Tariffs threaten P/C insurers with rising costs, sinking margins

Tariffs have dominated headlines in recent weeks, from the announcements and negotiations to the delays and swift retaliations. The escalating trade war has put a spotlight on global supply chains, but what’s getting overlooked is how much tariffs could impact the property/casualty insurance industry.

Simply put, tariffs mean higher costs for the materials needed for P/C repairs, further hurting the industry’s already tight profit margins. Coming off an especially volatile year with back-to-back hurricanes, wildfires and catastrophic flooding, this further blow to profitability could quickly undermine the progress the P/C sector made in recent quarters.

The impacts of tariffs

The looming threat of new tariffs in the U.S. puts added financial pressure on insurers and complicates an already fragile landscape. Many carriers are still recovering from the previous year’s profitability challenges stemming from natural disasters, inflation and supply chain disruptions. Tariffs would undermine the progress recently made across the industry to transform operations and improve profit margins.

The P/C industry heavily relies on affordable, available materials for repairs and replacements of insured property as part of claims settlements. Tariffs lead to higher claims costs for building materials and auto parts, which directly impact carriers' profitability and may result in rate increases for policyholders. In regions across the country, especially those with higher climate-related risks, insurers are deciding whether to write new policies without being able to reduce their exposure amid rising costs and the inability to adequately raise premiums. Likewise, families and businesses are facing the decision of whether to rebuild after losing everything.

Areas recently hit with natural disasters such as the unprecedented wildfires in Los Angeles and the devastating hurricanes in the Southeast will face an even higher burden of cost increases for materials, impacting the recovery efforts from coast to coast. The ongoing uncertainty from tariffs and the downstream impact will adversely affect insurers at a time when the industry already faces financial pressure.

Optimizing operations

In the face of compounding financial strain resulting from trade policy changes, supply chain disruptions and catastrophic natural events, it’s easy to get paralyzed in the uncertainty. But it’s more important than ever for insurers to focus on what they can control. If materials and claims costs rise, where can carriers cut and optimize? To avoid premium increases that lead to customer churn, what are alternatives to cut costs and maintain profitability?

Advanced technologies that automate and streamline claims operations can make all the difference. For example, there are AI tools available that help carriers and policyholders streamline the proof of loss and damage assessment processes for both personal property contents pricing and additional living expense reimbursement for homeowner claims. These tools help policyholders through the daunting task of creating an inventory list for the contents inside their home, leveraging talk-to-text technology and AI to determine pricing and potential replacement items. This process can take weeks, but advanced technology can help carriers reduce that evaluation time to just hours, while also driving indemnity accuracy and preventing loss leakage. Beyond financials, AI used in this way can help insurers manage spikes in volume and keep customers informed throughout the claims process, improving customer experience.

AI already touches all aspects of insurance today, including underwriting, claims processing, pricing, and fraud detection. From streamlining processes to enhancing customer engagement and delivering personalized experiences, AI’s impact on insurance is profound and far-reaching. By replacing labor-intensive manual tasks with efficient, AI-driven workflows, insurers can reduce claims costs and processing times while improving accuracy and boosting customer experience – all in the pursuit of improving margins and controlling the controllable.

Mitigating risk with technology

From tariffs to natural disasters, the threat of rising risks poses significant challenges to the insurance industry. Preparation is essential for an industry that craves certainty. To be prepared, insurers need to be able to analyze complex data, identify risks early and predict what’s coming with better accuracy. AI goes beyond automation and efficiency to enhance resilience through predictive analytics, scenario planning and actionable insights.

By integrating real-time data across functions, AI will offer more precise risk assessments, helping insurers and policyholders prepare for and minimize damages from all types of risk. For example, with predictive capabilities, P/C insurers can anticipate demand by analyzing patterns like seasonal trends and weather patterns and forecast the financial fallout of varying levels of tariffs to prepare for cost increases and create financial buffers without putting the burden on policyholders via premium increases.

Navigating uncertainty and optimizing operations with AI will be a competitive advantage for insurers today. AI-powered operations are setting the foundation for tomorrow’s growth. Whether the moment calls for boosting efficiency or creating value to mitigate the financial fallout of tariffs, insurers equipped with the right technology to predict and plan will find themselves stronger and leading the way for the rest.

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Vasu Srinivasan is global head of claims practice at Genpact. Contact him at [email protected].