Mounting Risk of Natural Disasters Strengthens Case for Federal Reinsurance Backstop

May 14, 2026 – As natural disasters become more frequent, Canada’s insurance system faces mounting pressure from extreme risks, including solvency concerns and strained underwriting capacity. Without a mechanism to smooth losses over time, a series of tail events or a large disaster such as a major earthquake can weaken insurers’ ability to underwrite risk, leading to higher premiums and reduced coverage, according to a new C.D. Howe Institute report. 

In “Preparing for the ‘Big One’: Designing a Federal Disaster Reinsurance Backstop,” author Thorsten V. Koeppl calls for a well-designed federal reinsurance backstop to transfer tail risk to the government, stabilize insurance markets, and improve coverage affordability. 

“Canada faces the risk of large seismic events that could wipe out the entire capital base of the country’s property and casualty (P&C) insurance sector. At the same time, natural disasters are becoming more frequent, from the Fort McMurray wildfires to major flooding in Quebec, causing significant losses across Canada’s insurance industry,” says Koeppl, Fellow-in-Residence and Scholar in Financial Services and Monetary Policy at the C.D. Howe Institute. “Also, many people tend to underestimate the risk they are exposed to or count on government assistance in case a disaster happens. Hence, the insurance premiums people are willing to pay do not always reflect the true level of underlying risk.” 

The report calls for a public-private partnership to manage catastrophic natural disaster risks, where the private sector continues to provide insurance and the government provides a backstop in the form of a reinsurance scheme for extreme risk. Because governments can borrow and spread losses over time, such private-public risk-sharing offers a lower-cost alternative to requiring private insurers to hold large amounts of capital against extreme natural disaster risks. The report finds that this approach could also lead to more affordable insurance premiums. 

“This type of federal risk transfer requires, however, a fiscally responsible design that protects taxpayers,” says Koeppl, Professor, Robert McIntosh Fellow, and RBC Fellow at Queen’s University. “The costs of providing public funds to backstop risk must be recovered both upfront and over time, and ultimately must be passed through to insurance customers, ideally through market-based mechanisms.” 

Koeppl proposes two core pillars for the program’s design. First, strengthening insurance uptake through mandatory or default coverage options. Second, creating an explicit reinsurance arrangement for property and casualty insurers, under which the government would assume industry-wide losses above certain thresholds in exchange for a premium reflecting the cost of backstopping risk. 

To implement the framework, the author recommends that the Department of Finance develop a framework for default or mandatory catastrophe coverage and build the infrastructure needed to price these insurance arrangements. The overall scheme would operate through a separate Crown corporation reporting to Parliament. 

For more information contact: Thorsten V. Koeppl, Fellow-In-Residence and Scholar in Financial Services and Monetary Policy, C.D. Howe Institute, and Professor, Robert McIntosh Fellow, and RBC Fellow, Queen’s University; and Raquel Schneider, Communications Officer, C.D. Howe Institute, 647-805-3918, rschneider@cdhowe.org. 

Read the Full Report 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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