Impact of US Tariffs on the Insurance Industry
The recent imposition of tariffs by the US on imports is expected to have far-reaching effects on the global insurance sector. According to a note by Morningstar DBRS, while insurance companies primarily provide financial services, they will still be impacted by the tariffs through various channels.
Direct and Indirect Effects
The direct effects of the tariffs will stem from inflationary pressures, while indirect effects may include financial market volatility and weaker economic conditions. The US has imposed a 10% tariff on most imports, with higher rates for certain trading partners, aiming to address trade imbalances. These tariffs are expected to increase costs for raw materials and manufactured goods, potentially leading to higher claims costs for insurers.
Property and casualty insurers in the UK and European Union are expected to be less affected, although the situation could change depending on the evolution of retaliatory tariffs. Auto and property insurance lines may experience higher claims costs due to supply chain disruptions and material shortages in these regions. In contrast, areas such as casualty insurance are not expected to face direct impacts.
Impact on Different Insurance Sectors
Policies in political risk and cyber insurance may see additional losses due to heightened geopolitical instability and trade policy uncertainty. While life and health insurers are not directly affected by the tariffs, the broader effects of financial market performance and investment sentiment could influence them. Changes in portfolio valuations and shifts in policyholder savings behavior are likely to affect the wealth and asset management sectors.
The North American economy is expected to be weaker, potentially leading to a larger impact on US life and health insurers compared to their European counterparts. Market volatility could drive demand for guaranteed savings products from risk-averse customers. However, the sales of life insurance products could slow if investment sentiment declines. If tariffs are eventually imposed on pharmaceuticals, it could increase health insurance claims, although this remains a potential scenario.
Reinsurers and Mitigating Actions
Reinsurers, particularly those involved in US property markets, are likely to face inflationary pressures due to tariffs. Global reinsurers providing coverage in life and health, as well as other lines like casualty insurance, are expected to be less impacted. “Despite these large trade and market disruptions, we believe that the impact on most well-diversified insurance companies is manageable,” said Nadja Dreff, senior vice president, sector lead Global Insurance & Pension Ratings, Morningstar DBRS.
Insurers are expected to take mitigating actions, such as premium increases, adjustments to supply chains, tighter control of expenses, and potential investment portfolio reallocations. For instance, insurers in the auto and property sectors are likely to raise premiums. In regulated markets, premium increases will require approval from local authorities, while in unregulated markets, insurers are expected to act more quickly.
The performance of investment portfolios will be an important factor for insurers’ financial outcomes. Morningstar DBRS will closely monitor market conditions affecting fixed income, private, and alternative assets.
