What’s on Dec? | Episode 20 | Tariffs’ impact on P&C insurance   

Stream this episode and others in our series on Spotify!

Featuring:  

Chris Cornell
Partner – Audit, and National Sector Leader, Insurance
KPMG Canada

Bobby Thompson 
Partner – Audit  
KPMG Canada 

Uncertainty is the name of the game when it comes to tariffs from the United States.

Within the Canadian P&C insurance industry specifically, how are industry sectors or policies affected by the ongoing economic situation?

Listen as Bobby Thompson and Chris Cornell from KPMG in Canada’s audit practice discuss the impact tariffs are having on the industry, and how they are advising businesses to navigate the choppy waters.

They dive into the effects of tariffs on the supply chain, and the possibility of cross-contagion exposure from other nations facing these levies.

Bobby and Chris also look at tariffs from a claims perspective. In particular, they discuss how these levies could factor into vehicle replacement and repair costs, and what could escalate claims costs.

Audio transcript:

Intro | Jason Contant: 

Hi, I’m Jason Contant. I’m Associate Editor at Canadian Underwriter and host of our podcast series “What’s On Dec?” On April 15th, I sat down with Chris Cornell and Bobby Thompson from KPMG to discuss tariffs and their impact on P&C insurance. In particular, we discussed which policies or industry sectors would be affected, how tariffs could factor into vehicle replacement and repair costs, and the possibility of cross-contagion exposure from other nations facing these levies.

Jason Contant: 

So for this podcast, we’re gonna be discussing the ever-popular topic of tariffs. We’ll talk about, you know, how tariffs are affecting the industry from cross-border and claims perspectives. And I know there’s still a lot of uncertainty surrounding the topic. I was discussing this with Bobby just before the recording, and we recorded the podcast on the 15th of April. So it’ll be out in about a month’s time, so mid-May. So there may be some changes by then with the tariff situation. So, you know, joining me today we have Chris Cornell and Bobby Thompson from KPMG. So thank you both for jumping on the podcast today.

Chris Cornell:

Thanks for having us, Jason.

Jason Contant: 

Maybe we can talk a little bit about the cross-border aspect. You know, if our currency declines, what advice are you giving to your business clients?

Bobby Thompson:

You know, with respect to currency declines, one of the things that’s very challenging to think through is just how long and how severe will any currency declines, you know, be. With policy changing on a daily basis and the market having a reaction to that, there needs to be some tolerance in the short run for volatility. And I think most companies have accepted that volatility. I think as we look out longer term, if we see a prolonged depression in the currency, that will cause companies to take a look at their supply chain. And I think, you know, one of the activities that most P&C insurers are taking a look at is looking at the auto suppliers that they use and thinking to themselves, “Where in the supply chain do I have risk? Where are we most exposed? Which models of vehicle, which type of parts are we exposed to the U.S. on? But where are we also exposed to other nations that might have currency matters because of cross-contagion, right, with various reciprocal tariffs that are out there?” In those cases, companies may say there is a more optimal way to do business, but in the short run of six months or less or a year or less, it’s going to be very hard to change some of those supplier contracts. And we really don’t know if P&C companies are going to need to change those supplier contracts. So I think from a currency perspective, it’s a lot of monitoring, it’s a lot of scenario planning, and it’s a lot of optimization along the supply chain to say, you know, maybe we’re looking because of currency depreciation, maybe we’re looking because of tariffs. But long term, is there a different or more efficient way to manage a claim from submission all the way through to payment, right? And are there different vendors that can be used that will save money anyways? Chris, I don’t know if you want to add in there.

Chris Cornell:

Yeah, I think, Bobby, it really depends. If you think about across industries, we recently did a survey of over 600 businesses across Canada. About two-thirds of them felt that, you know, the impact of a potential weaker Canadian dollar would offset a portion or a part of the tariffs that they potentially are going to have to, you know, endure as a result of, you know, the initial kind of tariff lobby, er, sorry, the volley that the U.S. sent over. So that potentially would have, you know, an offsetting impact that organizations need to consider. 10% of them said that it would put them in a net-positive position. So obviously 90% in a negative position. And then, you know, roughly about 15 to 17% said they were uncertain at this point in time, right? So they are aware of the currency exposure, and that’s not just insurers, that’s across all businesses. And so you’re getting a cross-section of the impact across.

Jason Contant: 

Yeah, and just actually to touch on something that you said, Bobby, like in terms of the policy length and that. Like with auto policies or any other policies for that matter, do you find are they typically like the one-year policy or are they subscription, multi-year policies? Because, obviously, if it’s one year, it’s hard to change within a year, if it’s multi-year, it could be easier perhaps.

