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Commercial pricing to carry on showing modest deceleration: Goldman Sachs

18th October 2022 - Author: Kassandra Jimenez-Sanchez

According to a recent Goldman Sachs report, commercial pricing is expected to continue to show modest deceleration in the quarter. This is mainly due to higher investment yields and improved underwriting over the past several years which have modestly outweigh ongoing inflationary pressures.

Goldman-SachsAnalysts noted that in the first two months of 2022’s third quarter, MarketScout and Ivans’ pricing indices showed about -100bps/+10bps rate changes quarter-on-quarter. In their view, reported pricing from covered standard lines insurers will likely be somewhere in between the two surveys (less than 1pp of deceleration).

Goldman Sachs said: “Similar to comments we’ve heard from insurers last quarter, MarketScout’s survey shows Professional Lines and D&O pricing exhibiting some of the greatest deceleration QoQ, while Cyber insurance remains in a hard market and accelerated QoQ.

“Broadly, the Ivans’ survey shows flat pricing across all major lines while MarketScout shows modest deceleration across all major lines. Given continued elevated inflation and the potential for inflationary pressures to expand into longer-tailed lines of business, we would expect insurers to communicate their intent to continue seeking pricing increases at similar levels.

“Our analysis of California & Texas Excess & Surplus (E&S) lines stamping office data points to continued robust volumes and pricing.”

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Goldman Sachs analysts highlighted that they see inflationary impacts as the biggest risk for the industry and whether the hard market benefits can overwhelm this pressure.

This is well understood for Personal Insurers who deal with large and well documented severity impacts from used car and property prices, however, analysts think that in Commercial Insurance it is harder to see.

Analysts said: “Coinciding with longer lasting headline CPI inflation, we are increasingly cautious around inflation making headway into longer tail lines, with evidence of the need for caution emerging recently via increases in both the legal services and medical care services CPI.”

Regarding personal lines, Goldman Sachs pointed out that recent pricing action suggests rates continue to rise in response to replacement cost inflation, which remains high.

Personal lines rates are up roughly +5% for this year’s third quarter across both home and auto, with home rate filings modestly higher than auto at +6.5% for the industry.

“We are starting to observe evidence of decelerating inflation in portions of home/auto lost costs,” analysts added. “In personal auto, the Manheim used vehicle value index has declined -4%/-2% sequentially in August and the first half of September, respectively.”

“In regard to homeowners’, increases in the materials and components for construction PPI decelerated 3pp QoQ in the first two months of 3Q (+14.9% vs. +17.9%), yet remains elevated; albeit 10pp lower than peak YoY increases of +24% observed in January of this year.”

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