European insurers brace for ripple effects of US tariffs

By Ryan Hewlett, Edward Carron

April 9 - (The Insurer) - European (re)insurers remain confident any direct impact from U.S. President Donald Trump’s “liberation day” tariffs will be manageable, according to market executives canvassed by The Insurer, despite early commentary from ratings agencies warning to expect significant indirect impacts.

Senior market executives told The Insurer noted that recent U.S. tariffs have introduced a range of challenges that are likely to affect the London market and wider European non-life P&C sector.

Trade credit and the marine cargo markets are most likely to come under pressure in the near-term, one senior London market source said. The tariffs will likely force some policyholders to alter existing supply chains, some of which may not be tested, and potentially leading to claims.

More broadly, the introduction of tariffs is expected to increase the cost of claims in the short to medium-term. Tariffs on imported construction materials including steel and timber could increase the repair or rebuild costs for structures, while a spike in the cost of importing vehicles and machine parts will place pressure on the motor market as well as specialty lines including aviation.

Discussing the impact of the U.S. tariffs in an interview with The Insurer late last week, Beazley CEO Adrian Cox said it would have an impact on loss costs as well as asset prices.

“There'll be a short term hit whilst that rolls through, but we should be able to price for it fairly quickly,” said Cox, who was talking to The Insurer last Thursday.

He continued: “The tariffs are focused on goods rather than services, so it doesn't have an impact on insurance directly. We just need to make sure that we rate for it quickly so that we can get the premium for the extra risk.”

More broadly, Cox said that the current uncertain geopolitical environment “does change the nature of some risks that we underwrite,” noting his company’s political risk, political violence, war and cyber books as examples.

“We’re adjusting our underwriting according to where we think the risks are increasing and decreasing,” he said.

Fitch Ratings said in a note on Wednesday that European carriers are not directly affected by U.S. tariffs but remain “significantly exposed” to second-order effects, with the ensuing global market volatility and economic repercussions expected to affect financial performance and operating conditions.

Global investors and listed firms faced some of the most challenging trading days last week since the coronavirus pandemic shook global markets in early 2020.

Stocks around the world fell sharply on Thursday and Friday, with the Stoxx 600 Insurance index falling 6.8% from 479.59 euros at the close of market on Wednesday to 446.96 euros at the end of the week.

This week, the index, an aggregate of the market performance of 600 European life and non-life carriers, continued to fall, with a slight uptick on Tuesday reversed on Wednesday when the tariffs came into force and global markets tumbled further.

Falling equity prices and widening credit spreads are particularly concerning, as they may lead to mark-to-market losses, affecting insurers' generally strong solvency ratios.

Moody’s reported that European insurers have already experienced moderate declines in their solvency ratios due to recent market turbulence. Despite this, insurers began the year with robust solvency positions, averaging 220% for major players, which has mitigated the immediate impact of equity market declines.

However, Moody’s cautions that prolonged tariffs could lead to broader economic slowdowns, further challenging insurers.

Ripple effects could spill over to real estate, private equity, and private debt markets, which are all areas (re)insurers are invested in, said S&P Global Ratings, which predicted that high uncertainty about the market direction and the duration of the market downturn could affect carriers over the short to medium term.

“While short-term market fluctuations are reflected in re/insurers' quarterly financial reports, losses from asset investments typically materialize after six to twelve months,” it said.

Reinsurers and London market insurers are particularly vulnerable, given their exposure to the US market through reinsurance coverage and investments.

Additionally, the potential for increased claims costs due to tariffs, such as higher inflation and supply chain disruptions, poses a risk to non-life insurers. The implications of these tariffs extend beyond immediate financial effects, as trade credit insurers could face reduced revenues and heightened claims if corporate defaults rise amid shrinking trade volumes.

US DOLLAR EXPOSURE AND CLAIMS INFLATION IMPACT

Reinsurers and London market insurers are the most directly exposed to potential weaknesses in the U.S. economy, U.S. dollar and U.S. operating conditions out of all EMEA insurers. Fitch noted that Europe’s major reinsurers are exposed to currency fluctuations with their earnings geared to the dollar.

The exposure is largely contained in local subsidiaries, and cross-border activities are limited, but weaker U.S. performance or a decline in the dollar would negatively affect consolidated results. London market insurers are similarly exposed through their U.S.-focused operations, it said.

Both Fitch and Moody’s noted that non-life insurers could face lower revenue from lower economic growth. Rising claims costs due to tariffs could lead to higher inflation and supply shortages, particularly for construction materials and motor spare parts.

Business interruption claims may also increase due to supply chain disruption, Fitch said, adding that non-life insurers’ pricing could fail to keep pace with claims inflation costs as pricing momentum is constrained by macroeconomic weakness, leading to pressure on margins.