How to advise your clients on trade risk when it changes every day

It’s hard to advise your clients about their trade risk exposure when it changes all the time. That’s why many property and casualty insurance brokers and carriers are telling their business clients to avoid reacting too quickly to announcements of one tariff or another.

“We’ve been advising clients to avoid knee-jerk reactions,” says Olaolu Aganga, U.S. chief investment officer at Mercer. She spoke in mid-April at the Marsh McLennan webinar, Navigating geopolitical risk and uncertainty.

“We fully acknowledge it is the natural human reaction to try and limit losses…and we’ve been reiterating how important it is for clients to stay the course,” Aganga says. “We have been rebalancing our client portfolios, we’ve been focused on guidelines and governance. We have been maintaining risk profiles in the portfolio, so we haven’t been de-risking if it’s not consistent with objectives.”

De-risking supply chains can take a long time. Because of this, clients should conduct scenario-based testing of their current supply chains, quantify the trade risk, and think of ways to reduce exposures, advises James Crask, managing director and global head of multinational clients at Marsh Advisory.

“But be careful when doing that,” he adds, “because every decision you make to mitigate one of those tariff risks could introduce a new risk that you’re not familiar with yet.

“You could be operating with new suppliers in locations that are exposed to a different type of geopolitical risk, or a climate-related risk, or you might be using untrusted suppliers, which actually could end up creating a product liability problem for you in the future.”

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Exhibit A of the risk inherent in acting too quickly came recently, with the U.S. and China de-escalating their tariff war soon after it started. In mid-April, U.S. President Donald Trump announced a 145% tariff on Chinese goods imported into the United States, and China responded with a 125% tariff on certain U.S. goods entering China.

One month later, the United States and China agreed to ratchet down their tariffs on each other to 30% and 10%, respectively. The two sides take a 90-day period to negotiate a resolution to their trade disputes.

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This yo-yo effect is wreaking havoc on all businesses, including insurance companies, making it difficult to plan for the long term. Asked during the election about the potential impact of the tariffs on Canadian insurance companies and their clients, Insurance Bureau of Canada said it’s still too soon to tell.

 “In the broader sense, it is still too early — and there is still too much uncertainty — to determine the scope of the effects of tariffs on insurance,” IBC told Canadian Underwriter in an email last month. “That said, insurers will work to mitigate the potential impacts of tariffs on their businesses and customers as these effects become clearer to each individual company. For example, some may seek substitutes for American goods in their supply chains.”

Likewise, brokers are taking a cautious approach to advising commercial clients on their trade risks.

“We need to be sure a client doesn’t take unnecessary risks for now, and that they don’t make decisions too quickly, since we see that it’s all shifting so rapidly,” says Mathieu Brunet, president of the Insurance Brokers Association of Canada. “[Clients may] have been operating for 10 years in one way, and now they say, ‘Oh, we need to change right away, because this is happening.’

“Maybe wait and see a little bit.”

For Brunet, the key for Canadian brokers who have clients with cross-border trade risk is to ensure that brokers are actively consulted when their clients make decisions about insurance and risk. Brokers, he added, don’t want to react to their clients’ risk decisions. To prevent this, commercial brokers will need to reach out to clients right away and make their value as risk advisors known.

“We need to give [clients] advice on their risk exposure, which is shifting,” says Brunet. “So, if today they’re manufacturing some product in the U.S., and they’re thinking about moving their factory to another country, or whatever the situation, we need to be in contact with them now and be part of their decision process, advising about risk management.”

And that’s not just for the large multinational commercial clients, he adds.

“Even medium-sized businesses in Canada, they’re more involved with many countries, many markets. They sell online to many countries, buy from providers that can be in China or other countries, and they may get [supplies] from a wholesaler in the U.S. — and then all their business models are disrupted because of [tariffs].

“So, we need to be really open and clear to our client on how we can protect them in those situations.”

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.