Quake backstop: Would PACICC take on the role of the banks’ CDIC?

Canada needs some form of pre-planned resolution regime in the event of a major earthquake that could also apply to very severe climate events as they occur, an executive from the Office of the Superintendent of Financial Institutions (OSFI) told an industry event last week.

OSFI superintendent Peter Routledge pointed to the Canadian Deposit Insurance Corporation (CDIC), a resolution regime for large and small deposit-taking institutions in the banking sector that protects deposits at member institutions in the event of a failure. It insures specific categories up to $100,000, including principal and interest.

At CatIQ Connect in Toronto on Wednesday, Routledge answered an audience question about whether there will be movement toward an earthquake backstop to manage associated financial risks.

Routledge says CDIC’s resolution has a fund to protect deposits and institutions, “so depositors have a reason not to run on a bank if the institution still gets into a chronic deficiency of capital and is insolvent.

“If a deposit-taking institution that I supervise becomes insolvent, I declare it non-viable and I hand it to CDIC and they work through the resolution. There are private and public sector forms of financing for that.”

This occurred during the U.S. banking crisis in 2023, where the federal government provided financial support for depositors for the resolution process and then costs were ultimately built back into the industry in the form of efficacy deposit insurance premiums, he explains.

“I think the challenge now is to sort out a similar mechanism for Canadian P&C insurers, so that if and when this catastrophic event occurs, there is a plan and a structure for dealing with non-viability of an individual institution or institutions,” Routledge says. “There’ll have to be some form of prefinancing for that.

“And then the post-financing…also has been a private-public sector agreement,” he says. “CDIC is an example of such an agreement, and that may or may not be applicable with the insurance industry, but that’s all for the parliament of Canada to work out.”

Backstop woes

Canadian P&C insurers have long been lobbying for a quake backstop. In Budget 2025, the federal government announced its “intention to consult federally regulated property and casualty insurers and other interested stakeholders on ways to ensure the stability of Canada’s insurance sector in an extreme earthquake event.”

Industry sources previously told Canadian Underwriter the government intended to set up a flood backstop and then explore how the mechanism might be used for other disasters such as earthquake. The Liberals’ 2025 election platform included a renewed promise to set up the flood backstop by 2026.

During the CatIQ conference, Routledge noted that over the next 50 years, there is a 35%-to-40% chance of a Magnitude 8 or greater earthquake in the Cascadia subduction zone, which runs from mid-Vancouver Island to northern California. There’s also about a 40% chance of an M6 or higher quake in the Ottawa-Charlevoix, Que. corridor.

“So, if you assume that those two events are independent…the probability that there will not be an earthquake in either of those regions over the next 50 years is 35%,” Routledge says. “The probability that there will be [a quake] in one of them over the next 50 years [is] about 65%.

CAIB New Edition 1.0 – a New Standard for Broker Education Image

Insights Paid Content

CAIB New Edition 1.0 – a New Standard for Broker Education

Preparing brokers to navigate an increasingly complex insurance landscape.

By 

Sponsor Image

“I don’t think there’s a general realization of those probabilities.”

In another session, attendees heard insured damage estimates for quakes in Vancouver and Montreal are much higher than industry estimates suggest. And in both scenarios, they far exceed the $35 billion mark the industry has identified as the ‘tipping point’ for the potential of multiple insurance company insolvencies.

Routledge says OSFI is working with the Property and Casualty Insurance Compensation Corporation to try and set up financial resources to deal with major earthquakes.

“And I think Canadians need to understand that at some point there’s going to be a big earthquake. It’ll do a lot of financial damage, and now’s the time to establish financial protection for them,” Routledge says. “The industry, working with regulators, has to figure out a product that is affordable and that provides adequate coverage. That’s not easy.”

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.