Canada's OSFI Lets Property Insurers Use Catastrophe Bonds to Cut Capital Requirements: Indemnity Triggers, Canadian Collateral and Prior Approval Required

Canada's federal insurance regulator has opened a door for catastrophe bonds. In a regulatory notice on using natural catastrophe bonds in its Minimum Capital Test guideline, the Office of the Superintendent of Financial Institutions says it will allow federally regulated property and casualty insurers to treat these bonds as a form of reinsurance that can reduce the capital they must hold for insurance risk. The OSFI page carries the date July 20, 2026, and Canadian Underwriter reported the change on July 27. The notice says the changes take effect immediately. It applies to federally regulated property and casualty insurers and excludes mortgage insurers.

A catastrophe bond, or cat bond, is an insurance-linked security issued to transfer the risk of a defined natural hazard to investors in the capital markets. OSFI's definition covers securities issued solely to transfer natural-hazard risk for a predefined peril. The listed perils are earthquakes, hurricanes, severe convective storms, floods, wildfires and other naturally occurring environmental events. Man-made or human-initiated events are excluded, including terrorism, war, industrial accidents, pollution, nuclear events caused by human action and cyberattacks. Investors put up money that is held as collateral. If a defined catastrophe occurs and the bond is triggered, some or all of that money is used to pay the insurer, and otherwise it is returned to investors with interest.

The notice sets out the conditions for capital credit. A qualifying bond is classified as unregistered reinsurance, with no margin requirement. OSFI states: "We expect the natural catastrophe bond to have an indemnity trigger." An indemnity trigger means the payout depends on the sponsoring insurer's own actual losses, not on a separate index or physical measurement, and the notice does not address parametric triggers. The collateral must be invested in high-quality assets, must be subject to the capital requirements for unregistered reinsurance, must be located in Canada and must be fully paid in under a reinsurance security agreement. OSFI is firm on the consequence: "We will not recognize the natural catastrophe bond for capital purposes if these characteristics are not met."

Insurers cannot simply adopt the treatment. OSFI says: "We expect insurers to obtain our approval prior to using natural catastrophe bonds to reduce capital required for insurance risk." Applications go to the insurer's lead supervisor with the information in an appendix. The appendix has ten items: the structure of the reinsurance programme and how it fits the insurer's strategy, its reinsurance risk management policy and Guideline B-3; the cat bond reinsurance contract, including settlement, governing law, loss calculation and payment terms; offering documents and investor information; inter-company agreements, the reinsurance security agreement and a diagram of the structure; confirmation that a default will not trigger cross-defaults in the sponsor's other debt or derivative agreements; auditor, legal or other opinions; documentation for the special purpose vehicle or issuing trust; investment management guidelines and oversight; a description of the type and quality of capital in the security agreement; and stress-testing and modelling reports. OSFI does not set specific standards for the special purpose vehicle, basis risk or counterparties in the notice itself, and it does not set public disclosure requirements, although insurers must give OSFI the offering documents provided to investors.

The notice is a stopgap. OSFI says it expects to include these adjustments in the next version of the Minimum Capital Test guideline, at which point the notice will be rescinded.

The Insurance Bureau of Canada, quoted by Canadian Underwriter, said that qualifying cat bonds will generally be treated like traditional reinsurance for capital purposes, without the additional margin requirement that applies to traditional unregistered reinsurance. It said the change removes a potential regulatory disadvantage, but that the choice between cat bonds and traditional reinsurance will still depend on pricing, transaction costs, investor appetite and each insurer's own risk needs. It said insurers can report approved bonds under the existing framework while OSFI updates its forms, that it does not expect reporting to be a major barrier, and that it is too early to predict how much the change will alter market behaviour.

Existing use in Canada is limited. Canadian Underwriter reports that only one Canadian insurer, TD Insurance, has publicly announced a cat bond covering Canadian perils. Its first deal, MMIFS Re Ltd. Series 2025-1, was issued in early 2025 and provided $150 million of additional reinsurance capacity for earthquakes and severe convective storms. Its second, Series 2026-1, provides $115 million of aggregate protection on an indemnity and annual aggregate basis for a three-year term from January 9, 2026 to December 31, 2028, covering named storms, earthquakes, severe convective storms, winter storms and wildfires. The article does not provide total Canadian cat bond volumes or details of other sponsors.

The regulatory change also sits alongside a heavy agenda at OSFI, including a new Credit Risk Management guideline and its Annual Risk Outlook, though those are separate from this notice. The significance of this notice is narrower and practical: it replaces uncertainty about capital treatment with a defined, if demanding, approval route. Whether Canadian insurers use it will depend on cost and on how quickly OSFI approves applications. Readers should consult the OSFI notice for the full conditions and appendix.