The Office of the Superintendent of Financial Institutions (OSFI) has released its updated Annual Risk Outlook for 2025-2026, highlighting key risks that could impact Canada’s financial markets over the next 12 months. The report also outlines OSFI’s strategies to ensure the stability and resilience of the financial system.

While the primary risks remain consistent with last year’s report, their ranking has changed. “Elevated threats in the current risk environment have a higher probability of triggering a scenario in which these risks materialize for institutions,” states the report’s summary.

OSFI’s report outlines the most pressing threats in order of significance:

  • Integrity and security risks: “Heightened geopolitical tensions, rapid technological advancements, and increased reliance on a complex network of third parties create vulnerabilities to the integrity and security of Canadian institutions and the financial system.” In response, OSFI has tightened reporting requirements for institutions to disclose cyber and technology-related incidents.
     
  • Wholesale credit risks: “Corporate and commercial borrowers continue to face economic challenges. Despite recent interest rate cuts, businesses remain vulnerable to macroeconomic uncertainties, elevated debt servicing costs, and weakening consumer demand that can lead to refinancing challenges.” The report also highlights declining commercial real estate values due to reduced demand and high vacancy rates. OSFI has increased the volume of data it collects from financial institutions to monitor these trends.
     
  • Funding and liquidity risks: Renewed uncertainty within financial markets, driven primarily by heightened geopolitical risk, could challenge stability if it drives market participants to reassess their risk appetite. OSFI will assess liquidity risks arising from the complexities of institutions operating across multiple jurisdictions and currencies.
     
  • Real estate secured lending and mortgage risks: Despite a recent decline in interest rates of more than 200 basis points, many borrowers still face rates that will be higher than their original mortgage rate upon renewal. Approximately 36 per cent of mortgages with fixed payments since origination are set to renew between November 2024 and December 2026. Mortgage delinquency rates are highest in urban centres such as Vancouver and Toronto, where housing prices remain elevated.
Risks facing the insurance sector  

Insurers are navigating a difficult environment marked by ongoing investment volatility, rising claims costs in auto insurance, and the impact of natural catastrophes. OSFI notes that catastrophic losses reached approximately $8.5 billion in 2024.

Over the next 12 months, OSFI will closely monitor capital management practices, operational resilience including cybersecurity preparedness and risks associated with third-party service providers, and risk governance in operational risk management.

“We will assess the business strategy exposure to geopolitical risks and integration risks from the pursuit of inorganic growth and also assess the implications of geopolitical risks on supply chain disruptions and claims inflation, particularly for property and casualty (P&C) insurers,” the report states.

A thematic review of the auto insurance sector is planned to assess effective risk oversight and the impact that shifting risks have on earnings and capital. OSFI will also analyze how the evolving housing market affects the financial resilience of mortgage insurers.

For certain life insurers, OSFI will assess investment risk, asset-liability management, and the implications of IFRS 17 policies on capital. The regulator will also assess how all insurers are adapting to climate transition and physical risks.

On the operational resilience front, OSFI will pay close attention to cyber incidents and institutions’ preparedness for cyber risks.

Finally, in terms of risk governance, OSFI plans to enhance oversight of anti-money laundering measures for life insurers and regulatory data quality for P&C insurers.

The report also outlines OSFI’s supervisory priorities for banks and pension plans.