Insurance industry braces for rising rates as tariffs hit vehicles and parts
“I hope they raise their prices because if they do, people are gonna buy American-made cars,” said President Trump during a March 29 interview with NBC News. “I couldn’t care less because if the prices on foreign cars go up, they’re going to buy American cars.”
While Trump “couldn’t care less” about tariffs increasing the price of automobiles, you and your wallet probably should. The president’s newly-announced America First Trade Policy follows through on his promise of more tariffs. The economic policy includes a baseline global tariff of 10 percent on all imports and additional reciprocal tariffs ranging from 10 to 50 percent.
Drivers in the U.S. are already struggling under the weight of rising auto insurance rates, and with Trump’s latest tariffs, the pressure will only get worse. Tariffs increase the cost of vehicles, car parts, medical care and more — leading to higher operating costs for insurers and higher premiums for policyholders.
Auto insurance premia are calculated based on car part replacement costs. So, as car parts cost more, auto insurance will also cost consumers more.— Samia Islam Ph.D., Professor of Economics, College of Business and Economics, Boise State University
Vehicles and parts face 25% tariff
According to a White House Fact Sheet, a 25 percent tariff will apply to all imported passenger vehicles and light trucks along with vehicle engines, transmission, powertrain parts and electrical components. In 2024, more than 50 percent of U.S. vehicle purchases were imported from Canada or Mexico tariff-free as part of the United States-Mexico-Canada Agreement (USMCA).
These tariffs impact every aspect of car ownership costs, including insurance rates. “The types of insurance potentially most affected by tariffs are those involving exposure to international supply chains,” says Rick Gorvett, professor of math and actuarial science at Bryant University. “Personal auto insurance is the most likely to be impacted in this way.” Since auto insurance companies pay to replace or repair cars when damaged in a covered claim, a tariff that increases the price of parts and materials will impact their bottom line.
According to research from The Budget Lab, a 25 percent automobile tariff could:
- Increase vehicle prices by an average of 13.5 percent
- Based on an MSRP of $48,000, tariffs could increase new car purchases by $6,400
- If other countries impose matching retaliatory tariffs, the U.S. would produce 4,000 fewer cars per year and lose around 500 jobs
- If other countries don’t retaliate at all, the U.S. could produce 1.3 million more cars and create 150,000 jobs
More than half of these parts and materials used in the U.S. come from the three countries currently being most targeted for tariffs (Canada, Mexico, and China). With…tariffs in place, those repair costs will increase, and insurers will see increased payments under their auto policies. These will most likely be passed on to policyholders at some level, resulting in higher premiums.— Rick Gorvett, FCAS, CERA, MAAA, ARM, FRM, PhD, Professor and Director of the MSAS Program, Department of Mathematics & Economics, Bryant University
The USMCA puts overseas manufacturers at a disadvantage.
Canada and Mexico are still subject to the new 25 percent tariff, but differently than overseas manufacturers. Manufacturers who import under the USMCA can certify their U.S. contents so that tariffs only apply to non-U.S. content. Additionally, USMCA-compliant auto parts will not be taxed until a process is established on how to apply auto tariffs on components made up of both U.S. and non-U.S. content.
While no car is 100 percent American-made, some manufacturers, like Tesla and Honda, have final assembly in America and a high percentage of U.S. content for most models. These manufacturers will still face tariffs, but only the non-U.S. content, not the whole car. The distinction leaves automakers with overseas manufacturing in a precarious situation — pay to move operations to the U.S. or risk being out-priced by domestic manufacturers.
Hyundai Motor America recently announced it would invest $21 billion in U.S. manufacturing operations, including a new steel mill in Louisiana. While Hyundai has existing factories in Alabama and Georgia, most of its manufacturing is done in Korea. Over time, this move could localize parts, strengthen its supply chain and hopefully keep the price of its vehicles and repair parts lower than overseas manufacturers.
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Powered by Coverage.com (NPN: 19966249)
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
Policyholders can expect rate hikes in the next 12-18 months
The financial impact of tariffs will be felt immediately in some markets; If you’re buying a new car in the near future, you’ll likely experience higher prices at the dealership, but when it comes to auto insurance, drivers won’t see tariff-related rate changes in their auto policies right away. “The effects of the proposed tariffs may be delayed since annual insurance rates are locked in,” says Islam, “but consumers will feel it in the next underwriting cycle.”
