Morningstar DBRS, a credit rating agency focused on financial institutions and insurance, together with the Property and Casualty Insurance Compensation Corporation (PACICC), a Canadian industry-funded organisation that supports property and casualty policyholders, and the Insurance Bureau of Canada (IBC), the national industry association representing private property and casualty insurers, examine the ongoing policy discussion around introducing a federally supported insurance backstop for earthquake risk in Canada.
The analysis also references the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal insurance regulator responsible for capital adequacy and prudential oversight, alongside international developments such as proposals from the European Insurance and Occupational Pensions Authority and the European Stability Mechanism aimed at strengthening catastrophe risk-sharing frameworks.
Morningstar said that in Europe, proposals published in April 2026 outline a coordinated approach to narrowing the natural catastrophe insurance protection gap through a structured risk-sharing mechanism across jurisdictions, intended to reinforce insurability while maintaining private sector participation. Similar themes are now being reflected in Canada, as highlighted in PACICC’s April 2026 solvency report on property and casualty insurers and in the Insurance Bureau of Canada’s May 2026 report.
According to Morningstar, Canada remains materially exposed to natural catastrophe perils, including flooding, wildfires, severe storms and earthquakes, with seismic risk most concentrated in British Columbia, Québec and Ontario, particularly British Columbia and Québec, as identified in Natural Resources Canada hazard mapping. A major seismic event in these regions could result in significant insured losses and lead to credit pressure due to rapid depletion of insurer regulatory capital, a key factor in assessments conducted by Morningstar DBRS when evaluating insurer financial strength.
PACICC has previously cautioned that a severe earthquake could exceed the capacity of the insurance sector, potentially resulting in multiple insurer insolvencies and placing strain on its compensation framework in the absence of a government-supported mechanism.
Morningstar stated that in earlier research published in 2021, PACICC estimated that a single catastrophic earthquake generating approximately $35 billion in insured losses could overwhelm the property and casualty insurance market and contribute to insurer failures.
In response, the Canadian government signalled in its November 2025 federal budget that it would consult insurers and stakeholders on options to improve sector resilience to extreme earthquake events. Following this, PACICC and the Insurance Bureau of Canada have jointly proposed a structured backstop model inspired by the US Terrorism Risk Insurance Act (TRIA), under which the US government shares insured losses with private insurers once defined thresholds are reached.
The Insurance Bureau of Canada noted in its May report that this approach would adapt TRIA’s structural principles to the Canadian earthquake context and provide a predictable, fiscally disciplined cost-sharing arrangement that would be triggered only in extreme circumstances.
The Insurance Bureau of Canada estimates that a severe earthquake in Canada could generate insured losses of approximately 52.6 billion dollars, significantly exceeding previous national disaster costs such as the 2016 Fort McMurray wildfire.
PACICC and the Insurance Bureau of Canada both indicate that, without a government-supported mechanism, recovery from such an event could place considerable pressure on insurers and policyholders. A federal backstop would be expected to improve confidence in claims payment, accelerate post-disaster recovery, reduce the likelihood of insurer insolvencies and support continuity across the broader financial system.
The US TRIA framework, frequently referenced by PACICC, operates through a layered risk-sharing structure in which insurer losses must exceed predefined thresholds before federal reimbursement applies. Insurers retain an initial layer of losses through deductibles linked to prior premiums, after which government support is triggered subject to overall caps on exposure.
The framework applies only to certified terrorism events and includes provisions allowing recovery of federal payouts through surcharges on future insurance premiums. Although intended as a temporary measure, TRIA has been repeatedly reauthorised and remains in force through 2027, contributing to market stability in the US insurance sector.
Morningstar noted that in Canada, no equivalent federal earthquake insurance backstop currently exists. Disaster response instead relies on private insurance markets alongside the Disaster Financial Assistance Arrangements (DFAA), which provide funding support to provincial and territorial governments following major catastrophes.
The DFAA does not provide direct compensation to individuals and is not an insurance programme, but instead supports broader recovery efforts at the provincial level. OSFI requires federally regulated insurers to assess earthquake exposure and maintain preparedness for extreme events, including stress testing based on a one-in-500-year nationwide earthquake scenario, reflecting the recognised potential for low-frequency but high-severity losses.
Morningstar stated that insurers manage earthquake risk through catastrophe modelling, geographic diversification, reinsurance arrangements and limited issuance of catastrophe bonds, although uptake of CAT bonds in Canada remains modest. Additional tools include policy deductibles and underwriting restrictions for higher-risk properties.
These risk management approaches operate alongside OSFI’s capital framework, under which federally regulated insurers must maintain a minimum capital test (MCT) ratio of at least 100%, with a supervisory target of 150% to reinforce resilience. Industry data indicate that insurers have consistently maintained capital ratios above this supervisory level through to the end of 2025, as reported in industry-wide disclosures reviewed by Morningstar.
OSFI’s regulatory framework includes explicit requirements for earthquake risk within its Minimum Capital Test guideline and associated standards. The Earthquake Exposure Sound Practices guideline sets out expectations for risk measurement, reserving practices and exposure management, forming part of a broader prudential regime designed to ensure insurers remain able to meet policyholder obligations under extreme stress scenarios.
Morningstar noted that although earthquake insurance is available across Canada, uptake remains relatively limited. The Insurance Bureau of Canada estimates that in Québec only around 4 to 7% of households carry earthquake coverage, while in British Columbia penetration is higher at approximately 50 to 65%. Earthquake insurance is generally offered as an optional endorsement to standard property policies and typically covers structural damage, contents and additional living expenses.
The Insurance Bureau of Canada attributes low uptake to factors including misunderstandings about coverage inclusion, cost considerations and expectations of government support following a disaster. As a result, a significant proportion of residential exposure remains uninsured, meaning total economic losses in a major earthquake would substantially exceed insured losses, with wider spillover impacts across other insurance lines.
From a credit perspective, Morningstar DBRS considers that the absence of a federal earthquake insurance backstop does not currently present immediate financial stability concerns, given the strong capitalisation of Canadian insurers and the robustness of OSFI’s prudential framework. Reinsurance provides an additional layer of risk transfer that supports sector resilience under normal catastrophe conditions.
However, a severe earthquake could occur without warning and place substantial pressure on liquidity and capital across the industry. In such circumstances, negative rating actions could arise if claims costs were to materially weaken insurers’ ability to meet obligations.
A government-supported backstop, as proposed by PACICC and the Insurance Bureau of Canada, would reduce tail-risk volatility, strengthen financial resilience and support more stable credit outcomes while preserving the effective functioning of Canada’s insurance market following extreme events.
