The Canadian financial markets regulator, the Office of the Superintendent of Financial Institutions (OSFI), has now added natural catastrophe bonds to its rules on allowable forms of reinsurance that can reduce capital requirements for insurance risk.
It’s a move that could help to stimulate more catastrophe bond issuance from Canadian insurance carriers, with the instruments now able to provide the relevant capital credit to sponsors that create a more level playing field for insurance-linked securities (ILS) versus traditional reinsurance arrangements.
Recall that, in 2024 TD Insurance became the first Canadian company to sponsor catastrophe bonds, bringing the C$150 million MMIFS Re Ltd. (Series 2025-1) catastrophe bond deal to market, which became the first natural cat bond to solely cover perils in that country.
TD Insurance returned to the cat bond market in 2026, securing a further C$115 million of annual aggregate reinsurance from the catastrophe bond market through its second sponsorship, under the MMIFS Re Ltd. (Series 2026-1) issuance.
Back in 2018, Canada’s Office of the Superintendent of Financial Institutions (OSFI) had been assessing the use of alternative reinsurance arrangements, including ILS and catastrophe bonds, cautioning at the time on the potential risks associated with third-party capital.
But now, the OFSI has added natural catastrophe bonds as a form of reinsurance to reduce capital requirements for insurance risk, signalling a greater parity in capital requirements for sponsors, compared to the rest of their reinsurance tower.
The regulator is changing Section 4.3 of the Minimum Capital Test Guideline, to include the use of natural catastrophe bonds as a form of reinsurance for capital credit, providing guidance for insurers that want to utilise cat bonds within their reinsurance towers.
The regulator notes that catastrophe bonds are considered “unregistered reinsurance, with no margin requirement” and says it expects cat bonds to have an indemnity trigger with collateral invested in high-quality assets.
Interestingly though, Canada’s regulator wants to see this collateral held in Canada, not overseas or offshore, while it must also be fully paid in under a reinsurance security agreement.
Unless these characteristics of a cat bond deal are met, the regulator says it will not recognise the instrument for reinsurance capital credit purposes.
Canadian insurers wanting to sponsor catastrophe bonds will have to gain approval from the OFSI before they endeavour to use cat bonds to reduce their capital requirement for insurance risk.
These regulatory adjustments take effect immediately, the OFSI explained.
It’s a positive move for insurers in Canada, making catastrophe bonds a viable reinsurance alternative that can provide the regulatory capital credit they would expect from any reinsurance arrangement.
As such, this could serve to bring more Canadian cat bond sponsors to market in future, which would be a positive for their ability to access diversifying forms of reinsurance capital and potentially a positive for investors in the catastrophe bond market, in bringing more deals from a different peril region.