Bobby Thompson:

Well, it changes across the across the landscape, right? So when I think about different types of insurance, most auto insurance that I see are annual renewable contracts. There are exceptions to that, of course, like there is anything. Most home coverage is the same. But we see various iterations of home and auto that could be a little bit longer. We see various iterations of commercial insurance and other types of insurance in the P&C chain like title, which are clearly longer term in nature. And those are the ones that are exposed to the long term. Now, coming back to volatility in these shorter-duration contracts, is the role of rate regulators. And rate regulators specifically in the auto industry, we know they’re doing a lot of scenario analysis now as well, just as the carriers are as well, to say if there is an increase in claims cost, what does an increase in premium rates look like? Will there be an increase in premium rates? Is there a need for that? And so that analysis really hinges on policy decisions, which are fluid. So again, for now, the best thing to do is scenario analysis until we sort of get to a steady state or at least a reasonably moderate-term steady state where maybe more of that analysis can be firmed up.

Jason Contant: 

Yeah, for sure. And sorry, you mentioned, I think both you mentioned actually in terms of advising businesses, right? So if somebody has U.S. offices, like, you know, if you have a client here in Canada with U.S. offices, how do you advise them to plan ahead or deal with the uncertain times that we’re facing?

Chris Cornell:

Yeah, Jason, lots of discussion with our clients on that. I think it’s a number of different steps that you need to take, right? The first thing is within that scenario planning that Bobby just mentioned, you know, assessing what your company’s exposure to tariffs really is, right? And you gotta be really thoughtful about that and understand your business in that way. Then, is there existing strategies that you can implement right now in order to offset the impact of tariffs right away? Is that, you know, looking closer at your supply chain, as Bobby mentioned? Or other activities like that. Within that approach, can you balance the cost, potentially move operations in certain areas without having to move your, you know, whether it’s your head office or your business in that capacity, right? Thinking through what those items are. And then if you know what those high impact areas are, you know, looking at what those impacts are. If it is, for example, P&C insurer, your supply chain is heavily reliant on U.S. autos or things of that nature, then, you know, you potentially need to move forward with that, and then you gotta kind of track it and everything from that perspective. But that being said, given the uncertainty, right, you know, the president’s message last night was that he’s gonna potentially delay the auto tariffs that aren’t covered by USMCA even more. You know, it’s almost like having a Plan A, a Plan B, and a Plan C. And so looking at that multi-step approach, but knowing at each time what are the levers that you potentially would need to pull. And then as well, if Plan A is not gonna, you know, work out, how do you move to Plan B and Plan C?

Jason Contant: 

Yeah, so that’s interesting, Chris, that you mentioned that with the auto. And we have some questions I’ll follow up with you later on, like in terms of the claims aspect, right? But just sort of sticking with the cross-border here, and, Bobby, I think you mentioned this in terms of the supply chain, right? So, when it comes to effects on the supply chain, how does this compare now to what we were facing with COVID and how do you deal with the suspected disruptions? I know you’ve got into it a little bit, but…

Bobby Thompson:

Yeah, no, no, I’m happy to start here. So, I think there is a difference between COVID and the tariffs in terms of disruption. With COVID, people were at home or physically not driving or building as many homes or just doing regular activities in that period of time. Whereas with tariffs, we’re seeing all the same volumes, but the cost is going higher. So the stockouts might have similar issues, there may be stockouts in different supply chain issues, which could be similar, but they’re really arising and manifesting from different causes. And I’ll give you a really good example. I was talking about this exact topic with someone who’s in the construction space, so not an insurer, but a someone who an insurer would be insuring. And they said, you know, “When we build a single or multi-unit residential property, we know in the supply chain exactly where things come from. And when we’re looking at this right now, we know where our vendors have materials that are stockpiled. So we know lumber we get from Canada will not be as subject to tariffs, but we know flooring, we do a lot of importing of flooring in from the U.S. But we know our Canadian vendor who gets that flooring from the U.S. has a big stockpile. So our vendors who are just in time, we feel we’re more exposed there. That’s where we have some softness, but our vendors who have stockpiles, we feel pretty good about the pricing in the short run and the ability to manage costs.” And he contrasted that with the COVID situation where he would go to vendors and the price was surging because there was such a demand on such a small quantity of goods because they couldn’t fill the supply chain quick enough. So this is really more from his perspective, anyways, was more about how are we doing from which vendor we’re going to choose from being selective as to who’s going to be more subject to tariffs in the short run versus the medium run versus the long run. And in COVID, it was really about those stockout issues that I had mentioned, just to give one example.

Jason Contant: 

Yeah, for sure. So what kind of, er, sorry, you were gonna say something, Chris?