Insurance pricing is reactionary, causing a lag in rates when the price for goods and services covered by auto insurance increases. Once insurers quantify how much more they are paying out in claims due to tariffs, they still need to go through the rate approval process in each state, which can take months.
Additionally, car insurance policies are issued on either 6-month or 12-month policy terms. Aside from changes initiated by drivers, like adding or removing coverage, rates remain the same for the duration of the policy contract. Once state rate filings are approved, you won’t see them reflected in your premium until your policy renews.
The potential impact of tariffs on car insurance premiums is hard to pin down this early on. However, Dr. Robert Hartwig, director of the Risk and Uncertainty Management Center in the Moore School of Business at the University of South Carolina, estimates that tariffs could increase personal auto insurance premiums by around $11 billion.
These new tariffs are a dramatic increase upon Trump’s 2018 tariffs — which still cost American households an estimated $200-$300 per year in additional tax collections. This time around, car insurance companies face a 10 percent baseline tariff, which will dramatically impact nearly all aspects of operating expenses. Costs will likely rise on everything from claim payouts for medical care to the cost of paper and electricity for corporate offices.
Tariffs put new strain on a fragile auto insurance industry
Full coverage auto insurance rates average $2,678 per year, according to Bankrate’s True Cost of Auto Insurance study. Average car insurance rates increased 12 percent from 2024 to 2025. While this is an improvement over the 17 percent increase from 2023 to 2024, it didn’t provide much in the way of financial relief for drivers.
The auto insurance market is slowly on the road to recovery from post-pandemic challenges of inflation, shipping delays and part shortages. Auto insurance inflation is cooling, vehicle theft rates are down, and traffic fatalities are at a three-year low. Rising prices due to tariffs could throw this stabilization trend off track.
The aggressive ping-pong tariff dialogue between the U.S. and other countries contributed to a 7.2-point drop in the Conference Board’s Consumer Confidence Index in March. The Expectation Index, which measures how consumers feel about the short-term outlook regarding income, business and labor market conditions, decreased by 9.6 points to 65.2 — a 12-year low.
“Tariffs can often be implemented (or revoked) and their levels increased (or reduced) fairly quickly, causing economic uncertainty and making corporate and organizational planning difficult,” says Gorvett. “While this is not as direct or transparent a ‘cost’ to society as increasing product prices, it is a very real cost in terms of consumer behavior and confidence.”
By the time tariffs are actualized in auto premiums, Americans will have potentially been paying higher prices for other goods and services for over a year. While full coverage auto insurance currently only makes up an average of 3.39 percent of the median household income, tariffs present the risk of increased pricing across the board for families.
As for consumers, car insurance cost is not going to be the only cost rising, so allocating their limited budget among household essentials may impact a household's ability to afford car insurance altogether.— Samia Islam Ph.D., Professor of Economics, College of Business and Economics, Boise State University
Bottom Line
It will take time to see how the rising cost of vehicles, materials and medical care trickle down to insurance rates.
If Americans turn their backs on imported vehicles, the production of domestic cars needs to ramp up immediately — but it will probably take years. During that time, the demand for imported cars and other goods could continually decrease, causing layoffs in manufacturing jobs across various sectors. Stellantis, which manufactures Ram trucks and Jeeps, already announced a temporary layoff of 900 workers and shutdown of two assembly plants in Mexico and Canada. Drivers will likely hold on to their current cars longer, increasing the sale price of used cars along with new ones.
And these tariffs won’t happen in a vacuum; they are widespread, impacting the already stretched budgets of Americans nationwide. Most Americans rely on their vehicles to commute to work and have limited alternatives. In tighter budgets, car insurance payments may be pushed to the wayside for more tangible daily necessities, like food and housing, increasing the number of uninsured drivers and further pushing up auto rates. The consequences of driving uninsured can quickly snowball into a financial situation that is hard to recover from, such as having driving privileges revoked and vehicle impounded, which can result in loss of employment.
“In the absence of transit alternatives, cars are critical for mobility and for job access for most households in the U.S.,” says Islam. “Rising auto insurance costs could have greater economic repercussions for the workforce, especially those households at the margin.”
