California Insurance Commissioner Ricardo Lara announced he will grant State Farm’s request to raise home insurance premiums by an average of 22% if the company agrees to specific conditions and secures approval at a public rate hearing next month.
Lara, overseeing the state’s largest homeowners insurance provider, stipulated several requirements: State Farm must halt policy cancellations and non-renewals through the end of the year. Furthermore, the parent company, State Farm Mutual, is asked to provide or loan $500 million to State Farm General, the California entity, to bolster its finances. State Farm must also substantiate its need for the interim rate increases during an April 8 hearing, where it must present updated and more detailed data.
Lara emphasized that he had to make “an unprecedented decision in the short term.” He stated, “I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely onto their customers.” He added, “The facts will be revealed in an open, transparent hearing.”
In an interview with CalMatters, the commissioner mentioned that he’s heard from other state insurance commissioners about major insurance companies, like State Farm, historically providing insufficient data to justify rate increase requests. “This is part of their playbook…they come in, they bully you. They start getting folks calling you and pressuring you, and threatening that hey, we may start not renewing folks,” Lara said. “That’s why I think it’s better to have a public hearing with an (administrative law judge).”
An email exchange obtained by CalMatters revealed that a State Farm lawyer informed the Insurance Department that the company wouldn’t halt the remaining 11,000 non-renewals announced last year, despite the commissioner’s request.
Consumer Watchdog, an advocacy group challenging State Farm’s rate requests, expressed enthusiasm about Lara’s decision. Carmen Balber, executive director of the group, stated in an email: “It’s a victory for consumers that State Farm will have to make its case in a public hearing before an (administrative law judge), and the judge will decide if a rate hike is justified.”
Sevag Sarkissian, a State Farm spokesperson, commented via email: “It’s time for certainty in the California insurance market for our customers. The provisional nature of today’s decision does not improve that certainty but it’s a step in the right direction.” Sarkissian also indicated the company would proceed with implementing the provisionally approved rate but did not immediately clarify the implementation details or timing.
The commissioner has been working to reform the state’s insurance market amid providers, including State Farm, canceling policies or pausing new ones, citing their inability to charge premiums commensurate with escalating wildfire risks.
State Farm sought “emergency” interim rate increases after January fires in Los Angeles County. Citing projected claims exceeding $7 billion from the blazes, a diminished surplus, and a potential credit rating downgrade that could affect mortgage lenders’ insurance requirements, the company, which insures approximately 3 million property owners in California, including over 1 million homeowners, applied for interim rates. These came after waiting for a decision on previously requested rate hikes from last summer.
Under California law, rate hearings are required for insurance companies requesting increases of 7% or more if objections are raised, as in State Farm’s case. Such hearings are uncommon, with the last one involving State Farm in 2015.
If State Farm validates its need for the rate increases at the hearing next month, the interim rates will increase by an average of 22% for homeowners, 15% for renters and condos, and 38% for rental dwellings, effective June 1. The company had initially sought the rates to take effect on May 1. These increases would follow a 20% premium rate hike State Farm customers experienced last year.
A rate hearing for the company’s summer rate requests will be held no later than June 1. An administrative law judge will preside over the hearing for the interim rate request at the department’s Oakland office and is expected to submit a proposed decision to the commissioner within ten days, according to Lara’s order.
Lara’s decision follows a meeting between his department, State Farm executives, and Consumer Watchdog. State Farm General Chief Executive Dan Krause mentioned the company’s willingness to consider a capital infusion of at least $250 million to the California arm if the interim rate requests were approved, according to the meeting transcript.
State Farm General stated in a press release that due to claims from the LA-area fires and its share of the FAIR Plan’s $1 billion assessment, it anticipates a $400 million reduction in its surplus.
At a private meeting called by the commissioner, State Farm Chief Financial Officer Mark Schwamberger indicated that without the interim rate increase, the company might need to decrease expenses further. When Lara inquired if this might lead to more policy cancellations and non-renewals, Schwamberger replied in the affirmative.
