Tariffs, Volatility Pressure Insurers on Claims, Investments, and Capital

Tariff disputes and related macroeconomic volatility are raising fresh concerns for US insurers, with new research from Kroll Bond Rating Agency (KBRA) warning of elevated credit risks across multiple business lines. While the insurance sector remains broadly resilient, the impact of tariffs on claims costs, investment volatility, and consumer behavior could test the risk management and capitalization of weaker insurers over time.

KBRA said property and casualty insurers—particularly those underwriting personal and commercial auto, homeowners, and property lines—are facing the most direct pressure from tariff-driven increases in replacement costs. Rising prices for imported steel, aluminum, lumber, and auto parts are directly impacting the cost of claims, particularly in post-disaster rebuilding scenarios or auto repairs, where supply chains remain disrupted post-pandemic.

"Rate filings for admitted products in the US require time-consuming regulatory approval," KBRA said. "In certain states, there has been notable resistance or delay in allowing premium increases following recent environmental and economic events." Such delays are compressing underwriting margins and weakening capital buffers.

Beyond claims costs, insurers face secondary pressures from financial market volatility, according to the report. Investment portfolios, especially those exposed to equities or lower-grade credit, are vulnerable to declining asset values and liquidity stress. Interest rate swings tied to inflation and monetary policy could also impair asset-liability management, particularly for life and annuity lines with long-duration exposures. Additionally, high volatility may drive up hedging costs and reduce new business volumes in equity-linked products.

While most insurer portfolios remain conservatively managed and diversified—many with high-quality fixed income holdings—credit deterioration remains a concern. KBRA pointed to the risk of "fallen angels," or bonds downgraded below investment grade, which may trigger capital charges or losses. Still, structural safeguards in investment policies and the recent trend toward private credit investments have helped bolster balance sheet resilience. These assets offer diversification and lower volatility, with KBRA citing strong performance through recent market disruptions.

The report also highlights how policyholder behavior shifts in response to inflation and market swings. While fixed annuity products may attract inflows during turbulent periods, early surrenders by cash-strapped households could strain liquidity for insurers with large annuity portfolios.

Tariff-related macroeconomic impacts may also disrupt reinsurance markets. Inflation-driven claims increases are pressuring reinsurer balance sheets, likely leading to tighter terms and higher prices at renewal. The report warned that global trade tensions could reverse recent trends in cross-border reinsurance flows, a key capital management tool for many life and annuity insurers.

The report outlines a series of questions insurers are increasingly expected to address as they navigate economic stress. These include how investment portfolios are being adjusted in response to market volatility; how interest rate changes could affect spreads, investment income, and asset values; and whether current reserves and underwriting can absorb inflation-driven increases in claims costs. Other considerations include the potential impact of declining consumer demand on annuity and auto policy sales, the effect of deteriorating corporate earnings on insurers' investment exposure, and whether ongoing trade disputes may disrupt reinsurance transactions that support capital planning.