The early days of a new presidency usually signal what the nation, and other interested observers, can expect the administration to prioritize. As Donald J. Trump nears the 100-day mark, a shift seems to have occurred.
Mr. Trump as a candidate and president-elect made bold assertions about adopting more protectionist trade policies and renegotiating agreements to drive domestic manufacturing and growth. In the past few weeks, however, the president’s stance has become more conciliatory, particularly regarding China and the North American Free Trade Agreement. Wherever Mr. Trump’s trade policy ends up, his focus on driving domestic economic activity will remain and is likely to have a significant effect on U.S. businesses, including insurers.
A focus on boosting the manufacturing sector and U.S. exports offers a mix of good, bad and ugly outcomes for insurers. There is some good news for insurers:
Increased domestic growth. More companies producing goods and employing workers in the United States implies growth in demand for various lines of property and casualty insurance, which would in turn stimulate growth in premiums. Amid a prolonged period of flat to falling rates at renewal for many lines, growth has, before now, been hard to attain.
Higher exposure values. Measured by revenues, property schedules or litigation risk relative to foreign jurisdictions, U.S. businesses will see increases in their exposures. For insurers, that likely means opportunities to offer additional coverages and/or larger policy limits to accommodate those increases.
Greater demand for political risk and trade credit coverage. If the administration succeeds in driving export growth, U.S. businesses trading internationally may well want to seek political risk and trade credit insurance to protect their assets and receivables abroad.
Now consider the "bad" news:
Supply chain risk. Many U.S. businesses source materials, labor, or both, in lower-cost foreign markets. Policies intended to promote domestic business and concentrate utilization of domestic supply sources may leave businesses vulnerable to supply chain disruptions.
Growth in complex claims. The United States is a litigious marketplace, with an organized plaintiffs’ bar, a variety of plaintiff-friendly jurisdictions and generally higher damages awarded than elsewhere in the world. If U.S. businesses do shift their operations away from foreign locations to concentrate them in the United States, liability risk profiles will change. And insurers are likely to see more – and more complex – claims.
Reserving and pricing challenges. Insurers with more U.S. risks in their portfolios will by necessity have to ensure appropriate reserving and pricing, which may be difficult in current market conditions.
Environmental risk. Industries that look to resurrect shuttered facilities or develop brownfields may find that environmental liability has become a costly exposure. Environmental insurers similarly may face more claims.
Lastly, protectionism offers potentially "ugly" impacts:
Trade restrictions. A nasty, if unsurprising, downside to protectionism is retaliation by other countries. U.S. businesses operating internationally, including insurers, may well face retaliatory actions, ranging from higher tariffs to taxes to difficulties in obtaining authorizations to enter or expand in foreign markets.
Political risk. International discontent over U.S. trade policies and increasing volatility in certain regions may make political risk a serious concern. Currency inconvertibility, political violence and expropriation may assume more prominent positions on U.S. businesses’ risk radars.
Kidnap, ransom and extortion. Political posturing may inflame resentment of U.S. organizations and their employees, bringing the ugly risks of kidnap, ransom and extortion closer.
It remains to be seen how dramatically the Trump administration will seek to reshape the global trade landscape, from altering existing agreements such as NAFTA to participation in the World Trade Organization. No matter how well intentioned, aggressive moves on global trade may well come at a price, for U.S. businesses and their insurers.