Impact of Trump’s proposed tariffs on home insurance
Key takeaways
- Donald Trump’s plan to raise federal revenue using tariffs will likely drive up prices for construction materials
- Higher home repair and replacement costs could put pressure on insurers to increase home insurance premiums
- China, Canada and Mexico, the top providers of building material imports in the U.S., are slated for the highest tariffs
What does the price of drywall have to do with the cost of home insurance? If construction costs rise because of tariffs proposed by the new Trump administration, and insurance companies have to pay more to repair or replace homes, the increase will be passed on to customers in the form of higher home insurance premiums, says Dean Baker, a senior economist at the Center for Economic and Policy Research.
The same dynamic holds true if insurers have to pay higher prices to replace insured contents of homes, including appliances and furniture.
“It’s virtually guaranteed that prices will go up with an increase in tariffs,” Baker says. “The only question is how much.”
Replacement costs aren’t the only factor contributing to the rising cost of home insurance. Another component is the increased risk driven by climate change, such as the $30 billion insurers will have to pay for the devastation caused by wildfires in Los Angeles, according to a Morningstar DBRS estimate.
While disaster risk is a bigger factor impacting premiums in some regions of the country, a jump in replacement costs due to higher prices caused by tariffs would impact everyone, Baker says.
We’ve already seen the impact of rising replacement costs in the premium hikes of 2023 and 2024 that were driven by overall inflation sparked by the pandemic’s disruption of global supply chains. While inflation has since cooled, the impact is still being felt when it comes to insurance premiums.
According to average rate data from Quadrant Information Services, the average cost of home insurance for a policy with $300K in dwelling coverage has increased 11 percent since June 2022 — from $1,963 to $2,181.
“When the underlying costs of rebuilding go up, it puts upward pressure on insurance premiums,” says Douglas Heller, director of insurance for Consumer Federation of America. “There’s also a willingness of insurance regulators to accept inflation arguments as justification for giving the industry what it wants.”
According to the Insurance Information Institute, premium increases tend to lag shifts in the overall economy. While overall inflation in the U.S. peaked in mid-2022, insurance carriers have to file for rate increase approvals with state insurance departments. Once those are approved, the increase doesn’t apply to policies until they renew the following year. This means that actual rate increases are usually at least a year or two behind the event that triggered them.
If the Trump administration makes good on its promise to boost tariffs, which are taxes on imported goods, look for the tax to be passed on to consumers buying the products, whether they’re individuals perusing the aisles of Home Depot or construction companies purchasing supplies through wholesalers, Baker says.
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How would tariffs impact home insurance premiums?
President Donald Trump has proposed various plans to increase tariffs to augment revenue to the U.S. Treasury. This week, he said he would create a Department of External Revenue to collect tariffs. That may face a legal challenge as the Constitution confers on Congress the power to establish and fund federal departments and agencies.
The most commonly repeated tariff proposal is a universal tariff of 10 percent, which alone would boost the inflation rate by about 1 percent, according to a forecast by Pantheon Macroeconomics.
Trump has proposed even higher tariffs for the U.S.’ top three trading partners. He says he may levy a 60 percent tariff on goods from China and 25 percent tariffs on imports from Canada and Mexico.
What impact could that have on home replacement costs? In 2023, 71 percent of lime and gypsum imports to the U.S. came from Mexico, according to the National Association of Home Builders. Lime is a key ingredient in mortar and other construction materials. Gypsum is used in drywall, cement, and plaster.
In the same year, 70 percent of wood imports, including the framing lumber for homes, came from Canada, and more than half of all household appliances such as stoves and washing machines came from China, according to NAHB.
“Tariffs on building materials raise the cost of construction of all types of housing,” says Robert Deitz, chief economist of NAHB. “That works against the fight against inflation.”
Tariffs give domestic producers wiggle room to increase prices
According to economists, boosting taxes on imports gives U.S. manufacturers the opportunity to raise domestic product prices as well.
For example, in 2018, the first Trump administration put a 20 percent tariff on washing machines from China, hiking the tariff to 50 percent later that year. While the move was aimed at protecting American manufacturers, U.S. companies used it as an opportunity to increase prices for their domestically produced washing machines and even hiked prices for dryers, which weren’t included in the new tariffs, according to a 2020 study in The American Economic Review.
The tariffs on washing machines from China “resulted in increased consumer costs of just over $1.5 billion annually. By comparison, the total amount of tariff revenue collected was relatively small, aggregating to about $82 million annually,” said the economists who authored the study, led by Aaron Flaaen, a senior economist for the Board of Governors of the Federal Reserve in Washington D.C.
The bottom line: The tariffs were paid by consumers, and then some.
“Our estimates imply a pass-through of the safeguard tariffs to consumer prices of above 100 percent with estimates ranging between 108 percent and 225 percent,” the study concluded.
Who pays the tariff bill?
The new president often claims that foreign nations will pay the tariff bills: “Trillions and trillions of dollars pouring into the United States Treasury from foreign countries,” according to Trump. But no one sends a bill to China, or Canada, or any other country.
Tariffs are collected at the border by U.S. Customs and Border Protection agents from the American importers who receive the shipments. Typically, those importers pass the costs down the retail chain, eventually reaching U.S. consumers.
The hope is that exporting nations hit by tariffs will be forced to lower the price of their goods to avoid losing sales. But when the first Trump administration started hiking tariffs on China in 2018, the globe’s most populous nation didn’t lower prices. Instead, it responded by slapping the U.S. with matching tariffs to retaliate — what’s known as a trade war.
According to the Peterson Institute for International Economics, the tariffs now proposed by Trump would impact eight times as many imports as the tariffs he levied during his first administration.
Last month, the National Retail Federation estimated that the tariffs proposed for the start of the second Trump administration could reduce U.S. consumer spending by up to $78 billion annually as Americans balk at higher prices.
Tariffs boost federal revenue
Trump has made the tax on imports a central feature of his economic agenda. “To me, the most beautiful word in the dictionary is tariff, and it’s my favorite word,” he told the Economic Club of Chicago in October.
According to an estimate from the Congressional Budget Office, a 10 percent across-the-board tariff coupled with an additional 50 percent tariff on goods from China would raise $2.9 trillion for federal coffers over the next 10 years.
The same level of tariffs would cost American families an average of $1,560 a year as retailers pass the import tax along to consumers, according to the U.S. Senate Budget Committee.
Jamie Dimon, CEO of JPMorgan Chase, said in an interview with CBS News’ Sunday Morning that Trump uses the threat of tariffs as a negotiating tool.
The incoming president is “a negotiator — he lays out some very tough things, and sometimes it works,” Dimon said.
The danger is that tariffs or even the threat of tariffs may backfire, damaging trading relationships and sparking retaliatory tariffs that would reduce consumer spending, which could slow U.S. economic growth. Political leaders in countries including Canada have already said they will match any Trump tariffs with their own tax on American goods entering their countries.
“Like any tool, if it’s misused it can do damage too,” said Dimon.
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