With more than 64 countries, about 49% of the global population, casting votes this year, political changes could potentially have a dramatic impact on the macroeconomic environment and insurance regulation and taxes. In the U.S., the world’s largest insurance market, all eyes are on the presidential election, plus four states are holding elections for insurance commissioners in November. Of the 37 US states where insurance commissioners are appointed by the governor, seven states are holding gubernatorial elections, which could result in a change of leadership.
Discussion questions include:
· Overview of possible fallout in a change in U.S. federal leadership
· Impact of possible changes to U.S. federal tax policies
· Impact of possible changes to tariffs
· Affect on broker M&A
Speakers:
Michael Konidaris, CFA, US Economics Associate Director, S&P Global Market Intelligence
Phil Trem, President - Financial Advisory, MarshBerry
Jerry Theodorou, Director, R Street Institute
Amit Kumar, Lead Research Analyst/D.O.R, Insurance Insider US
Moderator: Meg Green, Senior Editor, Insurance Insider
The US election is on the horizon and, whatever the outcome, insurers should be alive to the fact that their operations will be affected by government decisions.
Democratic candidate Kamala Harris and Republican pick Donald Trump are vying for the leadership and promise two, very different, plans of action in relation to the economy and financial services if they are voted into power.
Michael Konidaris, CFA, US Economics Associate Director, S&P Global Market Intelligence, explained the two scenarios.
“Harris seeks to reshape the taxation landscape for high income individuals and corporations while maintaining or expanding specific tax credits. The reforms that she has proposed emphasize a shift towards a more progressive tax structure, aiming to enhance tax equity by increasing the tax burden on corporations and hiring individuals to fund social programs and tax credits for lower income groups.”
Meanwhile, Trump, Kondaris detailed, “has proposed several key provisions that build on his previous approach of reducing tax burdens for corporations and individuals. His tax reforms are designed to boost economic growth on one hand, while also revitalizing the domestic manufacturing industry by higher tariffs.”
Both approaches are set to impact the US-economy and will affect insurers on a number of fronts including investments and claims costs.
An audience vote showed that viewers of the webinar were most concerned about the impact of the election on inflation and interest rates (49%), tariffs (21%), the federal deficit (12%), while 12% were worried about the impact on taxation.
Tackling the tax question, Amit Kumar, Lead Research Analyst/D.O.R, Insurance Insider US, reflected: “If we do see a reduction in taxation, it does help the industry in rebuilding capital. In 2018 the three hurricanes Harvey, Irma and Maria, created $100 billion or so of insured losses. It [tax reduction] did give a massive reprieve to the industry in being able to respond to the market and not being caught up in trying to raise additional capital.”
He explained that lower taxes help insurers to build a capital buffer, allow them to respond to the marketplace better and creates space for insurers to invest in innovation.
However, Kondaris noted that S&P analysis found: [Trump policies] will lead to higher inflation, tighter monetary policy, higher interest rates… we estimate the that the drag to economic growth from higher interest rates, a result of those higher tariffs, more than offsets the boost to economic growth from the tax cuts.”
There may be benefits for insurers with Harris’ tax plan. “Harris's more populist approach, which means more money in the pocket for the middle class, will spur some kind of spending. For insurers, that means more exposure base, people doing things, buying houses, putting extensions on their houses, buying automobiles, etc.” stated Jerry Theodorou, Director, R Street Institute.
A key concern for the expert panel was the potential changes to tariffs which is likely to be effected by a new Trump administration, which is set to increase universal tariffs by 10% and add 60% to imports from China. This could have far-reaching impacts for the insurance sector.
Kondaris explained: “Increased tariffs will cause a jump to import prices, a significant part of inflation measures, which will lead to a reduction in US imports. Retaliation from the rest of the world will also decrease US exports. The decline in imports means that demand will gradually and over time, shift domestically, boosting domestic production, while a decline in exports means destruction on some amount of that domestic production.”
Kumar pointed out that tariff changes are likely to have a significant influence on supply chains for insurers especially for commercial rebuilding and auto replacement. He remarked that around 25-30% of materials for rebuilding come from China and between 15-20% of auto parts. The changes will create challenges for insurers and industry and, costs will be cascaded down to the consumers who are already struggling with incremental cost increases.
The industry is still in recovery from the supply chain issues caused by the Covid-19 pandemic, according to Jerry Theodorou, Director, R Street Institute. He warned that in addition to building on problems caused by Covid-19, increased tariffs could also lead to inflationary impact.
“The imposition of tariffs definitely going to be inflationary, which adds to some of the factors that are also already driving up lost costs” he explained, noting that in sectors such as auto repair and parts costs were already going up due to the increasingly complex nature of the vehicles and hybrid power parts.
“The tariffs would be really inflationary, because if you restrict it to US production, we're going to see more demand surge, limited supply, and higher prices for the imports. Because, make no mistakes about it, when tariffs are introduced, it raises the price,” Theodorou added.
Governmental changes are also likely to have a trickle-down impact on the broker community, particularly when it comes to M&A and consolidation.
Phil Trem, President - Financial Advisory, MarshBerry, highlighted that there continues to be consolidation in the broker space. He said there was a sense that 2024 feels a lot like the back end of 2020 during the last election when there was a lot of concern about personal taxes and a potential change to capital gains which led to a push for broker M&A.
His prediction is that 2025 could be another bumper year for M&A in the broker space. On top of this larger firms may become more interested in buying each other.
Trem explained: “We're seeing some of the buyers consolidate with one another, and we do believe that's a continued theme that we'll see throughout 2025 and maybe in the future.”
Of course, any action by either side could be stifled if they do not have the required level of votes in the Congress or Senate. The experts agreed that there remains the potential for gridlock.
However, the panel also noted that the more seismic impact of a change in administration are more likely to have short term effects. “In the long run, meaning 10 years from now, 2035, both of these scenarios get back to baseline and get back to equilibrium, Kondaris added.
Kumar concluded: “Hang on to your seats… Everything is going to be fine. The industry, time and again, has shown a lot of resilience in being able to address any short term changes.”