KBRA: Tariffs expected to raise claims costs for P&C insurers

By Mia MacGregor

April 17 - (The Insurer) - Tariffs are likely to drive up claims costs for property and casualty insurers, particularly in the property and auto lines, according to a report by rating agency KBRA.

The report noted that the primary, secondary and tertiary effects of tariffs will vary depending on the specific lines of business underwritten, as well as the strength of an insurer’s capitalization, risk management framework and liquidity profile.

Tariffs on imported materials such as steel, aluminum, lumber and auto parts, as well as the broader impact on complex supply chains, are affecting replacement costs for insured property and vehicles, affecting both personal and commercial lines, KBRA said.

Post-pandemic supply chain disruptions have already contributed to inflationary pressures for P&C insurers, although those pressures have only started to ease over the past 12 to 18 months.

KBRA warned that claims severity could continue to rise, particularly following natural disasters, when rebuilding costs are often inflated due to demand surge.

Auto insurers in particular are expected to face higher costs to repair or replace vehicles, although these costs may not be fully reflected in premiums if underwriting practices have not been sufficiently adjusted, the report said.

While P&C insurers bear the brunt of rising claims costs, KBRA cautioned that all insurers could be exposed to the secondary effects of market volatility and the tertiary impacts of shifting consumer behavior.

Economic slowdown, or even recession, could result in investment volatility and corporate credit deterioration, pressuring insurers’ liquidity and capital adequacy, the report stated.

However, KBRA said most insurer investment portfolios remain high quality and well diversified. Recent increases in allocations to private credit could help buffer portfolios, offering greater diversification, stronger structural protections and less volatile credit exposure.

Weaker insurers with thin risk management and capital buffers may face credit deterioration risks over time, the report warned. It also noted that reinsurance may become less available and more expensive in this environment.

Going forward, KBRA stated that it will be critical to “monitor the intersection of claims inflation, investment volatility, policyholder behavior, and reinsurance."

“As KBRA examines the evolving tariff environment, the focus will remain on risk management, capital adequacy, liquidity resilience, pricing, and policyholder effects," it added.