US could target reinsurance trade gap, warns think tank

The US may look to close its sizable reinsurance trade imbalance under President Donald Trump, but such a move would likely drive up premiums for US businesses and consumers, according to a Geneva Association online event. The US has a yawning trade gap in reinsurance, with imports far exceeding exports. According to the US International Trade Commission, US reinsurance exports were $17.4bn in 2022, compared with imports of $50.6bn. Offshore companies accounted for almost 64% of reinsurance premiums ceded by US insurance, according to data from the Reinsurance Association of America. “Trade in services has grown faster than trade in goods, so we definitely need to think about it,” said Kai Uwe Schanz, director of macro-economic and geoeconomic shifts at the Geneva Association, a Switzerland-based insurance industry think tank. There are several “levers” the US federal government could pull to address the trade imbalance in reinsurance, including the reintroduction of collateral requirements, according to Schanz. Through past trade agreements, the US liberalised cross-border trade in reinsurance, removing collateral requirements for certain countries. “That could be thrown into question,” said Schanz, during an online panel discussion on the impact of trade wars on insurance. The Trump administration could also address the reinsurance trade imbalance through taxation, he added. For example, by increasing the tax on cessions US primary insurers make to foreign reinsurers or affiliates, said Schanz, author of a recent Geneva Association paper on Insurance in a Fragmented World Economy. But the situation is very complex, according to Schanz. It is unclear what could be achieved through presidential executive orders, or what would require the involvement of congress, or involve US state regulators, he explained. “How likely is such a scenario? I personally do not consider it very likely because if reinsurance access is restricted, US insurers might face much higher costs, especially in catastrophe prone states, such as California and Florida. It would certainly lead to higher premiums for businesses and consumers, and it would force US insurers to retain more risk,” said Schanz. “So I think these protectionist measures would make no sense at all, especially in light of the current insurance crisis in California. So I do not consider it likely to happen,” he said. Commenting on the emerging threat of a global trade war, Schanz warned that tariffs and trade barriers would lead to higher costs for consumers and businesses, disrupt supply chains and create inflationary pressures. Even the threat of tariffs would delay investment decisions and hiring, he said. Schanz set out three possible scenarios for an escalating global trade dispute. The mildest impact scenario would see a continuation of the current trend for increasing trade barriers and government subsidies for strategic sectors. At the other extreme, the scenario of bifurcation would see the world split into two distinct trade blocks, where trade neutrality becomes almost impossible. Schanz, however, believes the most likely scenario is a strategic decoupling, which would see shifting trade patterns rather than deglobalisation. “Exacerbation [scenario] now looks like the baseline, where fragmentation worsens significantly as nations engage in tit-for-tat restrictions – countries imposing tariffs, and others responding in kind – setting off a spiral of trade wars. That would certainly mean much higher costs for consumers and businesses, and it would disrupt the availability of goods, and lead to much higher financial market and economic volatility,” he said. Countries have been trading and investing more in countries that are geopolitically similar since 2017, according to Kweilin Ellingrud, director and senior partner at the McKinsey Global Institute. There is already a trend towards decreased investment in China and Russia in favour of Africa and India, she noted. But 20% of global trade is still with “geopolitically distant partners”, rising to 40% for concentrated items like minerals. “No country is an island or totally independent,” said Ellingrud on the webinar. A trade war and shifting trade patterns would have significant implications for insurers, according to Miguel Abecasis, executive board member at Portugal-based insurer Fidelidade. Higher inflation and supply chain disruption would impact claims inflation with increased repair and rebuild costs, while trade credit and marine insurance could see an increase in claims frequency, he explained.

US could target reinsurance trade gap, warns think tank

But move likely to drive up premiums for business and consumers

Want to read this article?

Read Next

Retain focus on loss prevention and resilience despite softening conditions

Demand for D&O rapidly rising in India

Rates fall further in India, Middle East and Africa: Marsh

BI policies unlikely to respond as Spain and Portugal search for cause of mega blackout

Talanx says Q1 profit backs full-year forecast

Retain focus on loss prevention and resilience despite softening conditions

Demand for D&O rapidly rising in India

Rates fall further in India, Middle East and Africa: Marsh

BI policies unlikely to respond as Spain and Portugal search for cause of mega blackout

Talanx says Q1 profit backs full-year forecast

Keep yourself informed

Sign up for Commercial Risk’s newsletters

Want to read this article?

Read Next

Retain focus on loss prevention and resilience despite softening conditions

Demand for D&O rapidly rising in India

Rates fall further in India, Middle East and Africa: Marsh

BI policies unlikely to respond as Spain and Portugal search for cause of mega blackout

Talanx says Q1 profit backs full-year forecast

Related Articles

Keep yourself informed

Sign up for Commercial Risk’s newsletters