State Farm Granted Provisional Rate Hike in California
California’s insurance commissioner, Ricardo Lara, has given State Farm Mutual Automobile Insurance Co. preliminary approval to raise home insurance premiums, but with numerous constraints. The average increase is set at 22% and could affect nearly a million homeowners across the state. This decision comes amidst a state-wide insurance crisis exacerbated by increasingly destructive wildfires.
However, along with the rate increase come mandatory conditions. State Farm must pause policy cancellations and is compelled to defend the increase at a public hearing in April.
State Farm, California’s largest home insurer, requested the emergency increase. The company cited over $2 billion in claims following a series of devastating fires earlier in the year within Los Angeles County. The company claimed that without more revenue, financial instability was possible, and that it might be forced to withdraw from the state.
Commissioner Lara acknowledged the instability of California’s insurance market. However, he emphasized the necessity of justifying any rate increase via a transparent public hearing process. “I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely on to their customers,” Lara stated. The hearing is scheduled for April 8.
The hearing, which will have an administrative law judge overseeing the proceedings, will decide whether State Farm’s interim rate increase, which would go into effect on June 1, is warranted. The judge will issue a recommendation, but Commissioner Lara will make the final decision.
Troubled Insurance Market
California’s home insurance market has been in distress for several years. Major insurers, including State Farm, Allstate, and Farmers, have reduced or stopped offering new policies due to wildfire risks and state-imposed restrictions on premium increases. State Farm previously stopped issuing new homeowner policies in California last year and announced that it would drop coverage for 72,000 homes and apartments. The company cited higher-than-expected claims costs, increased wildfire risks, and rising reinsurance expenses.
The Department of Insurance has been under pressure to stabilize the market by introducing new rules that allow insurers to factor in future climate risks when setting rates. However, these regulations have yet to fully take effect, which leaves insurers frustrated. State Farm has reported over $5 billion in underwriting losses since 2016. The insurance company’s executives have stated that the firm’s California subsidiary, State Farm General Insurance Co., has been operating at a loss for years and requires financial relief.
Conditions of the Rate Increase
In granting the rate increase provisionally, Commissioner Lara set explicit conditions that State Farm must meet before it can charge higher premiums:
- Pause on policy cancellations: The company needs to halt cancellations and non-renewals of existing policies, at least through the end of 2025.
- Capital infusion from parent company: State Farm Mutual, the insurer’s parent company, must provide a $500 million capital injection to its California subsidiary.
- Public rate hearing: The company has to present comprehensive financial data at the April 8 hearing to explain the necessity of the emergency rate increase.
Consumer advocates, including Consumer Watchdog, have criticized the approval because State Farm’s parent company has ample reserves. “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,” said Carmen Balber, executive director of Consumer Watchdog.
State Farm has defended its request, stating that the company needs “certainty” in California’s volatile insurance market. “The provisional nature of today’s decision does not improve that certainty, but it’s a step in the right direction,” State Farm spokesperson Sevag Sarkissian said in a statement.
Growing Financial Concerns
The Los Angeles wildfires in January destroyed more than 16,000 buildings, resulting in about $45 billion insured losses. State Farm anticipates being responsible for roughly $7.6 billion of those claims, which further strains its finances. In addition to wildfire payouts, the company also faces a $1 billion assessment from California’s FAIR Plan, the state’s last-resort fire insurance provider.
California lawmakers have proposed overhauling state regulations to make it easier for insurers to raise rates and adjust policies based on climate risks, but consumer groups and other critics fear increases in premiums.
What’s Next?
If State Farm can successfully prove its case at the April 8 hearing, the new rates will officially become effective on June 1. Homeowners can expect to see an average 22% increase in their premiums, while rental property owners could see hikes of up to 38%. If the administrative law judge finds that the increase is not justified, State Farm might be forced to scale back its rate hikes or even return excess charges to customers. For now, the state’s insurance market is uncertain, as policymakers, insurers, and consumer advocates grapple with how to balance financial realities of increasing wildfire risks and affordability.
