Baden-Baden Q&A: Aon's Jan-Oliver Thofern
On the eve of the 2023 Baden-Baden Reinsurance Meeting, Jan-Oliver Thofern, CEO Germany for Aon's Reinsurance Solutions, talks to Insider about what's changed in the last 12 months in the world of reinsurance.
What are the key capacity trends you are seeing in the region at the moment? How has this changed since the last Baden-Baden conference?
The market has changed significantly since early 2022. Last renewal season was a very difficult one and, at one point, there was uncertainty about whether there was enough capacity to complete all placements. We saw price increases and terms were tightened at higher retention levels.
Moving into 2023 globally we’ve seen improvements. The Asian market renewals where we observed price increases that were still significant, but not quite as high as we saw them in 2022.
During the US renewals again there have been increases, but the overall trend is pointing down now.
Is the sentiment around capacity changing? We saw more optimism in Monte Carlo this year compared to pessimism in 2022? Why is that?
In Monte Carlo we saw a swing in the mood of reinsurers. Due to our global reach and market position we can see well who is reducing, who is flat and who is increasing their cat capacity.. I think there are two reasons for that. Number one: there was moderate loss activity globally. Germany had about EUR2bn of cat losses and globally we were at about EUR55bn. Number two: the risk profile of the reinsurers in their portfolios has changed and improved noticeable after retentions have been increased. Losses have therefor attached to the balance sheets of insurers rather than reinsurers. We are seeing combined ratios of around 90%. As a result due to retained earnings and some capital raises there’s more capital available and we expect a much more orderly renewal with price pressure in certain segments of the business.
Another driver of that improvement is that the threat of further interest-rate increases has moderated. Insurers and reinsurers are also seeing great returns on the money they invest and more capital is coming back into the market. We expect retained earnings and fresh capital to add about EUR10bn to the market.
What is your view on ILS markets? How are they developing and changing?
Bigger insurers are using ILS as a component of their overall risk mitigation strategy. However, for the most part this has been limited to large insurers. This hadn’t trickled down to the more regional insurance companies, but this is happening now.
The thought of adding a separate, uncorrelated source of capital is attractive and so we are going to see more activity on this with smaller providers taking advantage of ILS as part of their strategy.
What is your personal view on the risk landscape?
A key takeaway is that the risk landscape is pretty much dominated by the recent inflationary trends. It’s important to keep track of that, especially in an environment where we expect reducing inflationary impact. We must make sure we’re able to present the risk in the proper way to the reinsurers.
Sometimes there is a tendency to simplify the risk analysis on the reinsurers side.
What are your thoughts on the renewals market in general?
Capacity wise, we expect a very orderly renewal this time around unless something dramatic happens. And we expect there will be enough capacity also for additional purchases, which we predict will come to the market.
You have to take into account portfolio growth and the level of protection companies are looking for. In the past renewal, firms may not have purchased extra protection simply because the capacity wasn’t available or the price was too high. Now we assume more competition among the reinsurers.