The Impact of US Tariffs on the Insurance Industry: Navigating New Risks

The introduction of heightened tariffs by the United States on a variety of imports is reshaping the risk landscape for insurers and igniting a surge in demand for trade credit insurance. These economic shifts, marked by tariffs reaching as much as 145% on specific Chinese imports, are causing businesses involved in international commerce to grapple with reduced margins, payment deferrals, and heightened exposure to nonpayment risks. As a consequence, industry leaders, including Hub International, report a notable increase in companies seeking trade credit insurance as a protective measure amidst tightening lender credit terms. This escalating demand has the potential to strain the capacities of insurers, raising significant challenges in meeting the burgeoning volume of new policy requests.

Insurers like AM Best are closely observing these developments, noting that the increased complexity in underwriting due to heightened credit risks and macroeconomic uncertainties could adversely affect insurers' financial health and reserve sufficiency. Allianz further paints a picture of a full-scale trade war environment, with a global tariff average reaching an unprecedented 25.5% since the late 19th century. Chinese imports face tariffs of 130%, and European goods encounter an average levy of 9%, with the exclusion of specific sectors such as semiconductors and pharmaceuticals. Legal interpretations from entities like Pillsbury Law suggest multiple insurance lines, including political risk, directors and officers liability, builder's risk, subconductor default, and marine insurance, might undergo significant impacts due to trade-induced financial and operational disruptions.

In addition, the American Property Casualty Insurance Association highlights that claims costs might escalate in sectors like construction and personal auto insurance. This aligns with AM Best's recent remarks about possible inflation-induced claims severity under the influence of current tariff policies. While Allianz projects a potential reduction in US tariff levels to 10.2% by the year's end, assuming successful trade negotiations, existing tariffs on key materials imported from China, Mexico, and Canada persist despite temporary reprieves. Market participants are urged by experts like AM Best’s Ann Modica to factor extended economic uncertainties into long-term risk assessments, which could affect market stability and insurer strategies.

Forecasts by Allianz indicate a global GDP growth of 2.3% for the year, with insolvency rates in the US expected to rise by 16% and a 7% increase globally. Anticipations of a peak in US inflation at about 4.3% by summer could lead to diverse monetary policy responses compared to European trends. Given this backdrop, PwC US advises insurance entities to stress-test their financial portfolios, adjusting underwriting models and pricing strategies to account for the medium- to long-term effects of tariffs and inflation pressures. In light of these evolving trade patterns, the insurance industry faces pivotal challenges in recalibrating its pricing frameworks, claims processes, and credit market dynamics to adapt and thrive amid ongoing global economic turbulences.