Impact of tariffs on home insurance

What are tariffs, and how do they affect costs? 

Tariffs are a tax on imported goods that the importer pays to the U.S. Customs Department. The tax is a percentage of the cost of the good and is used to regulate trade. Tariffs are implemented for numerous reasons, such as stimulating domestic production, raising revenue and political bargaining. 

When tariffs are placed on a good, the increased cost of that product can be absorbed by the importer or passed along to the consumer through higher prices. For example, if you import $1,000 worth of steel and the tariff is 25%, you’re now paying $1,250 for the same amount of steel. You can then reduce your profits to make up the difference or charge your buyer a higher price.

Current tariffs affect materials used in the building industry, such as steel, aluminum and appliances. China, Mexico and Canada account for around 46% of these imports.

When builders have to pay a higher price for goods to build or repair your home, they pass the costs to the homeowner. Insurance companies recognize that increased costs lead to higher claim payouts. In turn, insurers raise premiums to handle the more expensive claims.

How increased costs affect the insurance industry 

When your home is damaged, your insurer gets an estimate from a builder for repairs or replacement, including materials and labor. The estimated costs increase significantly as tariffs are placed on building materials.  

“They're importing things like softwood lumber, gypsum, drywall, cement, and concrete right from Canada and Mexico, respectively, so if the cost of the goods [is] going up when ultimately there are claims that occur, the cost to service those claims is going to go up for the components where the input costs have also gone up. That ultimately will lead to some level of increase in premium since the carriers ingest those new loss costs, and then eventually have to pass it back on to customers when they re-file rates in the future,” Nadel says.

Increased repair or replacement costs cause claims payouts to be higher than the insurer anticipated. The insurance company must recoup the unexpected material increases and plan for the future, leading to rising premiums. 

“Insurance is a cost-plus model in terms of how products are sold to customers. That means that insurance carriers understand the loss cost they take on insurance products. Then they file rates with their DOI that enable them to create a margin for the cost they incur,” Nadel says. “So naturally, if there are rising costs of the inputs too, like construction for homes and rebuild cost, the increased claim costs for insurance ultimately lead to subsequent increases in premiums.”

The increase in natural disasters like wildfires, floods, and tornadoes has already resulted in more claims payouts. When you combine increased claims with more costly building products, insurance companies look for ways to avoid significant losses.

“If you think about a 25% increase in tariff on these goods coming from Canada and Mexico, lumber, drywall, and concrete make up a portion of a total claim that might happen on a total home loss, maybe due to some catastrophic storm,” Nadel says. “There are a number of things that need to be replaced that are not impacted by the tariffs or may be manufactured here in the U.S., so it's going to be some figure that's lower than the overall tariff increase amount and the percentage that the carriers pass back to the customer.”

Direct impact of tariffs on home insurance premiums 

Insurance is a risky business. Insurers gamble that they will make more money in premiums than they pay out in claims. However, natural disasters and increased tariffs can make that a shaky bet.

Areas with frequent claims, such as the Florida coast, can see significant premium increases, even for homeowners who haven’t filed a claim. When you add in the increased costs of building materials, insurers must adjust replacement cost estimates and pay out more in claims than planned.

For example, a hurricane could hit Florida and cause major roof damage in several towns. A 20% steel tariff could significantly increase roofing claim costs. If an insurer has to pay multiple claims in an area with a 20% increase in materials, that’s an enormous economic hit. The insurer then looks for ways to recoup costs by increasing premiums.

However, insurance rates don’t rise immediately to cover the impact of tariffs. Insurers must gather data and petition each state’s insurance department to increase rates. Then, insurers can only raise premiums when a policy is up for renewal. So, it can be a while before the economic impact of tariffs reaches a homeowner. 

“The process lags the actual cost of development because as insurers want to refi rates, they can't do that until they realize some level of the loss cost before they can file with their department of insurance for these new rates So, insurers are looking at these tariffs, knowing that their loss costs are going to increase, but they can't do anything to adjust their rates until they actually realize some of these costs. It doesn't mean they need to wait until the full cycle has played out, so typically these insurers will be well prepared to file these rates because they can see it coming,” Nadel says.

“There are some lessons that we learned from the COVID years of 2020 and 2022, where similar supply chain contractions occurred. That also might occur as a part of increased tariffs. So, it’s likely not a year or two before rates increase. My guess is it’s probably a lag by about two quarters,” he adds.

Impact of tariffs on claims  

Tariffs have other effects on insurance. With increased costs, it can take longer to source materials. One object of tariffs is to stimulate the domestic production of particular items. However, increasing production takes time, and finding materials may be more challenging until production has increased. This can lead to delays in construction and repairs, which can delay insurance claims settlements.

A delay in getting materials causes claims to take longer to settle, leads to longer displacement for the homeowner, and incurs additional living expenses. 

“You'll see the increase at renewal, and that's also further impacted by potential supply chain contractions. It could take longer for someone to fulfill a claim and manage the cost associated with that now. When the process takes longer to fulfill the claim, that also means more cost incurred by the carrier for things like living expenses, which further drives up the cost of the carrier, which will eventually increase premiums to the consumer base,” Nadel says.

Additionally, homeowners may find that their policy limits aren’t sufficient to cover the increased costs. They will then be responsible for paying for anything over their policy limits.

So, while insurance premium increases are a big concern for homeowners, they may feel the effects of tariffs sooner in other ways.

How tariffs have impacted insurance in the past

This isn’t the first time tariffs have been implemented on imports affecting homeowners. In the U.S.-China trade war from 2018 to 2020, tariffs on steel, aluminum and other building materials were increased. This led to slowed economic and construction growth in both countries.

Although past tariffs indirectly impacted home insurance rates, policyholders typically saw increases related to where they live, natural disasters, and other individual factors.

How tariffs may influence underwriting practices 

Insurers may be forced to reconsider underwriting practices as they start to see increased claims and associated costs. For example, California and Florida have already seen insurers limit or stop offering coverage in certain areas. As costs continue to rise, older homes that are harder to repair with modern materials or homes in disaster-prone areas may see a shift in insurance products available.

Additionally, insurers may shift towards offering coverage for your home's actual cash value(ACV) instead of replacement cost value (RCV). The ACV refers to the depreciated value of your home, while the RCV refers to the full cost of replacing your home at today’s prices. Policies that include RCV are typically more expensive, but you won’t be hit with significant out-of-pocket costs if replacement costs continue to rise.

What can homeowners do to lower premiums? 

Homeowners insurance is expensive, but not having coverage can be detrimental if disaster strikes. Fortunately, there are ways to lower your premiums. 

“There are many things that homeowners can do in general to mitigate losses, and insurers have utilized a number of tactics over the years to drive risk mitigation behaviors, like water sensors in homes and other things that are used to prevent a claim before it happens. You're seeing more smart home devices and things being deployed by insurance carriers directly to consumers in a risk mitigation strategy to avoid claims, and avoiding any claim results in avoiding these increased costs,” says Nadel.

Other ways to save money on homeowners insurance include:

• Review replacement cost limits regularly. You can reduce coverage if your needs have changed. However, you could be left with massive out-of-pocket costs if you don’t have enough coverage to replace your home. 
• Complete repairs and upgrades. Newer roofs and well-maintained properties are a lower risk for a claim, so these homes see lower insurance rates.

• Stay aware of economic trends. Learn how tariffs and supply chain disruptions could affect insurance rates. 
• Shop around for coverage. Every insurer calculates rates differently, so compare homeowners insurance quotes from multiple companies to find the best rate.

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