Chris Cornell:

Jason, I was just gonna jump in and just say, you know, I think that the Canadian business leaders have been relatively proactive on this supply chain issue. We recently did a study and 44% of respondents said that they were already reconfiguring their supply chain to divert some U.S. goods and exports to other countries to, you know, potentially avoid the tariffs. Same number said that they’re reconfiguring their supply chain to divert goods away from the U.S., you know, in that record. And then 50%, excuse me, 57% said that they were taking steps to move production out of China to avoid the impact of U.S. tariffs as well. So I think, you know, across all industries that there’s been a pretty agile response to some of the risks that are out there at this time.

Jason Contant: 

I’m curious sort of what policies would be triggered by supply chain disruptions. Like, my thought maybe it would be BI, right, like business interruption, but then you need this physical trigger, right? So any thoughts on that? Which policies would be affected or which wouldn’t be?

Bobby Thompson:

You know, from a commercial insurance perspective, I think we lived a very fluid experience through COVID as to what constituted a business interruption and we saw a lot of, you know, litigation and disputes around what is covered and what isn’t. I think one of the lessons the industry learned was some additional clarification in the language that’s used in a lot of policies. And so again, similar to the COVID playbook, pulling the COVID playbook out here for some of those policies like business interruption, it’s important to understand what’s covered, and would something like this meet that legal definition, which again could be subject to some uncertainty, but I think there was additional clarification put in in a lot of cases in the underwriting. But, in my view, there’s an impact across the spectrum. I mean, if a home costs more to build or an auto costs more, that’s going to impact personal insurance. Obviously, home and auto. If supplies are more expensive and you have something like a title insurance claim, title insurance could have higher claims costs. If you look at commercial fleets, commercial fleets are subject to similar risks as personal. So I think across the spectrum, an increasing claims cost in different ways and different severities impacts a wide variety of policies. And there’s some that are obvious, but there’s some that are less obvious like you had mentioned with BI. And I think specifically commercial underwriters really need to look at their book and see, if I have, you know, surety on my books, am I worried more around default risk as a result of, you know, maybe a homeowner doesn’t have the money needed to close, and I can’t finish a project, right? Like, where, you know, is the economy in general? And again, that’s not to say there’s a knee-jerk reaction that’s gonna come in the short run, but these are things to keep on people’s mind as they go through.

Chris Cornell:

Well, maybe just to add on there a couple other ones, one being trade credit insurance, right? As you tip towards a recession, does that become more prevalent, or your claims cost go up associated with that and the ability of enterprises to pay their bills? Second one is cyber, right? If we’re in a trade war and you’ve got state actors who, you know, are gonna look at different ways to impact, you know, different sovereign nations, then that’s another one where potential cyber insurance costs could skyrocket as, you know, certainly organizations are looking for different ways in different markets to sell their products given our prevalence of the U.S. market in Canada. And so I think that’s another area that we should be aware of.

Jason Contant: 

Yep, and that’s a good segue I think into the claims cost aspect. Like in terms of vehicle cost, that’s a big one. And like we said, you have vehicle costs going up and stuff like that. So what does that mean now if the cost of cars goes up even further, what’s that mean for clients?

Chris Cornell:

Yeah, Jason, I thought it was interesting. He said that the US automakers need, you know, more time to get their supply chains in order, right? Which I’m assuming means more domestic production there, so, you know, regardless of whether he is gonna delay it, or, you know, again on April 15th, you know, what that looks like. But I think that the diligence needs to be in place for insurers to make sure that they’re mitigating their supply chain. So, you know, I think Bobby hit on it a little bit earlier around the impact on profitability, you know, from a perspective it will take time for any potential rate increases to work their way through the system if claims costs do go up. The supply chain aspects of what parts are crossing the border potentially multiple times and you have tariffs that are stacking on top of each other will also impact that profitability or the amount of claims costs as well. And then I think it’s, you know, in general, would be, you know, insurers are going to want to make sure that they’re being supported by the government. You know, rate regulation would be something that I’m sure would be looked at for the impacts on tariffs. But is the insurance industry at the front of the line when you think about industries that are impacted by tariffs? You know, obviously, the automotive sector, there’s been governments that have pledged to provide subsidies and things like that to support that industry. I would suspect that the insurance industry would be a little bit further down in terms of the pecking order of where government, you know, supporter subsidies would be included in there. So, yep.

