Canada seismic backstop could strengthen insurance sector resilience

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Canada seismic insurance backstop

Highlights

Morningstar DBRS warns that Canada lacks a government-supported insurance backstop despite significant seismic risk that could overwhelm insurers.
A catastrophic earthquake could severely strain even the strongest Canadian property and casualty insurers' capital, raising the risk of multiple insolvencies.
Morningstar DBRS states a government backstop would bolster sector financial resilience and help prevent credit downgrades following major earthquake losses.

Morningstar DBRS assessment of seismic exposure

As reported by Morningstar DBRS, Canada remains exposed to significant seismic risk and a major earthquake could overwhelm insurers, raising the possibility of multiple insolvencies.

The commentary says the country does not have a government-supported insurance backstop in place, despite that exposure. Instead, it relies on the insurance industry to provide coverage and on the Disaster Financial Assistance Arrangements program in the event of major losses.

Victor Adesanya, Senior Vice President, Global Insurance & Pension Ratings, says the insurance industry is prepared to support policyholders under a range of stress conditions. He adds that a catastrophic earthquake could still significantly strain the capital resources of even the strongest Canadian property and casualty insurers.

Credit and stability implications for insurers

A government-supported insurance backstop would help insurers absorb extremely large losses and reduce the risk of multiple company failures, according to the commentary. Morningstar DBRS says such a framework would improve financial resilience across the sector.

The agency adds that Canadian insurers are currently well capitalized, but a catastrophe on that scale would likely trigger credit rating actions if capital buffers were materially depleted. That makes earthquake risk not only an insurance coverage issue, but also a broader financial stability concern for Canada's insurance market.

Our earlier report on Greg Lindberg’s insurance fraud case detailed how a years-long scheme allegedly drained insurer funds and pushed multiple companies into rehabilitation or liquidation, leaving policyholders facing over $1 billion in unpaid losses. We noted that the case highlighted how quickly failures in oversight and governance can translate into severe protection gaps for policyholders and broader stress across the insurance system.

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