Goldman Sachs analysts expect a hard market cycle in P&C commercial lines to continue in 2022-23, with the retail cycle to inflect as inflation is priced in.
In the short term, analysts expect the commercial cycle will continue to outperform, but in the medium term the retail cycle is expected to harden as the commercial cycle naturally matures.
According to Goldman Sachs, commercial price momentum has continued in this year’s second quarter since the market started to harden from mid-2018. Analysts looked at the Marsh Global Insurance Market Index, which measures global commercial insurance premium pricing changes at renewal, and noted that commercial insurance prices rose 9% in Q2 globally and 10% in the US.
Goldman Sachs said: “In aggregate, the pricing level is still at the highest level in a decade. According to the half-year results analyst calls, in our view, generally there were no signs from management indicating that the price momentum will fade away in the short term, given the continued focus on profitability.
“The cumulative rate earned, and the expected price momentum needed to address economic and social inflation, should continue to support underwriting profitability in commercial lines.”
Analysts observed that insurers and reinsurers like AXA XL, Allianz AGCS and Zurich North America, all reported positive price increases in H1 2022. They said that this suggests that pricing momentum has continued during this period at a moderate pace.
Year-on-year growth in premiums relative to pricing increases also suggests insurers still maintained underwriting discipline in exposure growth, analysts added.
Goldman Sachs said: “In our view, the data shows insurers still take advantage of the hard market with positive price increases and disciplined growth. For large corporate commercial lines where embedded risks are intrinsically complex, we believe this approach should support the underwriting profitability.”
In their report analysts added that pricing in personal lines appears relatively softer compared to commercial lines, but it shows signs of turning. This is mainly driven by the relatively softer pricing level in personal motor lines, which reflects the competitive landscape and lower-frequencies compared to H1 2022 pre-COVID.
Additionally, they also observed that in the first half of 2022 – marked by record high inflation – CORs from more commercial-focused names (AXA and Zurich) were higher/inline with consensus expectations, while CORs from more retail-focused names (Allianz and Generali) missed consensus expectations.
According to Goldman Sachs, this reflects higher underlying pressure from personal/retail lines in contrast with commercial lines.
“Generally, management highlighted that levers to manage inflation in personal lines include continued pricing actions, prudent reserving assumptions, claims management and indexation clauses especially in non-motor policies,” analysts noted.
As a prolonged hard cycle in P&C commercial lines is expected to support underwriting profit, a turn of cycle in the P&C retail line should also help towards this.
Analysts added that, in general, against the backdrop of inflation, H1 2022 results suggest inflation pressures are well-manageable by the companies, with levers including pricing actions, prudent reserving assumptions, indexation clauses and benefits from investment income.
