California's largest insurer, State Farm, recently notified California's Department of Insurance to allow them to hike home insurance rates for millions of residents, or they will drop coverage of many insured. The request comes amid the state's ongoing insurance crisis as coverage costs increase.
Several insurers, such as Allstate, Farmers Direct, and State Farm, have limited coverage or stopped conducting business entirely in the Golden State, citing the growing risks of climate disasters. In turn, over 50% of all Californians believe they have been affected by climbing property prices or dropped by their insurer in the last year. Applying with a new provider also becomes challenging, with few firms offering coverage.
State Farm seeks to raise prices by 30% for homeowners, 36% for condo owners, and 52% for renters. According to Insurance Commissioner Ricardo Lara, the high cost "has the potential to affect millions of California consumers and the integrity of our residential property insurance market," adding that he will "get to the bottom" of the firm's financial status and carry out a comprehensive evaluation before deciding on the applications.
"State Farm General's latest rate filings raise serious questions about its financial condition," Lara added. He highlighted that a rate hearing could be necessary to understand the public's view on the proposed rate changes before officials decide on the rate hike requests, which could take months. The department is averaging 180 days per rate review, a spokesperson told the LA Times. The long duration could be due to the massive fires in the state in recent years.
State Farm Increased Rates by 20% in March
The state's Insurance Department had previously greenlit multiple State Farm proposals that increased California citizens' home insurance rates by 20%. These decisions usually hint that an insurance provider is facing challenges, but the company's 2023 net income jumped over 100% year-over-year to $1.2 billion.
State Farm had mentioned in a filing that the latest hike request is to improve its financial situation, stating that "if the variance is denied, further deterioration of surplus is anticipated." The company added it was "working toward its long-term sustainability in California." The company is the first to resist the idea of automatic coverage in the state, which faced 7,127 fires last year, marginally down YoY from 7,667. However, there were a record 8,835 fires in California in 2021.
"Rate changes are driven by increased costs and risk and are necessary for State Farm General to deliver on the promises the company makes every day to its customers," the company stated after laying down its proposals. "We continue to look for ways to maintain competitive rates."
The company had attributed its previous rate hikes to wildfires and sticky inflation, which reportedly bumped its reconstruction expenditures along with their costs for reinsurance purchased to strengthen balance sheets. These plans are bought to safeguard the company from the extremely high costs of climate catastrophes.
Insurers Are Dropping Customers, Hesitant To Return To The State
In March, the State Farm announced it had planned to cut ties with 72,000 California customers, given the crisis across the Golden State's insurance industry. Meanwhile, Farmers Direct Insurance said it was moving out of the state last year. Allstate disclosed in 2022 that it has stopped writing new policies in California. Still, the company said a few months ago it could return if the state introduces new regulations that help it minimise risks.
Tokio Marine Holdings-owned Tokio Marine America Insurance Company and Trans Pacific Insurance Company also recently announced they would halt providing homeowners coverage. Together, they covered 12,556 homeowners in California.
In March, Lara introduced new policies amid rising wildfire risks. These helped insurance providers like State Farm adopt more progressive modelling for their pricing structures rather than entirely calculating them based on past trends. Although the industry welcomed new regulations, insurers have yet to commit to returning to the state.
