By Isha Marathe

April 25 - (The Insurer) - North American insurers who sell auto and property insurance policies are likely to be the most directly and highly affected by U.S. tariffs with reinsurers also likely to be "mildly affected", Morningstar DBRS said.

U.S. and Canada auto and property insurers are likely to see resultant claims cost pressures related to car prices, cost of car repairs, and expenses associated with property rebuilding materials.

But Morningstar DNRS said most well-diversified insurers should be able to manage the volatility,

While exemptions are in place for goods compliant with the U.S.-Mexico-Canada Agreement, other goods are subject to 25% tariff, which may include materials like lumber.

Because Canada's economy and supply chains are so closely integrated with the U.S., insurers in both markets will see their claims costs increase, which could in turn affect loss ratios and profitability, the report said.

Additionally, P&C subsectors such as travel, marine cargo, and surety could also see impacts because of reduced travel, slowing global trade (partially offset by higher values of imported goods), and weakening of credit quality that is likely to follow.

While Morningstar DBRS does not anticipate EU and UK insurers to be affected in the same way as their North American insurance peers, that could change depending on the extent of the EU's retaliatory tariffs, with auto and property being the most affected.

Some lines of business, such as the casualty (liability) subsector, including directors' and officers' coverage policies, are also not immediately affected by the tariffs, the report said.

"Political risk and cyber insurance policy wordings are likely to differ in terms of specific coverage and may also incur some additional losses as a result of the heightened geopolitical risk and trade policy turmoil," Morningstar DBRS said.

Morningstar DBRS also said that global reinsurers “are not spared the impact of trade policy turmoil”.

Most of the tariff-induced inflationary factors that affect property insurance will also impact property reinsurance, especially in the U.S., it said.

“Additionally, global reinsurers also provide life and health reinsurance, and some have primary insurance lines focused on businesses that are not closely correlated with property reinsurance (i.e., casualty insurance). As such, reinsurers are going to be only mildly affected by the existing tariffs,” the report said.

Mitigating measures

The measures insurers are likely to take to mitigate the losses from the impact of trade wars and tariffs, especially in the auto and P&C sectors, is likely premium hikes.

"In many jurisdictions, auto insurance premiums need to be approved by the local regulator, which means that filing for those increases may need to occur in the near future," Morningstar DBRS said.

"For unregulated businesses, premium increases can be implemented more promptly."

In some cases, insurers may change their supply chains to reduce their reliance on imported inputs, but adjustments to existing supply chain networks are not easily or quickly accomplished, and introduce a potential for delayed and therefore costlier claims, the report said.

"$(G)$iven the challenging macroeconomic and financial market environment, we would expect insurers to cut back on expenses to preserve their bottom line," Morningstar DBRS said.

"This may come in the form of reduced IT and AI investments or reduced operational expenses."

Insurers will likely keep an eye on alternative asset valuations and investment performance portfolios, which might be strained in response to market volatility.