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Navigating tariff impacts on existing and future claims

Recent tariff and counter-tariff implementations globally have given rise to concerns about price increases that could impact organisations across a wide range of industries during the normal course of business and at critical moments.

The tariffs on steel and aluminium, cars and auto parts, and a range of other products aim to reduce the US’s dependence on foreign goods and stimulate domestic production. However, uncertainty regarding future trade policies and negotiations on tariff rates persists, exacerbating existing supply chain challenges and concerns about recovery costs and timelines following a natural or human-caused disaster.

The current situation is reminiscent of 2021, when stretched supply chains as a result of the COVID-19 pandemic contributed to a significant increase in costs for critical construction materials, including steel, lumber, and oriented strand board (OSB).

Understanding the cost implications of today’s tariffs

While there is still uncertainty regarding how long certain tariffs will be in place and at what level, in an environment where costs could continue to fluctuate, businesses should be prepared for a number of potential impacts, which include:

Increased replacement and repair costs. Tariffs on imports, including many auto parts, machinery, and construction supplies, are likely to lead to higher repair and replacement costs. These higher prices will likely increase claims estimates provided to insurers.
Supply chain disruptions. Increased costs may lead to import decision changes, potentially causing delays in the availability of needed items. This can extend repair times, which could also prolong business interruption.
Increased loss retentions. Deductibles for a number of insurance lines — such as windstorm and earthquake coverage — are often based on a percentage of the replacement cost at the time of loss. Higher replacement costs due to increased values could translate into larger deductibles.
Time element exclusions. Stretched supply chains could lead to extended rebuild and replacement timelines. Insurers may question these extended timelines, making it more important to ensure due diligence and take immediate action to repair or replace lost or damaged property.
Inadequate insurance limits. Higher repair and replacement costs could mean that current valuations on which insurance limits and claims recovery plans are calculated are no longer accurate, leaving insureds exposed to unexpected costs in the event of a loss. This could also apply to third party liability claims, for example in the event of a collision.
Potentially higher premiums. Increased claims costs due to higher repair and replacement expenses, as well as the potential for longer downtimes, could lead to insurance companies raising premiums to maintain profitability.
Impact on current losses. Many policies base the recoverable replacement cost on the replacement value at the time of loss. Price increases that take place after the date a loss occurred could be questioned by insurers. Again, it will be critical to demonstrate to insurers due diligence taken to expedite the repair and replacement process.

Assessing your assets

As we continue to monitor the evolving situation, it is crucial for senior leaders to take action to assess how changing costs can impact their insurance programmes and identify strategies that can help them protect their business. The businesses that identify how changing policy decisions may impact their exposures may be better placed to respond and recover following a loss.

With replacement costs for damaged or lost assets expected to increase, it is important for business leaders to focus on regularly assessing and updating their insured values to mitigate the risk of underinsurance following a loss.

It is also important to consider potential price changes for locally purchased products if any of their components or raw materials are affected by tariffs. By mapping your end-to-end supply chain, you may gain visibility into previously hidden vulnerabilities that lie deep within the supply chain. Marsh McLennan’s AI-powered Sentrisk, for example, assists in the identification of secondary and tertiary suppliers, helping organisations to assess whether end products may be impacted by tariff-related price changes and need to be considered when updating insured values.

In an environment where costs are expected to fluctuate, insurers may also start to request updated property values, so that they can better calculate premiums. Organisations will need to develop and maintain reliable asset values, based on accurate data and consistent methods, and make sure they discuss any significant changes with insurers. And since replacement costs that are significantly higher than the value at the time of loss may be subject to higher insurer scrutiny, consider discussing with insurers any significant cost increases, especially if these are due to difficulties securing essential materials and parts.

Discussions with insurers can help determine early on the actions they are considering to protect their books. For example, some insurers may consider coinsurance provisions or limit coverage to the values reported. While some insurers may agree to a margin clause, which typically states the maximum amount paid is between 110% and 125% of reported values, there is also the possibility that insurers opt against renewing policies where they consider reported values to be well below market averages.

In addition to the cost of physical assets, organisations should also determine any impacts for their business interruption values. Supply chain disruptions or delays and workforce challenges may also prolong downtime. Senior leaders should consider how these evolving dynamics may impact the period needed for business recovery.

Is your coverage adequate?

As the introduction of tariffs and the potential for escalation continues to concern businesses across multiple industries, it is essential to take action to make sure that your organisation is prepared for the potential impact of increased costs on existing and future claims. Aside from reviewing asset valuations, this may also be a good time to assess your overall insurance programme and determine whether there are any opportunities for improved protection.

By adopting a proactive approach to risk management and staying informed about the evolving trade environment, businesses can better position themselves to navigate the current period of uncertainty.

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Navigating tariff impacts on existing and future claims

Understanding the cost implications of today’s tariffs

Assessing your assets

Is your coverage adequate?

Speak with a Marsh representative

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