Bobby Thompson:

You know, just just on that question, I think one of the biggest things I would think of with the higher cost of vehicles is, do the policy decisions from the U.S. administration and like I said, the contagion effect from elsewhere, change the way you’re looking at replace versus repair? So give an example, if we look at a German auto manufacturer, and all of a sudden there is a large tariff to ship new cars into the U.S. but there might be parts that they can supply from Canada subject to USMCA, does that change the way that you get a new car replacement versus repair what you had before? And there’s many, many scenarios that need to be evaluated there from different, you know, countries and movements and flows. But really, if you used to say, okay, well, this automobile, and we’ve seen more of this trend, this automobile is highly digitized, right? There’s a lot more digital capabilities of an automobile than there used to be. And so if I’m in an accident, and it has been easier to replace the vehicle in a lot of cases, especially with higher-end vehicles, whereas, you know, if you think back to our parents or our grandparents’ cars, you can always replace the steel bumper or something like that, right? With the cost of autos going up and perhaps the cost of parts, we’re still figuring that out, is there a different mix? Is there a different threshold? And what are body shops doing about that as well? Because body shops and their quotes also guide in a lot of cases financially what’s the most optimal decision for an insurer as to whether they’re gonna write the car off or they’re going to repair it. So I think it’s going to be very interesting to see how the vendors that insurers use to do the repairs change the way they approach things as well and what the mandates are given down to those vendors.

Jason Contant: 

And from what I understand too, just with the increasing complexity of vehicles and that with the sensors and stuff, repair costs obviously are increasing too. So like you said, it’ll be interesting to see how that affects the vendor aspect too, right?

Chris Cornell:

For sure, Jason. Yep.

Jason Contant: 

And just touching on something you said Chris, about, you know, rate costs working their way through the system. What I’m curious, like how much harder do you think the market could get now? Like, how much could claims cost increase by?

Chris Cornell:

Yeah, I think it’s interesting, right? Because I think we were probably looking at a potentially a softer market before the tariffs, you know, were announced and kind of kicked in. And so I think it’s difficult to predict where that would potentially, could potentially take us. But no doubt, you know, I think that there’s been some early estimates on those costs. I think there are a bit of a stab in the dark in all honesty given the uncertainty around the tariff approach. But, you know, if there is a prolonged trade war, inflation will go up, you know, we’re looking at a recession, and therefore I think you can expect a harder market in terms of what the impact is. And, you know, if you think about some of the multinational organizations that do insure, whether that’s in the P&C side or others, right, they have to look at what’s happening in the other jurisdictions where they operate also, and the impacts of, you know, what’s happening, whether it’s in Europe, the U.S., and others. So I think, you know, it’s early days on what that would look like, but I don’t think we should be naive to think that it wouldn’t have a significant impact.

Jason Contant: 

Yeah. Is there anything else that would escalate claims costs? Like, you know, are there sort of non-obvious areas other than cars and homes, for example?

Chris Cornell:

Jason, I think when you think about the steel and aluminum tariffs, right? So maybe some of the non-obvious areas are appliance costs, things of that, right, that are certainly, you know, not many are built here in Canada and so, you know, those items would potentially be subject to retaliatory tariffs when they come in. And so that’s one area from a home insurance perspective. You know, rising premiums as well, right? You know, we talked about that, and we don’t know exactly where that’s going to go, but, you know, when those things do happen and we chatted a little bit about harder or softer market, and we don’t know where that’s gonna happen, But, you know, it certainly wouldn’t just be on the auto side, right? It could potentially be on home insurance as well. And then, you know, I think we’re looking at the duration of how long this goes, the uncertainty related to it, and, you know, what reciprocal actions the government here in Canada will take post-election also, so…

Bobby Thompson:

You know, two really quick things from me, but very opposite things. The first one is more on the micro side. Will we see policies start to have certain exclusions? Are there going to be things that become too expensive to insure reasonably so they’re either excluded or they need a separate policy or something to that extent. Right now, we’re not seeing anything like that, but longer term, that’s something we could see potentially just like we’re seeing different types of coverages perhaps go away with changes in weather. The other thing that’s on my mind is that every day, different countries react differently to retaliatory tariffs and tariffs amongst themselves and a lot of discussion. And so because we have such a globally connected economy, what’s going on between the European Union and the Asian countries who were more adversely impacted by retaliatory tariffs, a lot of the input parts that go into making an auto part are shipped from some of those territories as well. So, it’s not just understanding where parts are coming from but where the inputs are coming from that go into the parts, and a lot of that might be steel and aluminum that we have in Canada or the U.S., but that could also come from other nations. So like I said, that cross-contagion, or that macroeconomic impact that we saw really hit electronics during COVID, that’s something we could once again see potentially, and we just need to keep monitoring it. Like you said, it’s April 15th, and the only thing I know is that things will be different on May 15th or roughly whenever this airs, so…

Jason Contant: 

Yeah, no for sure. And I know, I think President Trump there was talk about semiconductors and electronics. I know there was a big rush, I have friends in the U.S., and big rush to buy smartphones and stuff before the tariffs came in. So we’ll see how it goes.

Outro | Jason Contant: 

That wraps up today’s episode. We hope you enjoyed the discussion. Thanks for tuning in, and we’ll see you next time on “What’s on Dec?”