How brokers can tame tariff impacts

As fallout from U.S. tariff impositions roil global equity markets, Canada’s P&C insurance industry is seeking ways to help commercial clients manage the trade war’s impacts.

Those mitigation efforts will largely be handled by brokers as opposed to insurers, says Jake Hovinga, commercial lines manager at Mitch Insurance.

“We need to be reviewing limits with clients where maybe they have more stock in their warehouse than usual; that they’re not selling the goods as quickly,” he says.

It’s also important to review where clients are getting their raw materials.

“Some insurers don’t prefer China, for example. If you started to get…a product from China, or raw material from China, manufacturers are always liable to the end user,” he tells CU. “If you were to use a lesser material or a lesser part from a different foreign entity, you may open yourself up liability-wise if your product became defective.”

Related: How Trump’s tariffs could affect P&C insurance

Meanwhile, import-dependent segments of the business community have voiced concerns about potential disruption of truck routes that routinely carry goods between Canada and Mexico or other parts of Central and South America. Alternate possibilities include companies using water routes into Canadian ports, sources tell CU.

Should such shipping changes become standard practice, Hovinga says, “you’d have to adjust their coverage for cargo coverage or ocean marine coverage.”

“There are definite trade routes – where you hear of pirates, etc. – that are extreme for getting cargo stolen…You have to be very careful of the trade routes you’re looking at and adjust accordingly.”

Concerns about tariffs may also induce companies to stock up on certain goods or manufacturing materials. Insurance companies will expect brokers to ensure clients increase limits for both the value and quantity of goods, and to ensure proper storage, Hovinga says. That would include inspections to make sure proper fire suppression is in place for any flammable goods, along with other mitigations.

He notes tariffs, as they’re introduced, will directly increase the value of goods roughly in line with the percentage of the tariffs. So, stored goods will increase in value just by sitting in warehouses, and slower sales of tariffed U.S. made goods could keep higher-valued merchandise in stock for longer periods.

Recession risk

Should tariffs harm Canada’s economy, businesses will need to keep their insurance companies abreast of inventory buildup, says Adam Mitchell CEO of Mitch Insurance.

“There’s a thing called receivables insurance, and it’s kind of a specialized line, but as you are lending things out to inventory, to The Bay [for example] and The Bay’s not turning over inventory, and therefore not paying [its] receivables. [Those] receivables could start to age into a chunky pile.”

Plus, obligations within commercial co-insurance policies exist for clients to fully disclose the amount of goods being insured – including stock and inventory.

ThinkInsure defines co-insurance as “a cost-sharing arrangement between an insurance policyholder and their insurance provider.” For example, co-insurance clauses in a commercial policy require policyholders to carry a certain percentage of their property’s value in insurance coverage. If they don’t, the insurer pays only a portion of the loss, and the policyholder pays the rest.

“When the insurance company writes you a policy as: ‘I insure your business for $100,000 of inventory,’ if you ratchet up inventory to $200,000 during that time, you have actually increased their exposure a lot,” Mitchell says.

To keep this in cheque, businesses must conduct a calculation expressed as: ‘did’ over ‘should’ times the ‘loss,’ (did/should x loss) which tells an owner the percentage of what ‘did’ they insure something for, divided by what ‘should’ they have insured it for.

“Say you ‘did’ that to 50%. Well, then the loss you incurred is only going to pay out to 50%…small caveat – unless it’s a total loss,” Mitchell tells CU.

“We could end up in a scenario where claims that happened during this time could have a bigger triggering of co-insurance because stock and inventory piled up without anybody expecting it.”

Adds Hovinga, “Most insurers have a 90% or 80% co-insurance clause on their policy. Meaning you’ve got to be up to 90% or 80% of the total value.”

Covering credit

In a Mar. 7 blog, Hub notes tariffs “could result in delayed or non-payment of goods from companies that cannot afford to pay tariffs or whose business comes under severe financial stress from export sales.”

That’s piqued interest in trade credit insurance to protect clients from non-payment for goods and services. “These policies…can protect businesses against customer defaults, insolvencies, non-acceptance of goods, civil unrest and losses resulting from currency devaluation,” the blog notes.

“In addition, lenders often allow organizations with trade credit or accounts receivable insurance to borrow against a higher percentage of their accounts receivable than for companies that don’t.”

That could change, Hub says, if tariffs push up total accounts receivables at companies and lead to capacity issues for insurers. “In addition, lenders are likely to tighten up lending on accounts receivable from foreign buyers and possibly make trade credit insurance a condition of lending,” the blog adds.