Navigating inflation and tariffs: Why flexible pricing strategies are critical for insurers

In the face of rising inflation and shifting economic conditions, insurance companies must adopt flexible pricing strategies to manage profitability while maintaining competitiveness. Potential tariffs can add to price inflation and trade wars can introduce notable volatility to shifting economic conditions. The last time the US implemented tariffs it put tax cuts into place first, which helped support economic growth. However, this time, trade policy is arriving before changes to taxes and regulation.

Inflation increases exposure bases, which increases premiums if rates remain constant. If rates soften, as is happening in some lines/classes, that means more exposure is being quoted at less rate, which is an obvious risk for overall insurance performance. However, no matter what the outcome, insurers should implement strategies to help mitigate its effects including dynamic price optimization, supply chain adaptation, tariff management and private equity investment. Just as businesses rerouted supply chains during previous tariff hikes, insurers can adjust risk models and coverage strategies to account for alternative sourcing and pricing changes. If new tariffs drive inflation, the impact on insurance claims could be softened by businesses absorbing costs, adjusting production locations, or securing exemptions.

The medium-term effects of these changes on different insurance sectors vary and understanding them can help insurers adjust their approaches.

Inflation can cause significant challenges for personal automobile and property insurers. If inflation persists, carriers will likely face significant price pressure, forcing them to either hold rates steady or even reduce them to maintain market share. However, with tariffs on construction and automotive materials and products, the cost of claims payouts will increase further. This in turn could put significant strain on insurers' reserves and surplus, reducing profitability. Carriers accordingly should carefully balance rate adjustments while considering the broader economic factors that could impact both claims frequency and severity, while also considering potential housing and automobile affordability issues in the wider economy.

The commercial underwriting space could experience a major shift if municipalities and state governments implement taxes that apply only to goods and services produced within the United States. Such a change could lead to reduced revenue from infrastructure investments, which in turn would put added pressure on specialty carriers, particularly those with significant exposure to surety bonds and large construction risks. As raw material costs — ranging from oil and natural gas to timber and minerals — continue to increase, public budgets may become increasingly strained, raising the risk of defaults. Insurers in these sectors will need to recalibrate their underwriting, risk and pricing models accordingly.

Price optimization in insurance is not just about responding to market conditions in real time, but about preparing for the medium-term effects of macroeconomic trends such as inflation, tariffs and supply chain disruptions. Companies should perform comprehensive strategic scenario exercises and related modeling to understand potential economic and business impacts, as well as understand potential mitigation strategies. Personal automobile and property and commercial underwriting face unique challenges but flexible pricing strategies can help insurers navigate economic uncertainties.

PwC's Bill Horan and Kate Jacks also contributed to this post.