Insurance industry must brace for tariff fallout, Hartwig warns

By Mia MacGregor

April 7 - (The Insurer) - In light of the sweeping tariffs imposed by President Donald Trump last week, insurers should closely monitor underlying claim severity trends and quickly incorporate them into ratemaking, according to Robert Hartwig, clinical associate professor of finance and insurance at the University of South Carolina.

Speaking to The Insurer, Hartwig said the tariffs could have broad consequences for the insurance industry because of its deep global integration.

“Every insurer, every employee of an insurer, whether they only operate in the United States, is, in fact, a globalist, because they are linked to global insurance markets through reinsurance,” he said.

Even domestic-only insurers are not immune, added Hartwig, who is a former president of the Insurance Information Institute.

“If they’re publicly traded, they no doubt have large institutional and retail investors from foreign countries holding their stock, so you need not be operating across borders to be a globalist in the insurance world. Insurers should be very aggressively defending the ability to operate on a global scale,” he said.

“When you dismantle globalisation, that means you are dismantling part of the global insurance and reinsurance industry implicitly.”

MULTIPLE LINES AND SECTORS AT RISK

Hartwig pointed to the potential impact on multiple lines of business.

“Auto lines, personal and commercial, as well as all property lines, are affected because of the significant import component in residential and commercial construction,” he said.

Transportation-related lines such as ocean marine, inland marine, as well as trade credit insurance could also be hit. Broader industry segments like energy and aviation are vulnerable as well, according to Hartwig.

“There’s a significant amount of insurance capital dedicated to infrastructure tied to trade: railroads, for example,” Hartwig said. “There’s an enormous amount of trade between Mexico, the U.S., and Canada transported by rail, including most of the vehicles produced. That cross-border movement could be severely disrupted.”

He warned that these disruptions carry deeper implications than many might realise.

“Tariffs increase claim severities, which ultimately get passed along to consumers as higher premiums. So over time, insurers may earn more in premium, but not necessarily more in profit.”

While services like insurance have not yet been directly targeted by trade restrictions, Hartwig cautioned that “we cannot rule out the possibility that, in an escalation, services, including insurance, could be affected.”

He also raised concerns about weakening investment income.

“Markets have been tanking, and that will hurt insurers’ equity holdings,” Hartwig said.

“About 20% to 25% of property casualty insurers’ financial assets in the U.S. are stocks. The rest are mostly bonds. Interest rates are falling, and that’s going to depress insurers’ ability to generate investment income over time.”

A potential recession could further strain insurers’ fixed-income portfolios through a rise in insolvencies, he said.

Adding to the headwinds, Hartwig noted that the U.S. dollar is weakening rapidly. “In economic theory, a tariff should strengthen a country’s economy, but we’re seeing the opposite.”

That’s partly because of fears of a recession and anticipated interest rate cuts by the Federal Reserve, he explained.

“Foreign investors are also losing faith in the dollar as the world’s global currency. They now view the U.S. dollar as unreliable because the administration is inconsistent on macroeconomic issues affecting international trade. That’s a very bad thing for the United States.”

TARIFFS COULD UNDERMINE VEHICLE SAFETY

Hartwig also warned of the “law of unintended consequences”.

He pointed to recent top safety ratings released by the Insurance Institute for Highway Safety (IIHS) for smaller and mid-sized cars. “All of the vehicles that earned top ratings in those categories were foreign imports: Toyotas, Hondas, Kias. Not a single American brand among them.”

As a result, consumers seeking affordable, safe cars could be priced out of the market.

“People trying to do the right thing, buy a safe vehicle, might not be able to afford one anymore. Some models may no longer be available in the U.S. at all if a 25% tariff makes them uneconomical to import,” he said.

“One of the unintended consequences is a fleet of less safe vehicles on the road, with consumers left with fewer choices, including those the insurance industry itself has identified as the safest on the road.”

RATE ADJUSTMENTS AND ADVOCACY

To adapt, Hartwig urged insurers: “Be vigilant in monitoring underlying claim severity trends and incorporate them into ratemaking as quickly as possible, to avoid falling behind, as happened with inflation after the pandemic.

“This will help preserve margins, and from a messaging standpoint, make it clear that insurers have no intent to absorb these costs. They will be passed through to consumers.”

Hartwig also called on industry leaders to raise their voices.

“Stand up and be vocal,” he said. “The message needs to get through to Washington. Not just to Mr. Trump, but to Congress. If the president won’t act, Congress needs to. But the president can act, and should act to preserve the free flow of trade and capital around the world.”

“There’s just no example of a global trade war that has ended well.”