Canadian property and casualty insurers are proposing a private-public earthquake backstop along the lines of the terrorism insurance backstop currently employed in the United States, the Insurance Bureau of Canada confirmed Tuesday.
“The industry’s proposed solution is known as the Canadian Earthquake Risk Protection Act (CERPA), and is modelled on the U.S. Terrorism Risk Insurance Act (TRIA),” IBC says in a paper published on the insurer association’s website. “TRIA has supported stability in the U.S. terrorism insurance market for more than two decades, by establishing a clear framework for sharing extreme tail risk between the government and the insurance industry.
“Although terrorism and earthquakes present different risk characteristics and market dynamics, TRIA demonstrates how a transparent, rules-based mechanism can reduce systemic risk and prevent market contagion after a catastrophic event. CERPA draws inspiration from these structural principles, while being tailored to the unique characteristics of earthquake risk in Canada.”
CERPA, like TRIA, “is designed to operate on a long-term, cost-neutral basis with no upfront public expenditure, while reinforcing insurer responsibility and preserving appropriate market incentives,” IBC says in a piece authored by Mahan Azimi, the association’s director of catastrophic and emerging risk policy team, and Christina Friend-Johnston, a communications manager at IBC.
Specifically, as in TRIA, taxpayers would be reimbursed for the government’s costs over the long term “by requiring the industry to repay any federal support through a temporary post-event premium surcharge, ensuring no upfront cost to taxpayers or consumers at the outset,” as IBC explains.
In the United States, if a terrorist attack is officially “certified” and industry-wide insured losses exceed the TRIA backstop’s trigger (currently $200 million), the US government reimburses part of insurers’ losses above their deductibles. The US government currently covers 80% of eligible losses above trigger thresholds, while insurers retain 20%. The US government recovers its outlay under a post-event premium surcharge paid by the US P&C industry.
Previously, CU reported information about the model published by the Property and Casualty Insurance Compensation Corporation. In its quarterly newsletter, Solvency Matters, PACICC CEO Alister Campbell says modelling for setting the proper ‘trigger’ would be critical.
“To the extent that any successful design will need to allow insurers ‘to fail’ (as antidote for ‘moral hazard’), there will also need to be accurate modelling to estimate how much failure the system can ‘afford,’” Campbell writes. “It seems very possible that the PACICC Systemic Risk Model (encompassing both federal and provincial insurers) will prove to be invaluable in supporting this modelling work.”
IBC says it’s 30% likely that Canada will see a Magnitude-8 or greater earthquake (“the Big One”) striking in Vancouver within the next 50 years. Plus, Montreal lies within Quebec’s most active seismic zone, which has experienced past earthquakes including a Magnitude-5.8 earthquake in 1732.
IBC cites a damage estimate suggesting a major earthquake in Canada could cause $52.6 billion in catastrophic damage. That’s 11 times greater than Canada’s current record-holding disaster, the 2016 wildfire that burned through Fort McMurray in Alberta.
Also in the news: Is insurance facing its Napster moment?
In previous reports, PACICC has said a damage loss exceeding $35 billion could create a “tipping point” after which multiple P&C insurers could fail.
To put that in perspective, MSA Research says Canada’s P&C insurance industry currently has approximately $66 billion in capital. That breaks down into $23.2 billion of minimum required capital, plus about $42.8 billion in excess capital.
“It’s important not to interpret the full $66 billion as capital available to absorb a single event,” MSA Research CEO Nevina Kishun tells CU. “The majority of this capital is already supporting ongoing risks across all lines of business, and insurers are required to maintain the minimum capital level.
“In practice, the [roughly] $43 billion of excess capital is the closer proxy for loss-absorbing capacity — but even that is not fully deployable without regulatory and market consequences.”
The industry has been calling for an earthquake backstop to prevent P&C insurance company failures for longer than a decade. In its 2025 budget, the federal government included a promise to consult with the industry on a quake backstop. Currently, the industry is calling for federally and provincially licensed insurers to be included in the discussion.
“Canada is the only G7 country with a significant earthquake risk that lacks a formal government-backed financial backstop for earthquake,” says Liam McGuinty, IBC’s vice president of federal affairs at the time the federal government released its budget. “Without a federal backstop, a major quake could trigger widespread financial instability.”