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.
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 is effective 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.
Industry sources are monitoring the situation closely. As of press time, Trump announced a one-month delay in implementing 25% tariffs on Mexican goods, which was originally timed to coincide with similar tariffs imposed on Canadian goods.
Trump announced on social media he had a meeting scheduled with Trudeau for 3 pm Monday to discuss the issue. 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 with 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.”
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In a statement to CU, Insurance Bureau of Canada, a national association of P&C insurance companies, confirmed the potential harm a trade war would have on claims costs, and thus insureds’ premiums costs.
“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,” IBC says in an emailed statement to CU. “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.”
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
