AM Best: Tariff uncertainty likely credit negative for insurers

By Michael Loney

April 15 - (The Insurer) – Investment volatility and inflationary pressures resulting from tariffs are likely credit negative for insurers, said AM Best, which added they could increase concerns over rate adequacy.

In a new commentary, AM Best said that, despite a current 90-day reprieve, stock and bond market volatility could pressure insurers’ balance sheets, causing unrealized losses in equity portfolios and leading to reduced balance sheet strength.

In addition, tariffs have the potential to add to inflationary pressures, and increase loss costs across several lines of property casualty coverage.

If this happens, AM Best said “property/casualty insurers would be concerned for rate adequacy” and would request higher rates and raising premiums.

The rating agency also said that unexpected inflation would cause reserves to weaken.

AM Best said that 166 U.S. property casualty insurers have more than 25% of their assets allocated to equities, while the 10 companies with the highest exposure to unaffiliated common stocks by dollars have varying degrees of exposure to invested assets and capital and surplus.

An increase in credit spreads could compensate for the decrease in yields, the rating agency said, but added any credit spread widening is a signal of potential credit deterioration.

“The impact of the tariffs proposed by the Trump Administration will not be limited to an increase in uncertainty and market volatility that intensifies existing business risks,” the commentary said. “An economic downturn that results in reduced levels of economic activity and stymies international trade could ultimately manifest in a somewhat reduced demand for insurance.”

This would result in decreased sales revenue for affected industries, and lower the exposure base for insurers to which rates are applied to determine premiums.

For personal lines carriers, spare vehicle parts could become more expensive for private passenger auto because of the tariffs and add to inflationary pressures. AM Best said that “claim costs would be expected to rise, resulting in rate adequacy concerns, which will become a prominent focus again for personal auto carriers.”

Commercial property and commercial auto insurers could also be negatively affected by price volatility from supply chain disruptions stemming from ambiguity in how tariffs are applied across different jurisdictions.

AM Best also highlighted that D&O insurance exposures could rise over the near term from decisions made by corporate executives in response to the tariffs and the ensuing economic volatility.

In addition, medical cost inflation would negatively affect workers’ compensation carriers.

“Ultimately, the consequence of the tariffs could translate into wider economic impacts for certain countries, affecting growth, affordability, and cost of living, as well as further compounding pressures,” the commentary said. “Ultimately, increased claim costs for insurers resulting from tariffs would likely put upward pressure on the premiums that policyholders have to pay.”

AM Best analytical teams are speaking with rated companies to gauge the impact of tariffs and their respective responses.

“While no immediate rating actions have been taken, the impact from tariffs is likely a credit negative for insurers and could lead to changes in credit ratings depending on individual company situations,” AM Best said.