Feb. 25, 2025 — INSURANCE-linked securities and catastrophe bonds could provide the Property and Casualty Insurance Compensation Corp. with a crucial financial backstop in the event of a major insurer failure following a catastrophic event such as an earthquake.

They would also save the government from having to cover all the gaps.

During a presentation at the CatIQ Connect conference earlier this month in Toronto, PACICC CEO Alister Campbell described a desktop simulation of a two-stage earthquake off the coast of B.C., where an initial 9.0-magnitude event caused $20bn in insured losses, followed by a 6.8-magnitude aftershock near Vancouver that compounded the damage.

Tegan Hobbs, a seismic risk expert, provided PACICC with the worst-case earthquake scenario for their desktop simulation, including the aftershock.

“So we went to Natural Resources Canada and got a scenario,” Mr. Campbell said.

“It frightened the heck out of us because the scenario that she gave us, we had never contemplated before.”

The first quake in the exercise bankrupted three small insurers, triggering PACICC’s normal response of assessing the remaining insurers to cover claims. However, after the aftershock, additional insurers became financially distressed, including a major national insurer with dangerously low capital reserves.

PACICC faced a dilemma: issuing further assessments to cover new failures would push more insurers into insolvency, potentially leading to systemic collapse. At a certain point, the industry could no longer absorb losses. PACICC’s board had to decide whether to pull the “circuit breaker,” halting claim payments and leaving policyholders without coverage.

Mr. Campbell said the exercise revealed key vulnerabilities, including PACICC’s inability to raise enough funds quickly, the lack of a government-backed liquidity backstop and the challenge of maintaining industry stability in extreme loss scenarios.

He said the recent TD Insurance-linked security issuance, the first pure Canada risk catastrophe bond, could serve as a model for PACICC and the broader insurance industry in managing extreme disaster scenarios like a major earthquake.

The TD bond covers earthquake and severe convective storms in B.C. and Alberta, demonstrating that investors are willing to back Canadian catastrophe risks.

PACICC, insurers or the government could explore pre-event financing through ILS to build resilience against large-scale disasters, Mr. Campbell said.

For PACICC, an ILS solution could provide an immediate liquidity backstop when multiple insurers fail following a catastrophe. Instead of relying on assessments from surviving insurers, which could trigger further insolvencies, the organization could tap into a pre-funded ILS structure. This would allow claims from failed insurers to be honoured without destabilizing the broader industry.

The key advantage of ILS is that it shifts risk to global investors rather than concentrating financial pressure within the domestic insurance sector.

If PACICC or the government arranged a catastrophe bond before a major disaster, the payout could be triggered when insured losses reach a certain threshold, ensuring timely and sufficient funding without requiring emergency government intervention.

However, several hurdles remain before this becomes a reality.

While the recent TD Insurance catastrophe bond demonstrates investor appetite for Canadian risk, PACICC faces structural and regulatory challenges that would need to be addressed.

One of the key challenges is that PACICC is not structured as a reinsurance entity or a direct insurer, which could complicate its ability to issue catastrophe bonds independently.

Mr. Campbell said the organization was never designed to handle a systemic crisis following a mega-disaster.

“We were not designed for serial failure after the mega-quake. And we’ve been saying this for a decade and trying to get the regulators to pay enough attention to work out what would happen in that worst-case scenario.”

This raises questions about whether PACICC has the legal authority to issue an ILS or if it would require a legislative or regulatory change to do so.

The government might also need to play a role in structuring or guaranteeing such a financial instrument.

PACICC’s current funding model is built on insurer assessments, billing surviving companies to cover claims from failed ones. And Mr. Campbell warned that this model could accelerate a financial collapse if too many insurers fail at once. 

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