product. Historically there wasn't a driver for it, but with climate change, and bigger storms, it became an issue, Feltmate said.

Not insured for flooding

Now, it's offered as an add-on to insurance policies. Still the majority of Canadian homeowners aren't insured for flooding, according to the Insurance Bureau of Canada, which estimates only 10 to 15 per cent of Canadians have overland flood insurance.

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Although overland flood insurance is now available to some, Feltmate said that still leaves many Canadians who live in certain high risk markets without coverage.

"What's happening now, is an uninsurable housing market is evolving in Canada fairly rapidly," he said.

"Where there's been repeated basement flooding and risks are now so high, the insurers are simply saying 'Look, we can't offer insurance in those areas or anything that would be a premium that anybody could afford."

Feltmate said cities need to focus on adaptability, and some are putting measures in place to lower their risks. Diversion channels, berms, holding ponds and cisterns are just some of the options available to give water a place to go when big storms hit, he said.

Jason Thistlethwaite, an assistant professor at the University of Waterloo's faculty of environment, said historically we've placed the emphasis on recovery after natural disasters, without thinking about how to take steps to prevent the next disaster from happening.

'It's like Groundhog Day'

"An example of this is, we give money to people to rebuild in high-risk flood areas. It's like [the film] Groundhog Day," he said, because rebuilding in a flood zone is like repeating the same mistakes.

Canada and the U.S, he said, suffer from a legacy of poor land use decisions. Governments, looking for more property taxes, have allowed developments in the flood plains, even after a disaster.

"What you have to do then, is if you have those who have built structures, assets and infrastructure in high-risk places, you have to buy them out."

This is what happened in Calgary after the 2013 floods. The government offered voluntary buyouts, with about a third of homeowners taking the option. In High River, which also suffered devastating flooding in 2013, the government implemented mandatory buyout programs for about 100 homes.

"They realized it's cheaper to buy out these people and force them to move to a safer area than to pay out for the recovery when the next flood happens.

"It's not popular. It's what the evidence says is the right idea, but it's not politically popular."