5 key actions insurers can take to assess the impact of tariffs

Despite some optimistic news like the UK-US trade agreement, tariffs have remained significantly high, sometimes quadruple historic norms. The impact of tariffs on insurance firms will largely depend on their portfolios and geographical areas.

Five key actions for the insurance sector to assess tariff impacts

Here are five proactive measures that insurers can adopt to understand the impact of tariffs:

1. Revise long-term forecasts and impairment assessments

Changes in global trade and tariffs can drive up claims costs for certain lines of business, leading to increased premiums and potentially reduced consumer demand if premiums or terms become undesirable. Although insurers' capital is highly resilient, these changes could impact future cash flow projections and may put strain on solvency metrics. On the other hand, there may be a growing need for business interruption and trade credit insurance.

2. Evaluate the impact on Insurance liabilities and other estimates in the financial statements

The imposition of substantial import tariffs is likely to fuel inflation, which was just starting to recover in the UK, the US and Europe. The rise in inflation expectations signals a looming concern that the impact of tariffs on insurance will raise input and consumer costs, particularly in sectors reliant on imports. Short-tailed lines, such as property and motor, may be impacted due to these increased costs (inflation) as well as delays in the supply chain. Lines such as cargo, aviation, and marine will likely experience a rise in claims frequency and severity as well as delays in claims settlement. The situation may require insurers to adjust premium estimates and reserving assumptions, with the effect on profit and loss accounted for prospectively. The combination of slower economic growth and increased claims could heighten the loss component recognised under onerous contracts and compress the contractual service margins for other contracts.

3. Anticipate changes to the investment result

Following the initial shock reaction in the market, investment sectors have begun to stabilise. While the investment market's response is typically reactive, insurers should proactively integrate the anticipated changes into their long-term investment strategies. This includes evaluating the forward-looking elements of expected credit loss (ECL) to ensure resilience in changing economic conditions.

4. Ensure comprehensive disclosures

it is crucial for insurers to provide transparent disclosures regarding any material effects and significant changes in estimates in their interim and annual reports. These disclosures should adequately reflect the immediate consequences stemming from the impact of tariffs on insurance.

5. Consider broader Implications

Insurers ought to assess their readiness for considerable changes in global trading patterns and shifting customer expectations. Critical considerations include:

• Risk management teams are adapting to higher delinquencies or loss of business, necessitating real-time responses and cross-departmental collaboration to navigate the volatile landscape influenced by the impact of tariffs on insurance.
• Capital structures are prepared for uncertainty in growth and inflation.
• Business development teams identify new growth opportunities and investment prospects.
• Strategies to retain talent and foster growth.
• Shifts in consumer preferences, including a rise in demand for business interruption and trade credit insurance, are expected, while potentially seeing a downturn in unit-linked policies due to uncertainty surrounding investment results.

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