This post is part of a series sponsored by Actentsync.
Since the inauguration in late January, President Donald Trump has imposed (and promised) tariffs that affect almost all U.S. imports. Although some sporadic nature of these actions makes it difficult to predict the full extent of their future consequences, studying our understanding of tariffs, the impact on prices, and the ins and outs of the P&C insurance industry can give us a general understanding of possible stores.
Spoiler Alert: P&C insurers and policy holders may have more difficult times.
Tariffs: What are they and how do they affect prices?
Today’s Econ 101 course: Tariffs – Taxes collected from goods imported from other countries. Typically, tariffs are expressed as a percentage of the value of the product and are paid directly to the government by the company that brings foreign goods into the country. While the overall idea of tariffs is that importers pay their duties, the reality is that the end consumer usually bears at least a certain cost.
To illustrate the impact on the end consumer, let’s use the Trump administration’s 25% tariff on all agricultural imports in Mexico. In this example, a U.S. grocery store imported 20-pound pepper bags from a farm in Guadalajara and now has to pay the price of the bag, plus a 25% tax directly from the U.S. government. To maintain its profit margins, grocery stores may choose to increase (if not all) fees by increasing the price of Bell peppers (if not all). Suddenly, family dinner nights cost more.
But, what does this have to do with P&C insurance? Trump’s tariffs will not only affect agricultural imports, analysts predict a range of commodities ranging from wood, sneakers to chocolate to cars. As investors and the U.S. economy’s uncertainty grows with uncertainty, changing actions on new taxes have put stocks in turmoil. Property and casualty insurance companies are also concerned, as the increased cost of importing homes and automobiles to build and repair materials will ultimately increase the cost of claims, thus reducing the already damaged solvency ratio tests. Let’s explore Trump’s impact on the value of two common assets: homes and cars.
How tariffs affect homeowners’ insurance premiums
According to the National Association of Home Builders, the U.S. imported about $14 billion in residential building materials in 2024, including wood from Canada and lime and plaster products from Mexico. Builders hope new tariffs raise the cost of building materials for ordinary U.S. homes by less than $11,000. The same is true for repairing property losses when the price of materials rises. In other words, homeowners who require $500,000 in 2024 now need at least $511,000 to pay for the tariff-related price increases. Economists predict that these price increases will result in higher claims payments for P&C carriers in the short term and ultimately increase homeowners’ premiums.
How tariffs affect auto insurance fees
With the 25% tariff on all imported cars, the automotive industry will directly feel the impact of Trump’s tariffs. In addition, millions of domestically assembled cars, including aluminum and steel, rely on imported parts and materials, face a 25% tariff, and generally 10% baseline value for all imports, and a sudden purchase of new cars is now at $2,500 to $12,000.
Higher automatic repair costs mean higher claims costs, which may require higher premiums as operators adjust their pricing models to more accurately reflect their risks. Advanced rate hike forecasts are already underway, with industry experts in the enterprise predicting that the price of fully covered auto insurance will increase by 19% by the end of 2025. However, the change in tariffs makes it impossible for you to accurately determine the quantity at this time.
Tariffs threaten an already difficult P&C landscape
The P&C industry relies on affordable materials for real estate repairs and replacements as part of a claim settlement. Higher claims costs directly affect carriers’ profitability as they scramble to redefine their pricing models to keep up with price increases and compete with state regulators trying to protect policyholders from unfair senior hikes.
To make things more complicated, P&C insurers are already facing a large margin, largely due to the increased frequency and severity of large-scale natural disasters. Insurers that have just begun to see their merger ratios increase in the past few years now have further hit their profitability due to new tariffs.
Profitability: 3 options for P&C carriers
Given the above, current P&C carriers may feel a little bleak. But we can be sure that even without flexibility, the insurance industry and about 3 million people are nothing.
Here are three paths the carrier can take to limit its risk, and remain profitable despite the shift in market conditions. The most active carriers will implement some combination of these three combinations, not only to survive the current tariff-related profit threats, but to better face future challenges.
1. Practice more active underwriting
The rapid nature of tariff fluctuations makes it difficult for insurers to increase their risk quickly and accurately. However, by prioritizing frequent actuarial reviews and regularly modeling best and worst-case scenarios, operators and state regulators can better understand the financial implications of various tariff measures on claims costs.
When it comes to more accurate coverage, data is key. Successful operators are already leveraging data and analytics to improve their coverage, and as data collection and analysis tools continue to evolve, we hope that more operators will use their vast amounts of real-time and historical data to improve coverage and claim forecasts. In the case of upcoming tariffs, P&C insurers may consider incorporating data points such as geopolitical risk scores and supply chain exposure measures into their underwriting models.
2. Innovation through policy products and design
To increase the cost of construction and maintenance materials, carriers may turn to innovations in their policy products and pricing models. One option is that P&C insurers introduce upgrade clauses to their policies that automatically adjust coverage as costs increase. These terms use manufacturer price index data in their pricing model to provide financial protection despite building materials tariffs:
- Carrier: By allowing them to adjust policy prices to reflect their risks more accurately
- Policy holder: By preventing them from being harmed by future damage
Other options for aircraft carriers include expanding their coverage. Some accidental business disruption insurance policies have tended the rise in geopolitical uncertainty to its terminology. Some companies already offer supply chain insurance and trade credit insurance.
3. Strengthen operation to improve elasticity
In response to ongoing P&C market volatility, operators and agencies will shift their focus to operational efficiency and risk reduction. When market uncertainty threatens profit margins, carriers should consider any opportunity to increase the efficiency of internal processes and reduce their indirect costs. With so many moving parts, understanding the current state of your insurance business is a challenging but crucial first step to increasing resilience and reducing risk.
Fortunately, operators can use this interactive evaluation to evaluate the strength of their current distribution channel strategies. Once you receive the results and diagnose the level of maturity in the five key areas of distribution strategy and execution, you can have a clearer understanding of where and how to mitigate risks and expenses from your operations.
All in all, while the target of tariffs may be to increase domestic production, they will also create huge inflationary pressures on the price of consumer goods that will affect loss point insurance companies and policyholders. If the insurance department wants to maintain a long-term commitment to protecting policyholders while also maintaining a stable and profitable career field, it needs to find innovative ways to adapt to changes.
To gain a deeper understanding of the challenges facing the P&C industry right now, check out our e-book: The Future of P&C Insurance: The Race to Curb Costs in the Situation of Catastrophic Losses.
theme
Property casualties
