Industry fears a trade war would sustain hard market conditions

Canada’s property and casualty insurance industry is bracing for the potential impact of a prolonged trade war between Canada and the United States, although most sources say it’s too early to tell if that could happen, given the fluid nature of ongoing trade negotiations.

Canadian Prime Minister Justin Trudeau announced on social media Monday that Trump had agreed to hold off on promised tariffs for one month while the two sides worked on a plan for border security.

The pause comes as a temporary relief to Canadian P&C industry professionals, who expect tariffs to exacerbate hardening market conditions in personal auto and property lines.

“Tariffs will only hurt consumers and families on both sides of the border as they add unnecessary costs to the goods used in replacing and repairing homes, cars and businesses,” Insurance Bureau of Canada says in an emailed statement to Canadian Underwriter. “At a time when people are already feeling stretched financially, tariffs will in many cases increase claims costs and could have a corresponding adverse impact on insurance affordability.”

For the moment, at least, an imminent trade war between Canada and the United States appears to have been averted.

“I just had a good call with President Trump,” Trudeau announced on X late Monday. “Canada is implementing our $1.3 billion border plan — reinforcing the border with new choppers, technology and personnel, enhanced coordination with our American partners, and increased resources to stop the flow of fentanyl. Nearly 10,000 frontline personnel are and will be working on protecting the border.

“In addition, Canada is making new commitments to appoint a Fentanyl Czar, we will list cartels as terrorists, ensure 24/7 eyes on the border, launch a Canada- U.S. Joint Strike Force to combat organized crime, fentanyl and money laundering. I have also signed a new intelligence directive on organized crime and fentanyl and we will be backing it with $200 million.

“Proposed tariffs will be paused for at least 30 days while we work together.”

The negotiated one-month pause on tariffs put a temporary halt to political brinkmanship between Canada and the United States over tariffs that heated up this past weekend.

U.S. President Donald Trump on Saturday made good on an election promise to impose a 25% tariff on imported Canadian goods, reducing the levy to 10% for Canadian energy sources such as crude oil, natural gas, uranium, and coal, among other things. His executive order was initially slated to take effect Tuesday.

On Sunday, Canadian Prime Minister Justin Trudeau responded by announcing counter-tariffs on $30 billion of U.S. goods, including products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper.

Insurance industry sources are monitoring the situation closely. Because of the fluid situation, some sources told CU it was “too soon to tell” how a trade war could affect the Canadian P&C insurance industry.

“The commencement of a trade war between the U.S. and Canada is a very concerning development,” Peter Braid, CEO of the Insurance Brokers Association, commented to Canadian Underwriter Tuesday, before the 3 pm meeting between Trudeau and Trump.

“From a macro-economic perspective, it will likely have the impact of simultaneously causing both higher inflation and lower economic growth…We are early in this new reality, and it is difficult to know the extent of the impacts and how long they will last.

“As a national association, we will continue to monitor ongoing developments. Similarly, brokers will continue to stay in close touch with their clients to help them navigate this shifting environment and manage any emerging risks that may come with changing trade conditions.”

Increased claims costs and re-shuffled investment portfolios are two possible outcomes of a prolonged trade war between Canada and the United States, sources tell CU.

“Auto and home insurance claims require resources that are sourced from cross-border trade, so the impact of a prolonged tariff regime with the U.S. could put pressure on claims costs,” Bobby Thompson, an audit partner in KPMG in Canada’s insurance practice, told CU Monday.

“The impact of cost increases to service insurance claims would challenge profitability under current premium rates, and there could be inflationary pressures for insurers to increase premiums in response to the higher claims costs.”

Related: Protect your clients from the trade war

Mathieu Brunet, president of the Insurance Brokers Association of Canada, and owner of MP2B, a brokerage mainly focused on commercial clients, explains further why claims costs could escalate.

“Several of the impacted products — steel, aluminum, lumber, and rubber — are critical materials for auto repairs and rebuilding properties after a loss,” Brunet told CU. “We will need to closely monitor the potential impacts of these rising input costs.

“For example, higher costs for auto parts could mean more expensive car repairs, which could lead to pressure on claims costs and insurance premiums.

“In terms of property insurance, if rebuilding costs increase, policy limits may need to be reviewed to ensure they still reflect actual reconstruction costs. This is something brokers will need to discuss with their clients.”

On the insurers’ side, a prolonged tariff war could also affect investment portfolios and capital and reserving practices, KPMG tells CU.

“We are in the early days, but we recommend clients start thinking about and building resiliency to these new market conditions brought on by U.S. tariffs,” says Chris Cornell, partner and national industry leader of KPMG in Canada’s insurance practice. “In the short term, we do not expect P&C insurers to make significant changes in investment mixes. However, as markets shift over the coming months, this could change…

“Insurers should look at their exposures to U.S. and foreign markets from an investment mix perspective. Companies will need to balance risk tolerance, market sentiment in Canada, target capital ratios, target asset return profile and exposure to certain asset classes expected to be challenged during a recession.”

Canada’s P&C insurance industry had a 2023 Q4 minimal capital test (MCT) score of 238.17%, per the national solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI) — well above the 150% score that attracts regulatory attention.

As such, it is well-positioned financially in advance of a prolonged trade war that would drain capital, especially if claims costs increase, industry sources tell CU.

 

Feature image courtesy of iStock.com/benoitb