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Farmers Renewal Points To 25% Increases On Loss-Hit Deals

Summary

Industry wildfire losses could top $10bn

Claims has already passed the $5bn mark

Farmers is being closely watched by the market as the first major property cat reinsurance renewal to price following the loss

Adam McNestrie

Farmers' $1.8bn catastrophe reinsurance programme looks set to price up by around 25 percent after the insured warned its panel that it expects to pass on $1bn of claims from the California wildfires, The Insurance Insider can reveal.

The firm order terms - the third set issued by Farmers in a stop-start renewal - were released last week as a slew of loss notifications from cedants indicated that industry wildfire losses could top $10bn, exceeding expectations that have already been repeatedly revised upwards.

A quick bottom-up count of losses from carriers that have officially or unofficially disclosed their claims has already passed the $5bn mark and excludes a number of insurers that will have sizeable exposure.

Farmers is being closely watched by the market as the first major property cat reinsurance renewal to price following the loss.

The account has been heavily loss-affected. The insurer previously disclosed a $500mn gross loss from Hurricane Harvey, which is said to have fallen somewhat as part of the renewals submission.

It also picked up claims from Irma, but has been most heavily impacted by the wildfires that raged in Napa and Santa Rosa in October, given Farmers' high concentration in the areas of northern California that were affected.

Sources said that the carrier, which has a 16.2 percent share of the California homeowners' market, told its reinsurers at renewal that it expects to incur gross losses of more than $1bn from the wildfires.

Two underwriting sources said they were anticipating losses of $1.1bn-$1.3bn.

Although Farmers may now set a benchmark of 20-30 percent rate increases on programmes with significant losses, the read-across to loss-free cat treaties in the US is less clear.

Farmers buys a $200mn reinstateable underlying cover excess of $200mn with aggregate features, which will have at least one loss for 2017, as well as development on prior-year losses. Sources said that this layer is paying around a 50 percent rate increase on a risk-adjusted basis.

Above this the carrier buys a $600mn xs $400mn cover that is likely to be impacted by Harvey and exhausted by the wildfires, as well as a $500mn xs $1bn stretch which is also on risk.

Sources said both of these layers have been firm-ordered with rates on line that are 25-30 percent in excess of those paid for 2016.

The final open market layer, which provides $500mn of cover excess of a $1.5bn trigger, is up only low-to-mid-single digits, sources said, suggesting a blended rate rise of roughly 25 percent.

There are also believed to be some private deals that sit in excess of this, taking the full programme to around $2bn of limit.

The Farmers renewal, which is normally conducted during August for a 1 January inception, has been highly fraught, with the cedant now on its third set of firm order terms.

The insurer initially released firm order terms around the time of Hurricane Harvey in August, which represented a 5-7.5 percent reduction year-on-year.

These were withdrawn and a second set offered after Harvey, with flat rates on line that equated to a low single-digit reduction. Again, Farmers was unable to place the cover on these terms.

Last week, it put brokers Aon Benfield, TigerRisk and Guy Carpenter back into the market with a third set of terms after heavy canvassing, and the placement now looks set to go through.

Farmers' blended rate rise will not be as high as the headline numbers because the carrier buys its cover on a multi-year basis, it is understood.

The full version of this article appeared in the latest issue of The Insurance Insider, which is available for subscribers to view at http://www.insuranceinsider.com/latest-issue