The Impact of Tariffs on the Insurance Industry
At its core, insurance is an exercise of predictions. These predictions are supported by extraordinary amounts of data and complex algorithmic accounting, but much of the exercise for insurance carriers is trying to predict the impact outside forces have on the risk of loss. On April 3, 2025, President Donald Trump announced a sweeping tariff policy that exceeded expectations on the amount and extent of tariffs the United States is willing to impose on its trading partners worldwide. In addition to a flat, 10% universal tariff on all imports, the White House announcement includes a 25% duty on all imported automobiles and auto parts, alongside expanded tariffs on key construction and manufacturing materials[1]. The president points to tariffs as a tool in leveling U.S. manufacturers’ playing field and creating jobs at home. However, one of the many ancillary impacts is a hit to an already constantly evolving insurance sector.
Auto Insurance: Rising Premiums Due to Parts Inflation
Automobile insurance rates are poised to absorb the most significant direct hit from the newly announced tariffs. Tariffs on new cars manufactured outside the U.S. are only one component of likely cost increases. As the cost of imported vehicle parts goes up, repair expenses are also expected to climb significantly. This increase in repair costs will lead to higher claims, which insurers must factor into their pricing models for customers[2]. Consequently, auto insurance premiums are expected to rise by 6-10% by the end of 2025[2]. Additionally, the higher vehicle replacement costs due to increased sticker prices will pressure insurers to adjust their rates.
Homeowners Insurance: Increased Construction Costs
The tariffs on building materials such as timber (from Canada) and steel and aluminum (from China, Germany, and Japan) will drive up the costs of home construction and repairs[2]. This inflation will directly affect insurers' loss payouts for both personal lines homeowner’s insurance and commercial coverage. For example, if a home previously insured for $500,000 now costs $575,000 to rebuild due to inflated material and labor costs, insurers must increase coverage limits, leading to higher premiums[2]. The construction industry, which relies heavily on imported materials, will feel the brunt of these tariffs, and homeowners will see the impact on their insurance bills.
Commercial Insurance: Broader Economic Impacts
The broader economic effects of the tariffs will also ripple through commercial insurance. Increased costs for raw materials and manufacturing components will strain public budgets and raise the risk of defaults, particularly in sectors dependent on imported goods[3]. Insurers focusing on the public sector may face heightened risks and must adjust their underwriting and rate actions accordingly.
Navigating the Changes
Insurance carriers hone their underwriting actuarial models over many years and with extreme caution. All insurance carriers must proactively model different scenarios to anticipate the mid-to-long-term impacts of these tariffs on loss cost trends[3]. By staying ahead of the underwriting cycle and managing market dislocation, insurers can better navigate the challenges posed by the new trade policies. With tariffs now a reality, insurers will have to think creatively and quickly about the breadth of impact they will have on the market.
In conclusion, while the newly announced U.S. tariffs aim to bolster domestic production, they also introduce significant inflationary pressures that will affect the insurance industry. Auto, homeowners, health, life, and commercial insurance sectors will need to adapt to these changes to maintain profitability while providing adequate coverage for their clients.
References
[1] Trump's new car tariffs start April 3 in US: What to know
[2] Tariff Trouble: How Trump’s 2025 Trade Policy Could Reshape the ...
