Germany’s recession drives new risk moves: Aon

“For the second year in a row, Germany is experiencing a recession, which has only happened once in post-WW2 history,” said Jan-Oliver Thofern, chief executive officer Germany of Aon’s Reinsurance Solutions.

“The difference, if you look at our economy compared to other European ones, is that Germany is a highly export-oriented industry, and with all the current global trade challenges, Germany is more affected by these trends than any other European country,” Thofern added.

The macroeconomic environment has had a profound impact on the insurance industry and Thofern noted that while Germany faced recessionary pressures, one positive for the insurance sector was a recent decline in inflation rates. 

“The general inflation rate has come down to 1.6 percent in Germany, which is below the desired level of 2 percent, but for the insurance industry, different factors of inflation calculation are important,” he said. 

Germany’s life insurance sector operates under a unique legal framework, distinct from that in other European countries, but Thofern acknowledged shared challenges across the continent, such as the increased exposure to natural catastrophe losses.

“In 2022 we recorded the largest insured loss ever in German insurance history,” he said. 

This event has driven a shift in the market. “As a result of those losses, more elemental perils insurance, aka nat cat, has been purchased, and this trend will continue into the future.” he added.

“The penetration rate for extended elemental perils insurance in Germany was around 30 percent nationwide only a few years ago. Now, following the 2022 loss, we have a penetration rate of over 50 percent,” said Thofern. 

This growth has changed the dynamics of insurers’ portfolios, increasing the demand for more comprehensive risk management strategies.

Risk capital and vertical structures

Thofern provided insights into how the German market is utilising risk capital and insurance vertical structures. He emphasised that in Aon’s approach, insurance verticals involved coordinated efforts across Aon’s full range of capabilities to re/insurance clients to meet their strategic goals and enable better business decisions.

“We have organised ourselves around industry solutions, and the insurance vertical is an important one,” he said. 

“We have access, we understand the challenges, and we have the opportunity to bring other solutions to our clients beyond reinsurance.”

Facultative reinsurance plays a key role in managing peak risks within this framework, with Thofern stating it is “a very important tool” for helping clients manage their exposures. 

“In many cases, we’ve found economies in combining facultative and treaty reinsurance structures, significantly lowering the weighted average cost of capital.”

This combination approach has delivered tangible results. 

“We’ve found economies in combining facultative and treaty reinsurance structures.”

The growing role of cat bonds

Thofern discussed a significant milestone for Aon in supporting the issuance of a catastrophe bond for the insurance group Versicherungskammer Bayern. 

“This was the first of its kind for a regional German insurer,” he said, explaining the broader trend towards alternative risk transfer solutions.

Insurance-linked securities (ILS) has gained traction as a result of several factors, including the supply shock to reinsurance capital caused by inflation. 

“In the aftermath of the 2022 flood loss, coupled with inflation and a declining global capital base, carriers are now increasingly considering alternative sources of capital,” Thofern explained. 

“The ILS market has been more stable in its supply than the traditional reinsurance sector.”

Cat bonds offer additional benefits for insurers, including multi-year pricing security. 

“Typically, these are longer-term transactions, with three years being a standard term,” Thofern said, adding that in major loss events, such as hurricanes or floods, ILS could offer an advantage. “At the tail end of the risk, fully collateralised coverage such as a cat bond adds a lot of value.”

The issuance of cat bonds in Germany is still relatively new, but the outlook is promising. 

Thofern referred to a company survey that indicated growing interest among insurers. “Almost 15 percent of the insurers surveyed said they are planning to make use of ILS structures going forward,” he said. 

He believes this trend will continue, driven by the need for capital diversification and pricing stability in a volatile market.

Thofern stressed the importance of data and informed decision-making in navigating the challenges of the market. “At Aon, we are in the business of better decisions, and better decisions are driven by better information,” he concluded.

Jan-Oliver Thofern is chairman of Aon Germany and chief executive officer of Aon’s Reinsurance Solutions Germany.

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