Morningstar DBRS, a credit rating agency focused on financial institutions and insurance, joins the Property and Casualty Insurance Compensation Corporation (PACICC), a Canadian industry-funded organization that supports property and casualty policyholders, and the Insurance Bureau of Canada (IBC), the national industry association representing private property and casualty insurance companies, to examine the ongoing policy discussions surrounding the introduction of federally supported earthquake risk insurance support in Canada.
The analysis also draws on international developments such as proposals from the Office of the Superintendent of Financial Institutions (OSFI), the Canadian federal insurance regulator responsible for capital adequacy and prudential regulation, and the European Insurance and Occupational Pensions Authority and the European Stability Mechanism to strengthen the catastrophe risk-sharing framework.
Morningstar said that in Europe, proposals released in April 2026 outline a coordinated approach to closing the natural catastrophe insurance protection gap through a structured risk-sharing mechanism across jurisdictions, aiming to enhance insurability while maintaining private sector participation. Similar themes are now reflected in Canada, as highlighted in PACICC’s April 2026 Solvency Report on Property and Casualty Insurers and the Insurance Bureau of Canada’s May 2026 report.
According to Morningstar, Canada remains severely exposed to risks from natural disasters, including floods, wildfires, severe storms and earthquakes, with the greatest concentration of earthquake risk in British Columbia, Quebec and Ontario, particularly in British Columbia and Quebec, as determined by Canada’s Natural Resources Hazard Map. A major seismic event in these regions could result in significant insured losses and lead to credit stress as insurers rapidly deplete regulatory capital, a key factor that Morningstar DBRS evaluates when assessing an insurer’s financial strength.
PACICC has previously warned that severe earthquakes could exceed the capacity of the insurance industry, potentially bankrupting several insurers and putting pressure on their compensation frameworks in the absence of government support mechanisms.
Morningstar said that in early research released in 2021, PACICC estimated that a catastrophic earthquake causing approximately $35 billion in insured losses could crush the property and casualty insurance market and cause insurers to fail.
In response, the Canadian government said in the November 2025 federal budget that it would consult with insurers and stakeholders on options to improve the industry’s ability to respond to extreme seismic events. PACICC and the Insurance Bureau of Canada have since jointly proposed a structured support model inspired by the U.S. Terrorism Risk Insurance Act (TRIA), under which the U.S. government would share insured losses with private insurers once specified thresholds are reached.
The Insurance Bureau of Canada noted in its May report that this approach would adapt TRIA’s structural principles to Canadian earthquake conditions and provide a predictable, fiscally disciplined cost-sharing arrangement that would only be triggered in extreme circumstances.
The Insurance Bureau of Canada estimates that a severe earthquake in Canada could cause insured losses of approximately C$52.6 billion, significantly exceeding losses from previous national disasters such as the 2016 Fort McMurray wildfire.
Both PACICC and the Insurance Bureau of Canada say that without government-backed mechanisms, recovering from such an event could put considerable stress on insurers and policyholders. Federal support is expected to increase confidence in claims payments, accelerate disaster recovery, reduce the likelihood of insurer insolvency, and support continuity across the financial system.
The U.S. TRIA framework, often cited by PACICC, operates through a tiered risk-sharing structure in which an insurer’s losses must exceed a predefined threshold for federal reimbursement to apply. Insurers retain an initial layer of losses through a deductible tied to previous premiums, before triggering government support based on overall risk limits.
The framework applies only to certified terrorism events and includes provisions that would allow federal expenditures to be recovered through surcharges on future insurance premiums. Although TRIA was intended as a temporary measure, it has been reauthorized multiple times and remains in effect until 2027, contributing to market stability in the U.S. insurance industry.
Morningstar notes that equivalent federal earthquake insurance coverage does not currently exist in Canada. Instead, disaster response relies on the private insurance market and the Disaster Financial Assistance Arrangement (DFAA), which provides financial support to provincial and territorial governments after major disasters.
DFAA does not provide direct compensation to individuals and is not an insurance program, but rather supports broader provincial recovery efforts. OSFI requires federally regulated insurance companies to assess earthquake risk and maintain preparedness for extreme events, including stress testing based on a 1-in-500-year nationwide earthquake scenario, reflecting the recognized likelihood of low-frequency but high-severity losses.
Morningstar said insurers manage earthquake risk through catastrophe modeling, geographic diversification, reinsurance arrangements and limited issuance of catastrophe bonds, although use of catastrophe bonds in Canada remains modest. Other tools include policy deductibles and coverage limits for high-risk properties.
These risk management approaches operate in conjunction with OSFI’s capital framework, under which federally regulated insurers are required to maintain a Minimum Capital Test (MCT) ratio of at least 100% with a regulatory target of 150% to enhance resiliency. Industry data suggests insurers’ capital ratios will remain above this regulatory level through the end of 2025, according to industry-wide disclosures reviewed by Morningstar.
OSFI’s regulatory framework includes clear requirements for seismic risk in its minimum capital testing guidance and related standards. The Guidance on Sound Practice for Earthquake Risk sets out expectations for risk measurement, provisioning practices and risk management and forms part of a wider prudential regime designed to ensure that insurers can still meet their policyholder obligations under extreme stress conditions.
Morningstar notes that while earthquake insurance is available across Canada, its use remains relatively limited. The Insurance Bureau of Canada estimates that only about 4 to 7 per cent of households in Quebec carry earthquake insurance, while in British Columbia coverage is higher at about 50 to 65 per cent. Earthquake insurance is often offered as an optional endorsement to a standard property policy and typically covers structural damage, contents and additional living expenses.
The Insurance Bureau of Canada attributes the low uptake to factors such as misunderstandings about coverage, cost considerations and expectations for government support after a disaster. As a result, a large proportion of residential risks remain uninsured, meaning that the total economic losses from a major earthquake will significantly exceed insured losses and have wider spillover effects on other insurance lines.
From a credit perspective, Morningstar DBRS believes that the lack of federal earthquake insurance support does not present immediate financial stability concerns, given the strong capitalization of Canadian insurance companies and the robustness of OSFI’s prudential framework. Reinsurance provides an additional layer of risk transfer that supports industry resilience during normal disaster conditions.
However, severe earthquakes can occur without warning, putting huge pressure on the liquidity and capital of the entire industry. In this scenario, negative rating action could result if claims costs materially impair the insurer’s ability to meet its obligations.
The government-backed safeguards proposed by PACICC and the Insurance Bureau of Canada will reduce tail risk volatility, enhance financial resilience, and support more stable credit outcomes while maintaining the efficient functioning of Canada’s insurance markets following extreme events.
