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Office of the Superintendent of Financial Institutions head, Peter Routledge, is advocating for building resilience from catastrophic events into property and casualty insurance.Dave Chan/The Globe and Mail

Canada’s banking regulator says property and casualty insurers could benefit from an industry-wide backstop fund to protect companies and consumers in the event of massive claims from a catastrophic event.

During a fireside chat with the industry on Tuesday, Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), said the idea of introducing a public-private industry support model – similar to the framework that exists for the Canadian banking system – would be a “responsible way” for the government and P&C insurers to deal with the tail risk companies currently face should the country be hit with a major catastrophic event, such as an earthquake.

Mr. Routledge, who was chief executive of Canada Deposit Insurance Corp. (CDIC) for five years before joining OSFI, has previously suggested the benefits of setting up such a framework during his time at OSFI.

In the event of a bank failure, CDIC insurance provides up to $100,000 in deposit insurance for eligible accounts, as long as the bank or trust company is a member of the organization. Account holders do not have to pay any premiums for this type of insurance – rather, the banks do.

Currently, the insurance industry does not have a similar setup, meaning if an earthquake were to hit the country – an event that Canadian insurers have yet to see but have prepared for in their risk modelling – the industry could be overwhelmed.

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Last year, insured damage for severe weather events across Canada reached over $3.1-billion, according to Catastrophe Indices and Quantification Inc.

Mr. Routledge said Vancouver, for example, could face $35- to $40-billion in total damages if hit with an earthquake.

“We could have, and most likely we would have, very serious systemic problems in terms of capital to absorb the aftermath of such an event,” he told the audience while speaking with Celyeste Power, the chief executive of the Insurance Bureau of Canada.

“For that reason, sooner is better than later in building some sort of resilience in the system for dealing with that,” he added.

Mr. Routledge said he wasn’t suggesting the insurance industry make an exact replica of the CDIC model, but, rather, “an industry-funded resolution regime” that would also have the government step in if the fund became underfunded – similar to the CDIC.

“That’s a really sensible way to deal with very rare but very shocking financial events.”

“....God forbid if an earthquake hits, citizens in Canada at that time will be pretty happy that we have that resilience in place. And I think we ought to strive for that.”

Ms. Power agreed with Mr. Routledge that an earthquake resolution program is critically important, but said she is concerned the arithmetic wouldn’t work like it does for a fund such as CDIC because the banking industry is much larger than the property and casualty insurance market.

“We’re about one-tenth of the Big Five banks in terms of profits,” Ms. Power said. “So even if you put a levy on the industry – similar to the CDIC model of 1 per cent – it would take about 150 years to capitalize for the significant tail risk of an earthquake and for contagion.”

Mr. Routledge said the insurance solution wouldn’t have to be funded like CDIC, and the idea is to find a public-private collaboration that won’t leave the taxpayer on the hook.

“If we can find a way around those principles to provide that [resolution] – the design is less important than coming into line with those principles.”

Last year, OFSI published guidance on new climate-related disclosures that will ask financial institutions to incorporate potential consequences of climate change into their risk profiles and account for a range of possible climate-related outcomes when assessing whether the capital they hold in reserve is adequate.

Institutions are expected to start the first phases of detailed disclosure at the end of their 2024 fiscal year, and most of the remaining requirements will come into effect in 2025.

On Tuesday, Mr. Routledge complimented the insurance industry – particularly P&C insurers – for being ahead of other financial institutions in recognizing climate risks and governance.

“Because it ensures against a variety of accidents including, natural disasters, P&C insurers have experienced financially the consequences of climate change,” he said. “There’s still more work to do, but I do think the industry is the furthest ahead in terms of climate change.”

With a report from Jeffrey Jones

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