The tariff ripple effect: how insurers can navigate inflation and market disruptions

A wave of potential new tariffs the Trump Administration plans to impose is sending shockwaves across various parts of the US economy. Tariffs increase costs, but who ultimately bears these costs plays a critical role in determining their impact on cost inflation. Tariffs had a limited effect on aggregate consumer inflation in 2018, due to low underlying inflationary pressures in the economy at the time, a greater focus on intermediate goods, the proactive rerouting of supply chains and other offsets. The newly announced tariffs may have a different effect because new trade policies could arrive before expected changes to taxes and deregulation.

Preparing for the medium-term effects of tariffs and associated inflationary trends can enable carriers to stay ahead of the underwriting cycle and manage through any upcoming market dislocation. In the face of inflationary pressures and shifting economic conditions, insurers must proactively model different scenarios, anticipate mid-to-long term impacts on loss cost trends and take the appropriate underwriting and rate actions.

In property and casualty, if some of the recently announced tariffs with Canada and/or Mexico are enacted, the severity of auto and homeowner claims could increase due to increased prices for aftermarket auto parts and construction materials. As a reference, according to PwC research, over 40% of US auto parts are imported from Mexico. We also estimate that a 25% tariff on Canadian products could result in approximately $73 billion a year in surcharges. The most-affected Canadian products will likely include motor vehicle and aerospace products and parts, metal manufacturing materials, chemicals, food items and agricultural products. Similarly in commercial lines, inflationary impacts can vary widely across sectors based on the magnitude and scope (e.g., countries and exemptions) of new tariffs. For instance, if the cost of raw materials — ranging from oil and natural gas to timber and minerals — increases, public budgets may become increasingly strained, raising the risk of defaults. This is likely to pressure insurers that focus on the public sector.

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