On July 20, 2026, the Office of the Superintendent of Financial Institutions (OSFI) issued a regulatory notice (Notice) indicating OSFI’s intention to formally recognize natural catastrophe (CAT) bonds as an acceptable form of reinsurance for capital credit purposes under the Minimum Capital Test (MCT) Guideline. The Notice applies to all federally regulated property and casualty (P&C) insurers, excluding mortgage insurers.
As the ILS market continues to mature and support demand for catastrophe risk capital, the addition of CAT bonds as a form of reinsurance for capital credit is a significant development for Canadian insurers. Historically, the Canadian federal insurance regulatory regime has not guaranteed capital relief for insurers participating in insurance-linked securities (ILS) instruments as an alternative to reinsurance. As a result, the financial incentive for insurers in Canada to use CAT bonds was limited.
Background
ILS are financial instruments that transfer catastrophe-related risk from insurers to capital markets and financial investors. CAT bonds are a form of ILS which deal with the risks associated with catastrophic events, such as flooding and wildfires.
CAT bonds are debt-like instruments that typically mature within three to five years. They are established by a sponsor (an insurer or reinsurer) through the use of a special purpose vehicle (SPV). The SPV collects premiums from the sponsor and issues CAT bonds to investors that are fully collateralized. If a covered natural catastrophe occurs that triggers the CAT bond’s predetermined metrics, the sponsor collects funds raised from the SPV to cover insured losses. If no covered natural catastrophe occurs, investors receive interest earned on the invested securities and return of principal at maturity.
Climate context: The escalating loss environment
OSFI’s decision to recognize CAT bonds for capital credit purposes emerges against the backdrop of Canada’s rapidly escalating insured loss experiences from natural catastrophes. According to Catastrophe Indices and Quantification Inc., insured losses caused by severe weather events exceeded CA$2.4 billion in 2025, ranking 2025 the tenth costliest year on record for severe weather.[1] Moreover, 2024 was the first year in Canadian history where insured damage caused by severe weather events surpassed CA$8 billion. The total amount of insured losses in 2024 nearly tripled the total amount of insured losses recorded in 2023 and was 12 times the annual average of CA$701 million in the decade between 2001 and 2010.[2]
The increasing frequency and severity of catastrophic events and resulting insured losses are contributing to higher premiums and reduced capacity in the insurance market, making this Notice a timely and welcome update for Canadian insurers seeking alternatives to traditional reinsurance as well as for Canadian policyholders.
Eligible CAT bonds
OSFI defines CAT bonds as insurance-linked securities issued for the sole purpose of transferring natural-hazard-related risk from an insurer, reinsurer or sponsor to capital markets for a predefined natural peril, such as earthquakes, hurricanes, severe convective storms, floods, wildfires and other naturally occurring environmental events. CAT bonds must exclude coverage for any man-made or human-initiated events including, but not limited to, terrorism, war or political violence, industrial or infrastructure accidents, pollution incidents, nuclear or radiological events arising from human actions, cyberattacks and any other non-natural cause of loss.
CAT bonds will only be recognized as unregistered reinsurance for capital purposes with no margin requirement, provided all of the following conditions are met:
- The CAT bond must have an indemnity trigger.
- Collateral must be invested in high-quality assets; located in Canada and fully paid under a reinsurance security agreement.
- Collateral is subject to the capital requirements applicable to unregistered reinsurance.
Transactions must therefore be structured properly to satisfy all conditions from the outset and on an ongoing basis.
OSFI approval process
Approval from OSFI must be obtained prior to using CAT bonds to reduce capital required for insurance risk. Applications must include the following information:
1. Purpose and reinsurance program structure
- A copy of the insurer’s reinsurance program structure, showing how the CAT bond fits within the applicant’s overall reinsurance strategy.
- Confirmation of compliance with the insurer’s reinsurance risk management policy and with Guideline B-3.
2. Reinsurance contract documentation and terms
- A copy of the CAT bond reinsurance contract.
- A description of the settlement of accounts if the bond is multi-peril.
- Identification of the governing law, loss calculation methodology and payment mechanics.
3. Transaction structure documentation
- A copy of offering documentation and information provided to CAT bond investors.
- Copies of related inter-company agreements, including agreements between the insurer and the SPV, the reinsurance security agreement and/or the issued CAT bond (as applicable), together with a transaction structure diagram.
- Confirmation that an event of default under the arrangement will not lead to cross-defaults or credit events in any other debt or derivative agreements of the sponsoring insurer.
- Copies of any related auditor, legal or other opinions or attestations received with respect to any part of the transaction.
4. Collateral documentation
- A copy of the documentation on the SPV and/or issuing trust (e.g., declaration of trust).
- A copy of investment management guidelines and oversight arrangements.
- A description of the type and quality of capital held in the reinsurance security agreement.
5. Modelling
- Copies of any stress testing and modelling reports related to the arrangement.
Given the breadth of these requirements, insurers should expect OSFI to conduct a thorough review of each proposed transaction.
Conclusion
By recognizing CAT bonds as an eligible form of capital credit reinsurance under the MCT Guideline, OSFI has laid the regulatory groundwork for Canadian insurers to participate in the global ILS market on a capital-efficient basis. CAT bonds will offer a capital-efficient complement to traditional reinsurance, which will be particularly relevant when managing peak natural catastrophe exposures. The conditions for capital recognition will materially influence how future Canadian-sponsored CAT bonds must be structured. Insurers considering CAT bonds as part of their capital and reinsurance risk management strategy should carefully assess these conditions, prepare comprehensive application packages aligned with OSFI’s requirements and plan for early engagement with their lead supervisor. Legal counsel experienced in insurance regulatory matters, ILS structuring and capital markets transactions will be essential to navigating this framework.
While this represents a significant step forward for Canadian insurers, CAT bonds are one of many products that are offered in the ever-maturing ILS market, which has recently seen substantial expansion in casualty lines, including cyber, in the US and other jurisdictions.
For more information on this topic, please reach out to Marisa Coggin and Claudia Lach or any member of Dentons Corporate and Regulatory Insurance team.
The authors would like to thank Maryanna Sierra Diab, articling student, for her contributions to this article.
[1] https://www.ibc.ca/news-insights/news/severe-weather-related-insured-losses-in-canada-exceed-2-4-billion-in-2025
[2] https://www.ibc.ca/news-insights/news/2024-shatters-record-for-costliest-year-for-severe-weather-related-losses-in-canadian-history-at-8-5-billion
