The re/insurance and insurance-linked securities (ILS) industry saw a turbulent start to the year with the devastating and record-breaking Los Angeles wildfires in January that were followed by severe thunderstorm, hail and tornado activity across the country throughout the spring. Considering these losses alongside forecasts of an above-average Atlantic hurricane season,1 the physical environment continues to prove challenging.
Simultaneously, Trump administration policies, namely those related to tariffs and immigration, introduce additional challenges as we believe they could lead to inflated property replacement costs in the event of a natural disaster. Over time, the impacts of these policies will be incorporated into the risk modeling and pricing of ILS instruments; however, as the risks of costlier materials and labor in the near term remain non-modeled (i.e., a potential source of loss not explicitly considered by a catastrophe model), we believe ILS participants must actively consider the potential impacts.
How might tariffs affect the cost of materials? Three countries at the center of trade negotiations, Canada, Mexico and China, provide much of the imported materials supply. We would likely see the biggest impacts from Canadian lumber, Chinese steel and Mexican and Canadian concrete, while major effects would occur in auto losses, as 60% of replacement parts are currently supplied by the three aforementioned countries.2
While commercial roofing is likely still exposed to tariff risk due to its complexity and use of materials such as metal sheeting, residential roofing is a key exception, as shingles are primarily sourced domestically.3 This is noteworthy because the roof is often one of the first parts of a home to be damaged or destroyed by hurricane-force winds; it is also one of the costliest to replace and exposes contents to flooding risk.
Trump administration immigration policies targeting non-visa or green-card holders, which comprise up to one fifth of the construction industry laborers,4 could likewise disrupt the re/insurance industry. According to the National Association of Home Builders, states such as Florida, Texas and California have some of the highest concentrations of immigrant laborers and are likewise among the most exposed to natural catastrophe risk (see display below). As large events strain the availability of materials and labor, these shortages will likely constrict further given the shrinking workforce, compounding already inflated replacement costs.
Tighter Immigration Could Drive Higher Construction Costs
Immigrant Workers in the Construction Labor Force, 2023
While policy outcomes could affect the re/insurance industry, equity market performance likely will not. Despite the volatility experienced after initial tariff announcements, the ILS market remains fundamentally uncorrelated to traditional asset classes, as reflected by the Swiss Re Total Return Cat Bond Index, which finished the first quarter of 2025 up 0.93%.5 Further, an inflationary environment would likely justify reinsurance repricing to account for increased costs and sustain high interest rates on cash collateral to the benefit of cat bond investors, as catastrophe bonds are floating-rate notes.
As we await clarity on the outcomes of these policies, we are reminded that ILS managers are increasingly tasked with the evolving complexity of managing natural catastrophe risk. We believe the ability to analyze these factors and translate that analysis into effective investment decisions will be crucial to investment success within the sector over time.6
