Zaffino: Tariffs could drive demand surge following another US cat event

By David Bull

May 5 - (The Insurer) - If another major catastrophe occurs in 2025 following January’s California wildfires, tariffs could drive demand surge, supply constraints and further inflation, which may also lead to extended business interruption, affecting loss costs for insurers, according to AIG president and CEO Peter Zaffino.

Speaking on the carrier’s earnings call last week, the executive highlighted the “significant uncertainty” around the topic of tariffs.

“Tariffs create uncertainty, which may lead to lower levels of transactional activity in the near term, impacting certain commercial businesses, but it’s premature to predict any specific outcomes related to these emerging macro trends,” he said.

“The greatest challenge for companies is understanding the real impact of tariffs and how they are changing in their implications. There’s a complexity not only with tariff policies evolving, but also the potential impact on supply chains,” Zaffino continued.

In his comments, he outlined the potential implications that should be considered in relation to loss costs and inflation.

Depending on the type of loss, he noted that typically in a high-net-worth property claim, around 60% of the loss would be for rebuilding costs, 30% for contents and 10% for allocated loss adjustment expense.

“When considering materials such as lumber, floor coverings, windows, steel, marble or granite, you need to take into account increased inflation rates. Then you should consider which of these items are imported,” he suggested.

Zaffino noted that Canada represents around 85% of all U.S. softwood lumber imports.

“This added dimension further complicates the calculation of future loss costs. Additionally, if there’s another major catastrophe in 2025 beyond the January wildfires, we could see demand surge, supply constraints and further inflation which may also lead to extended business interruption,” he said.

“Lastly, insurance companies need to monitor the effects of sales, payroll and other factors to calculate the potential impact on future premiums, if any. We will continue to monitor the implications for our business as more information becomes available,” the executive continued.

He highlighted the fact that only seven countries worldwide export more than $100 billion to the U.S., with only China, Canada and Mexico exporting over $250 billion.

INDIAN OPPORTUNITY

Also in prepared comments on the earnings call, Zaffino talked about AIG’s joint venture with the Tata Group in India, which has grown from being the 10th largest economy to the fifth largest in a decade and is on course to be the third largest after the U.S. and China by 2030.

He said: “In close partnership with Tata Group, we’re prepared to significantly invest in growth organically and possibly inorganically should opportunities present themselves, and I expect this business to continue to scale faster than any other geography in our portfolio.”

Zaffino reported that the general insurance market in the country was over $35 billion in gross premiums written in 2023 and had a compound annual growth rate of around 11% over the last five years.

“We expect the market will sustain this type of growth through 2030. And there’s a massive opportunity for growth given the changing dynamics. In India, non-life insurance penetration is still relatively low at 1% of GDP. In contrast, the U.S. is at 9% of GDP,” he said.

AIG partnered with Tata Group in 2000, when the India insurance market opened to private carriers and direct foreign investment. It has a 26% stake in the company.

Zaffino said that today private sector insurers represent 60% of the non-life market in the country.

“While India offers tremendous opportunity, it’s a complex and highly competitive market. For foreign companies, it’s important to choose the right partner, a company with deep and broad knowledge of India and one with a strong reputation,” he continued.

The executive said Tata has consistently been ranked as one of India’s most valuable brands and is the number two private insurer in the commercial insurance and motor insurance sectors. Tata AIG wrote $2.1 billion of GPW last year, split 75% personal insurance and 25% commercial insurance.

He described it as a high-growth business, with a compound annual growth rate of 20% over the last five years, which is expected to continue through 2030. Zaffino said Tata AIG’s products and services are “digital first,” with the operation benefiting from access to AIG’s multinational network to support the joint venture’s domestic multinational corporate clients.