New government, old request: Industry renews call for quake backstop

For Canada’s Property and Casualty Insurance Compensation Corporation (PACICC), among the first orders of business with the new minority Liberal government will be to promote the establishment of a federal earthquake backstop program.

“Our board remains very concerned…about the lack of government action on our permanent priority issue,” PACICC board chair Dave Oakden said at the public compensation fund’s annual general meeting in Toronto Apr. 29. “A federal liquidity backstop mechanism is urgently needed to address the existential earthquake risk.

“PACICC has done excellent work with the systemic risk modeling to clearly frame the issue and illustrate the tipping point beyond which our funding mechanism would be overwhelmed. The lack of government action here leaves our insurance guarantee system exposed to failure in scenarios that remain remote, but [for] certain regimes of a nation like Canada to have a protection gap like this is inexcusable.

“In particular, with IBC [Insurance Bureau of Canada], we will urge the new government, elected yesterday, to exhibit proactive leadership on this pressing priority issue for Canada.”

In its Budget 2023, the Liberal federal government committed $31.7 million to establish a low-cost flood insurance program, aiming to protect households at high risk of flooding. The intent was to offer reinsurance through a federal Crown corporation and a separate insurance subsidy program.

Parallel to the flood backstop, the government in the 2023 budget said “the Department of Finance and Public Safety Canada will engage with industry on solutions to earthquake insurance and other evolving climate-related insurance market challenges.”

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Industry sources have told Canadian Underwriter in the past that the government strategy was to set up the flood backstop first and then explore how the mechanism might be used for other disaster events such as earthquake. However, in its 2024 budget, the federal Liberals committed only $15 million to advance a low-cost flood insurance program.

“Frankly, it’s not enough to operationalize this program and provide the 1.5 million Canadians with the flood protection they need for upcoming flood seasons,” Insurance Bureau of Canada president and CEO Celyeste Power said at the time.

IBC tried to get the flood backstop established before the anticipated 2026 election, but with Justin Trudeau resigning early this year, Mark Carney became the new Prime Minister and called a snap election. As a result of the election ‘quiet period,’ no work has yet been done on the file this year.

The Liberals’ 2025 election platform does include a renewed promise to set up the flood backstop by 2026.

According to the party’s platform, a Liberal government would “stand up Canada’s high-risk flood insurance program by April 2026 to support homeowners to reduce their exposure to future climate risk. We will expedite work with provinces, territories, and industry to finalize this low-cost program.”

The industry has long said earthquake risk is a more urgent need than flood risk, in large part because the industry’s financial exposure to an earthquake is more significant. Past PACICC research has shown a major earthquake in Canada exceeding $35 billion in insured damage could be the ‘tipping point’ that causes systemic insurer financial stress.

“Our study shows that the industry would also likely survive a larger event, resulting in insured losses of up to $35 billion,” says PACICC’s 2021 report, How Big is Too Big? The Tipping Point for Systemic Failure. “However, at this scale of event, multiple insurers would become insolvent.”

In February 2024, Office of the Superintendent of Financial Institution’s head Peter Routledge took up the industry’s call for an earthquake backstop.

“We could have, and most likely would have, very serious problems, systemic problems, in terms of capital to absorb the aftermath [of an earthquake],” Routledge told industry reps at a catastrophe conference in Toronto. “For that reason, sooner is better than later in building some sort of resilience in this system for dealing with that.”

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.