The shake-up to the world’s trading relationships as a result of the US tariff fallout will exacerbate various existing macro challenges facing insurance industry leaders.
There are potential trade-offs ahead that will have to be negotiated because – as we argued last week – the reprieve only partially unwinds the increased costs and volatility facing the sector.
It is still not known what tariffs will apply to semiconductors, for example, after they were carved out from the China tariffs.
We explore several balancing acts that executives may now have to navigate below.
New investment: Prioritise savings or growth?
As we wrote last week, the impact of the tariff market meltdown will be chilling for business confidence, given the potential for policy changes to again veer off the expected course.
Even after the reprieve rally, insurance-related stocks are also trading well below pre-April levels, despite being more defensively positioned than many other sectors.
But companies will not want to halt new investments altogether – and it could be envisaged that a tension arises between investing for growth and investing for efficiency savings.
With the current focus on AI’s potential to cut costs, these types of efficiency investments could retain more of an edge in the near term over a bigger-picture acquisition or talent hiring drive to expand in new areas.
After all, AI efficiencies could provide extra sources of growth in themselves, as AIG argued at its latest investor day.
Greater volatility: Managing risks but showing value
An already heightened environment for geopolitical risk has just got more contentious, as Insurance Insider US argued on Friday.
The nightmare escalation of the trade conflict between the US and China has always been a blockade of Taiwan by China, or even in the worst-case scenario an invasion. Even the lesser of these two scenarios would create massive economic ripple effects, with Taiwan the centre of global chip production.
Under the new administration, with President Donald Trump less willing to shoulder international security obligations, it is even less clear how the US would respond to Chinese escalation on Taiwan than before.
In the past couple of years in the wake of new conflict, insurers and reinsurers have been quick to limit their exposures in various ways – for example, cutting back in countries surrounding Israel.
This environment could heighten that risk-off trend as insurers seek to manage their exposures at a time of rising loss costs.
However, at the same time, a still-lower growth outlook exacerbates the risk of premium growth tapering away.
This will put more onus on insurers to show their value and relevance to insureds to mitigate the slower natural growth trends.
Some of the post-war Ukraine insurance facilities agreed upon showcase what the industry can do to provide coverage in the face of a volatile situation.
So even in this new phase of uncertainty, market participants will need to find a fine balance between innovating to show their relevance, with the need to control their risk exposure and manage rate adequacy.
Some segments are more directly impacted by the tariff fallout in this respect than others, even if the tariff burden is greatest for US-China trade. Beyond the political risk sphere, product liability and recall is another line of business that participants expect to be altered heavily by changing supply chains and higher trade costs.
As we wrote in our initial coverage of the tariff fallout on the sector, one recall underwriter explained that cost pressures often lead firms to cut back on “optional” monitoring or maintenance. As companies start to look at changing suppliers to keep costs down, this also raises new questions and the “room for error”.
More generally, if the economy dips from lower growth into recession, there are still the broader knock-on impacts across various lines from credit lines exposed to insolvencies, to elevated D&O risk and more.
Exit routes: Considering all options
A further impact of the market volatility, as we have written, will be to make finding an exit more challenging for any businesses currently in the early phases of working on their options.
But while there might be near-term inactivity, the PE investors that are over-time in this sector will still want their exits.
Certain routes may now be harder to achieve, such as IPOs, while trade buyers may be even more focussed on synergies than usual in a cost-conscious environment.
This could reinforce the existing trade-offs that management and their backers were facing over whether to prioritise liquidity or valuation and certainty of nearer-term exits or time-delayed exits.
To date, credit spreads have not been as volatile as equities, but there have been increased borrowing costs that will impact the most leveraged firms.
Not a full reprieve
As a reminder, there are still extensive tariffs in place even as the reprieve was announced.
Yale’s Budget Lab estimated that, even after the pause, US consumers still face the highest average tariff rate since 1909 at 25.3%, potentially moderating to 18% after consumption patterns shift, impacting prices by 2.7% in the short term and lowering GDP growth by 1 point over the calendar year.
The most immediate benefit to insurance industry firms as a result of the reprieve is the bounce-back in their stocks, and for insurers’ asset portfolios.
However, as we wrote earlier this week, a manageable investment hit was not the insurance industry’s primary concern with the tariffs anyway.
Even at the height of the tariff market meltdowns, Moody’s Ratings said the impact of equity declines was “moderate”.
It estimated European carriers’ solvency ratios have fallen by low-to-mid-single digits since year end 2024, and noted that they entered the current period of market volatility with very strong solvency ratios, “averaging a high 220% for large players”.
Moreover, there is arguably now more opacity over how base interest rates will fare as the Fed faces the unenviable task of trying to control inflation in this fragile environment. What this means for bond yields and insurers’ future investment returns could make a big difference in how painful loss inflation will be for insurers.
But of course, after the past two weeks, carriers will be happy to take the initial win from the equity rebound.
One major headache for carriers may have been removed. But there are still plenty of others to be managed.