An Uncertain Policy: Tariffs and the Future of P&C Insurance

arely has international trade policy created more friction for the U.S. P&C insurance industry than it does today. At the recent CAS 2026 Spring Meeting, Tom Roth and Phillip Kall, experts in actuarial analysis and reinsurance with Aon, presented a comprehensive study on how rapid shifts in U.S. tariff policy in 2025 directly influenced loss costs across multiple lines of P&C insurance. Their analysis provides a vital framework for insurance professionals to better understand how geopolitical “shocks” translate into inflationary pressure on claims.

Despite their ubiquity in current public discourse, tariffs remain widely misunderstood. In simple terms, a tariff is a tax levied on imported goods and services. A common misconception is that the exporting country pays this tax. Roth clarified that the U.S. importer is the entity that writes the check to customs. Once this cost is incurred, the importer can choose to either absorb the cost within their own profit margins or pass it on to consumers through higher prices.

Ongoing debate on the tariffs’ legality has added to the confusion. Many of the 2025 tariffs, which were issued under the Trade Expansion Act and the International Emergency Economic Powers Act (IEEPA), were introduced to combat drug trafficking, penalize geopolitical policies, and address trade deficits. But because tariffs may apply only to legal, declared imports that pass through official customs, many were levied on specific trade categories, including steel, aluminum, copper, and automotive parts, with rates reaching as high as 145% for certain imports.

A Supreme Court ruling in February 2026 declared that most of the IEEPA-levied tariffs were unlawful, effectively ending the broadest tariffs issued under the IEEPA. In response, temporary 10% “balance of payments” tariffs were implemented under different legal authority. The court’s decision also opened the door for potential refunds to U.S. importers.

Aon’s study highlighted that foreign exporters generally do not lower their prices to offset tariffs. If they paid for tariffs, the prices of imported goods would decrease as tariff rates rise. The data indicates that import price indices remained elevated throughout 2025, confirming that tariffs create new costs for U.S. manufacturers and retailers. These costs eventually influence the consumer prices driving insurance claim severity.

The core of the presentation focused on how Aon’s study modeled these trade developments to estimate loss cost impacts. Describing the tariffs as extreme and volatile, Roth noted the challenges to assessing, analyzing, and modeling market reactions to them in real time, especially since the 2025 change to U.S. tariff policy is the largest in the model era.

As such, Aon’s methodology deviated from a traditional one-off change approach that assumes a single, nonrecurring event or policy shift. Instead, the methodology accounted for rapidly changing tariffs and how businesses changed import patterns in response to policy shifts. This more dynamic methodology sourced White House executive orders, U.S. Census Bureau import values, and Personal Consumption Expenditure (PCE) monthly data to gauge inflationary costs.

The model divided inflation costs into goods inflation, service inflation, and wage inflation, with goods inflation reflecting the direct impact on pricing from the tariff itself. To calculate goods inflation, the study divided potential business reactions to the tariffs into four categories:

• Absorption: No change in prices. The business shoulders the cost.
• Pass-Through: The price increases by the same dollar amount as the tariff. The consumer shoulders the cost.
• Ratio Protection: The price increases by the same percentage amount as the tariff. The consumer will pay more than the full cost of the tariff.
• Partial Pass-Through: The business and the consumer split the cost. For example, a 70% pass-through would pass 30% of the cost to the business and 70% to the consumer.

Kall noted that tariffs often initially create a “goods shock,” during which the price of physical items rises. However, because the U.S. economy is largely service based, this inflation eventually flows into service costs. A critical component of the modeling is this “wage-price service spiral,” meaning that, as the cost of living increases, workers demand higher wages, which further drives up the cost of services.

To determine the post-tariff inflation rate compared to an inflation baseline of 2.8%, the study modeled four primary lines of business:

• Auto Physical Damage: This line saw the greatest impact, with an estimated post-tariff inflation rate of 5.7%. Vehicle replacement costs were the primary cost driver, due to the high concentration of imported parts and materials used in repairs.
• Property: Construction costs for residential and commercial property showed a 4% post-tariff inflation rate.
• Liability and Auto Liability: These lines are primarily influenced by healthcare and legal services rather than physical goods. However, the service spiral still generated inflation rates of 3.2% for liability and 3.5% for auto liability.

Kall added that these estimates are highly sensitive to pass-through assumptions. While some manufacturers and retailers initially absorbed costs to maintain market share, industry estimates suggest a 70% pass-through rate may be the ultimate outcome.

For liability lines, claim costs were already increasing at a rate greater than the inflation rate prior to the tariffs being levied and continued a steady increase in growth rate in 2025; ultimately loss costs increased above the potential impact of tariffs. For residential and commercial property lines, roughly half of tariff costs may have been passed to consumers, though more recently, the pass-through may have escalated to 100%. The results also indicate that while tariff costs were not passed on to consumers, car parts and equipment fell in line with a 70% pass-through, leading to the high impact on auto physical damage.

Despite not ranking among the top five U.S. exports, the automotive industry often sits at the center of the international trade landscape, driven by its household visibility, supply chain vulnerability, and velocity of trade. Kall explained that impacts on the automotive sector from the 2025 tariffs vary significantly based on how manufacturers balance domestic production with international supply chains. European luxury brands have faced substantial sales declines, leading some to invest billions in U.S. manufacturing to insulate themselves from future trade volatility. In contrast, certain Japanese makers have leveraged their existing U.S. infrastructure to maintain a competitive advantage.

U.S. producers are navigating billions in additional costs, and the market response has been immediate. In early 2025, vehicle supply declined sharply as consumers accelerated purchases to avoid anticipated price hikes. By the end of 2025, manufacturers reported significant earnings hits. To counter these costs, some manufacturers are keeping the base price stable by increasing delivery charges or resorting to “shrinkflation.” As Kall noted, cars don’t get smaller, but optional features and sensors can be reduced.

Roth and Kall concluded with several key lessons for evaluating emerging risks. For insurance leaders, the most critical lesson is the necessity of going to the source. Relying solely on news headlines can lead to poor assumptions. Instead, the presenters advocated for using publicly available, traceable data such as U.S. Census data to build objective, validated models.

As legal challenges and pauses in trade policy occur, insurance professionals must also be equipped to adjust their scenarios in real time. Rather than pursue every possible scenario, insurers should look to maximizing their resources by remaining problem-focused and utilizing a best estimate approach. Roth emphasized that the goal isn’t to develop perfect parameters but to ensure that the core assumptions remain grounded in the current regulatory environment.

While the 2025 tariff shock was unique in its speed and scale, it serves as a strategic proof for how the insurance industry can better prepare against geopolitical risks. By monitoring the pass-through behavior of manufacturers and breaking down costs into goods, services, and labor, P&C professionals may be able to better anticipate how tariffs and supply-chain disruptions will broadly impact claim severity trends. As Roth and Kall emphasized, estimating the impacts of international trade policies on the insurance industry requires collaboration between actuaries and supply chain experts. A grounded, data-driven perspective is the best defense against economic uncertainty in an era where shifting trade dynamics have become another cost driver of insurance.