They insure the banks against mortgage default. People pay a small premium on their monthly mortgage payments so that if they default, the bank is insured for the cash difference of the outstanding amount on the mortgage.
As a result, banks in Canada face no risks from mortgage default so there's no reason to deny a mortgage. Over 90% of mortgages made in the past decade are CMHC-insured.
By 2010 CMHC had an annual financial surplus of more than $2 billion.[6] CMHC is the largest Crown Corporation in terms of assets with some $26 billion in holdings as of 2008-2009.
If you think this insurance can cause Canadian banks to be more risky in their lending - I don't think that is currently the case.
You would prefer if there was not such an insurance system required for home owners putting less than 20% down?
I know I would. It would be like the 90's again where banks had to only loan out to people who they thought wouldn't default.
This is 100% exactly how the US crash happened through Fannie Mae and Freddie Mac.