California Insurance Commissioner Ricardo Lara is set to meet with State Farm representatives to consider the insurance giant’s request for emergency rate increases. The proposed increases, which could reach up to 38%, are intended to offset expenses related to the Los Angeles-area wildfires.
The meeting, scheduled for Wednesday in Oakland, follows State Farm’s request for significant rate hikes: a 22% increase on homeowner policies, an additional 15% for condominium owners, and a 38% increase for rental units, all effective May 1. This request has drawn scrutiny from Consumer Watchdog, a Los Angeles-based consumer advocacy group, which has challenged the proposed increases as “improper.” The group’s concerns center on the justification for the increases and State Farm’s financial standing.
Consumer Watchdog Executive Director Carmen Balber stated, “The company can’t justify rate increases above zero,” highlighting the group’s disagreement with State Farm’s assertions that the increases are necessary for financial solvency. Balber emphasized that State Farm must provide actuarial data subject to public review to justify any homeowners rate increase. As of February 1st, State Farm General Insurance Company had received over 8,700 claims and paid over $1 billion due to the Los Angeles-area wildfires, with the insurer acknowledging that the total costs will be the “costliest in the history of the company.”
In a letter to Commissioner Lara, the insurer noted that while reinsurance would assist in paying customer claims, the costs of the fires would further deplete its capital. The company also warned of potential financial consequences, stating that “future downgrades of the company over its ‘capital deterioration’ may result in policyholders losing State Farm as collateral backing for their mortgages.”
State Farm has cited a desire to “preserve its claims paying capacity” after a period of challenging years. The company announced in May 2023 that it would stop writing new policies in California and in March 2024 unveiled plans not to renew 72,000 existing policies, with almost half being homeowners policies. Commissioner Lara has questioned what specifically may have changed for State Farm to necessitate this emergency relief. The commissioner is also seeking an explanation for the decrease in the company’s policyholder surplus and what steps have been taken to prevent further deterioration.
Some policyholders are already feeling the impact. Julie Tyler of Windsor was informed her policy would not be renewed. She was forced to obtain coverage from a non-admitted insurer, resulting in her deductible increasing from $1,000 to $10,000 and her premium rising from $1,800 to $7,000. Now insured through the FAIR Plan, Tyler has concerns about its ability to manage the surge of claims from the recent L.A. wildfires saying, “I told my husband I think we should sell the house and move into our RV. It’s crazy.”
To prevent mass coverage losses, the California Department of Insurance launched a sustainability insurance strategy last month. The strategy involves a concession by the state where insurance companies were permitted to file for rate increases using “catastrophe modeling” in exchange for promises not to leave the state.
In related developments, Mercury General and Liberty Mutual have been approved for rate increases affecting over 600,000 policyholders, set to take effect as early as the end of next month. This Los Angeles-based insurer will raise rates on homeowners, condo owners, and dwelling rentals by an average of 12%, while Safeco, a subsidiary of Liberty Mutual, will see rates rise by an average of 7.2% in May. Condo owners or renters will not be impacted as the Boston insurer announced in December it was exiting that market.
Increased rates and non-renewals have pushed residents onto the California FAIR Plan, the state’s insurer of last resort, which was not designed to manage the current influx of policies. A spokesman from the state insurance department, Gabriel Sanchez, clarified “There is no law or regulation that prevents an insurance company from continuing to bill customers for premiums in a wildfire emergency. The commissioner’s moratorium authority only applies to cancellations and non-renewals.”
