The regulator of financial institutions in Ottawa says it is prepared to consider any proposal or innovation that could create a risk-transfer mechanism for a major catastrophe if it can help prevent a financial crisis among insurers.
The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, took part in the recent National Insurance Conference of Canada, held in Quebec City at the end of September.
The discussion with Routledge was moderated by Celyeste Power, president and CEO of the Insurance Bureau of Canada (IBC). The first question concerned catastrophe risk, particularly the risk associated with a major earthquake striking a large urban centre such as Vancouver or Montreal.
OSFI reviewed the simulation exercise conducted by the Property and Casualty Insurance Compensation Corporation (PACICC), which highlighted the need to prepare for the systemic risk associated with a major earthquake.
Routledge believes this type of catastrophe risk needs to be better assessed. “This is an underpriced and underappreciated financial risk bearing down on all the industry,” he says.
He estimates there is a 50 per cent chance that such a catastrophe will occur within the next 50 years and that the event “will destroy capital in the insurance industry.”
Along the same lines, he notes that Canada experienced its worst year for catastrophic losses in 2024, with insured damage twice as high as in the previous worst year, 2016, when the Fort McMurray wildfires occurred. “At some point in the next three or five years, we're going to double it. That is the just a reality tied to global warming,” Routledge says.
Catastrophe bonds (insurance-linked securities, or ILS) are increasingly being used as a risk-transfer mechanism, notes Celyeste Power. According to Routledge, these changes are helping to increase access to capital. How that capacity is used is up to insurance company executives and directors.
Is OSFI prepared to consider other forms of transfer mechanisms for these emerging risks? “We are open for business, and there's more innovation to come. If there are more products that can help manage earthquake risk, I'd love to hear the ideas. If there are more products that help with the risks from global warming, we'll look at that,” Routledge says.
Financial impact
OSFI’s top executive cites two examples of companies that discovered the significance of the financial risk associated with a catastrophic loss. Two electric utilities saw their share prices plunge following major wildfires caused by inadequate maintenance of their infrastructure.
In California, the failure of a transmission line operated by Pacific Gas & Electric Company caused the Camp Fire in November 2018. Some 85 people died because of the disaster. In January 2019, the company had to seek bankruptcy protection.
In the case of Hawaiian Electric, on the island of Maui, the fire that devastated the historic town of Lahaina in August 2023 also weighed on its capital. The event caused about 100 deaths. “The stock before the event was worth $43, and today, it's just under $9,” Routledge says.
“You don't think climate risk is a financial risk? You got to pull your head out of it,” he insists.
About 15 years
The 2008-2009 financial crisis shook several major institutions, forcing governments to intervene to maintain the stability of the financial system. Not all taxpayers were enthusiastic about the bailout, Routledge notes.
As a result, over the following 15 years, OSFI focused on the protection and resilience of financial institutions. Without tools to “absorb a big financial shock, the severity of the shock creates far more economic misery than it's necessary,” he says.
In 2023, several U.S. banks were pushed into bankruptcy, raising new concerns about the stability of financial institutions in North America. In Canada, however, “we barely registered a pulse,” Peter Routledge says.
The stability experienced in Canada during the same period prompted the federal regulator to reflect. “We started to ask ourselves: maybe we did enough?” he says.
On Sept. 11, 2026, speaking to members of the Economic Club of Canada in Toronto, Routledge made the same observation. Despite the most significant pandemic in a century, followed by a surge in inflation and interest rates, Canadian financial institutions continued to serve their customers and support the economy without interruption.
OSFI has therefore reviewed its capital requirements and continues to redo its calculations to determine the appropriate level of risk that financial institutions can tolerate, in a context where the federal government wants to boost productivity and economic growth, Routledge explains.
“OSFI's supervisory efforts will ensure that Canada’s financial system benefits from institutional risk-taking while remaining resilient to the punches that will also arrive,” the head of the agency said in his Toronto speech.
Use of AI
A question from the audience concerned the use of artificial intelligence (AI) and its impact on financial institutions. Peter Routledge points to three types of risk that warrant OSFI’s attention.
The first is the financial stability of data centre operators that host banks and insurers’ content. The second is cybersecurity.
The third type of risk, which he finds the most interesting, is the behaviour of AI tools and the possibility that they may decide not to follow the constraints imposed by their creators in carrying out their mandate.
In general, OSFI takes a technology-neutral approach. The regulator focuses on the risks associated with a product, service or activity, rather than on the technology being used.
On the same subject, Power notes that IBC will soon send its members a best practices guide for the responsible use of AI.
Climate guideline
The discussion continued on the topic of climate risk management. Guideline B-15, published by OSFI in 2023, requires insurers to estimate the impact of climate risk on their business strategy, including by disclosing data on the companies they insure and their greenhouse gas (GHG) emissions.
Does the interest shown by the government led by Mark Carney in expanding oil and gas production capacity conflict with the requirements of Guideline B-15? In response to Celyeste Power’s question, Peter Routledge says that after modernizing the guideline three years ago, OSFI was criticized for not doing enough to promote the fight against climate change. Now it is suspected of restricting economic growth. “We are not trying to do either of those things,” he says.
“It seems intelligent to us that financial institutions will start to think about themselves whether it's material for them and to determine whether their measurement practices are sufficient for that. That's what B-15 does,” he continues.
“It’s simply saying measure the risk and understand it at your board and once you've done that, we're out. You make economic decisions and decide best how to create value for shareholders and guard the interests of other stakeholders, like employees, customers, creditors,” Routledge says.
“We're just trying to bring in financial measurement discipline into a financial risk. That’s all,” he adds.
