As Donald Trump prepares for a second term as president, the world of insurance is keenly watching to see his impact on the US market and international relations
With Trump’s return to office, his policies are expected to shape the U.S. insurance and financial sectors by reducing regulations, altering corporate tax structures, and potentially impacting international relations, including the UK.
Scott Williams, of Clarke Williams Ltd, explores how some of Trump’s policies may unfold:
Deregulation in the financial sector
Trump’s pro-deregulation stance, with a likely focus on reduced oversight in financial services, raises similar questions. His previous administration scaled back parts of the Dodd-Frank Act—a Wall Street reform and consumer protection act passed in 2010 to prevent another crisis. This act mirrored the UK’s Financial Services (Banking Reform) Act, designed to tighten regulation in response to the events of 2008. With a renewed focus on reducing regulatory burdens, U.S. insurers might experience fewer compliance requirements, allowing them greater flexibility in setting premiums and managing risk. However, this leniency could introduce increased volatility, particularly for companies heavily reliant on bond yields, impacting underwriting profits and potentially exposing the financial sector to heightened risks.
If we ease back on compliance, could we risk setting the stage for another financial crisis in the future? As the famous film The Big Short highlights, a significant portion of the global financial crisis stemmed from insufficient regulation and oversight in the financial sector. A lack of checks and balances allowed financial practices, like subprime mortgage lending, to flourish unchecked, ultimately leading to the 2008 crisis. The role of credit default swaps (an insurance of sorts) in this downturn is still debated; some argue CDS were a primary cause, while others contend they merely exacerbated underlying issues.
Lower corporate tax rates
Trump aims to cut corporate tax rates further, proposing a range of 15-20%. If realised, lower taxes would increase profitability for insurers and could make the U.S. market more attractive to foreign insurers, potentially intensifying competition. These tax reductions, however, depend on Congressional support. In the UK, insurers linked to U.S. operations might benefit from increased investment returns, though this depends on both UK regulatory responses and the relative strength of the British pound.
Impact on interest rates and monetary policy
Trump’s preference for a pro-growth, low-interest rate environment could mean pressure on the Federal Reserve to ease monetary policy. Lower rates may stimulate growth but reduce investment income for life and annuity insurers who rely on fixed-income assets, leading to mixed impacts. UK insurers with U.S. bond holdings or those who rely on dollar-denominated returns might find returns squeezed if bond yields fall, while U.S.-UK interest rate differentials could affect currency valuations.
U.S.-UK trade relationship
Trump has long been a fan of the Royal Family and the UK, a sentiment that persists despite recent missteps by the new Labour government, which now seem to have been smoothed over. This admiration could play into his approach to trade with the UK, potentially making it more favourable, especially if he builds on prior commitments to a strong bilateral trade relationship post-Brexit.
Trump has previously emphasised a robust U.S.-UK economic alliance, and his administration might pursue advantageous trade terms, including financial services agreements, which could provide UK insurers greater access to the U.S. market. At the same time, if trade terms lean more in favour of the U.S., the UK’s financial sector—including insurers—may face pressures to adapt to new competitive standards.
Economic volatility and protectionism
Trump’s policies may bring heightened protectionism, particularly toward China, and could affect the global economy. For UK insurers, this might translate to increased market volatility, especially in sectors like international trade credit insurance, due to fluctuating global supply chains. Increased U.S. economic isolation could shift some trade flows toward the UK, offering British insurers new opportunities in export-linked policies if trade volumes rise.
In summary, a Trump presidency is likely to create a complex mix of opportunities and risks for the insurance market, with specific impacts dependent on U.S.-UK policy alignments and global economic conditions.
Sources: Allianz Global Investors, Morningstar & American Century.
