With a record-breaking $8.5 billion of natural catastrophe-related insured losses in Canada last year, the resilience of private insurance markets faces growing pressure, says a recent an industry report.
Industry constraints emphasize the fragility of relying solely on existing systems. Plus, they highlight an urgent need for systemic reforms, including robust contingency planning and increased government involvement, to keep markets stable and resilient, says Mary Kelly, a professor in finance and chairwoman in insurance at Ontario’s Wilfrid Laurier University.
“Government participation in catastrophe insurance (CI) programs is critical,” Kelly writes in an article in the Property and Casualty Insurance Compensation Corporation’s (PACICC) latest Solvency Matters report released earlier this month.
Government involvement can take a variety of forms.
For example, unlimited backstops, where government assumes all losses beyond a defined threshold, provide maximum stability by distributing costs over taxpayers and over time, minimizing the need for unplanned and potentially costly interventions, Kelly writes in the article, Bridging the Gap in Catastrophe Insurance for Canada.
Alternatively, governments can assume upper layers of losses, capping payouts and transferring residual risks to private insurers or policyholders. If governments assume the initial layer of loss, resilience is increased, but tail risk sits with the private insurance industry, Kelly writes. Co-insurance agreements — where losses are shared above a retention threshold — reduce the financial burden on insurers but do not entirely mitigate tail risks.
Distributing risk
Another option is a catastrophe pool that distributes risks across all, or potentially just high-risk policyholders. These pools can stabilize markets and encourage private-sector participation. They aim to improve the availability of coverage and, depending on the size and return period of the insured peril, may not require government intervention.
“When supported by reinsurance arrangements or government guarantees, they become more effective by reducing tail risks and enhancing private market resilience,” Kelly writes. “Importantly, such pools must complement rather than compete with private insurers.”
Another practical approach involves mechanisms like Belgium’s loss-sharing system or the U.S. Terrorism Risk Insurance Act. By leveraging existing insurers’ expertise and infrastructure, these mechanisms enhance resilience and market stability without requiring the creation of new insurance entities.
Governments should also consider strategies that go beyond insurance, Kelly writes, including subsidies or tax credits for low-income households, enhanced affordability measures, and targeted investments in proactive risk mitigation and community resilience.
“CI program sustainability also depends on effective risk mitigation through policies like risk-informed land use planning and climate-resilient building codes,” Kelly says. “Restricting construction in high-risk areas and enforcing robust standards for new developments are essential strategies.
“These measures reduce exposure and serve as a foundation for lowering insurance costs by decreasing overall risk levels.”
The importance of public-private partnerships
For Kelly, public-private partnerships remain central to building effective CI frameworks. Collaboration between governments and insurers can create innovative solutions, such as structured reinsurance agreements backed by government guarantees. “Parametric insurance models, which trigger rapid payouts based on predefined criteria, can further enhance efficiency and speed in disaster response.”
Intensifying impacts of climate change require a forward-looking and comprehensive CI framework for Canada. While establishing a robust national flood insurance program is a crucial first step, broader strategies are needed to address other risks, Kelly says. “Expanding insurance frameworks to include wildfires and developing specialized mechanisms for secondary perils can help close significant coverage gaps.”
In another Solvency Matters article, PACICC president and CEO Alister Campbell writes Canada’s lack of public-private partnership mechanisms to share NatCat risk means Canadian consumers are left holding the bag. And while the industry is using the ‘price lever’ to manage exposure in property insurance, that risk mitigation tool alone isn’t proving adequate, Campbell argues.
Kelly agrees strong public-private collaboration is essential.
“The time to act is now,” she says. “As climate change accelerates, the cost of inaction will only grow.
“A sustainable CI program that combines government support with private market stabilization offers the most effective path forward, safeguarding Canadian communities for generations to come.”
Feature image by iStock.com/Marc Bruxelle
