A real estate sign is seen in front of a burning home during the Carr fire in Redding, California on July 27, 2018. State Farm, California’s largest property insurer, said it would be at risk of insolvency without raising rates. But rate hikes alone cannot solve the state’s insurance crisis. (Josh Edelson/AFP via Getty Images)
California will allow State Farm to move ahead with an emergency rate increase that the company and insurance regulators said is necessary to ensure its near-term stability after massive losses from this year’s Los Angeles-area fires.
On Tuesday, an administrative law judge issued approval of the rate request, which effectively sent the decision to Insurance Commissioner Ricardo Lara for final approval, who quickly signaled that he would grant it. Judge Karl Fredric Seligman agreed with State Farm’s contention that it is in serious financial trouble and at risk of insolvency without intervention.
The company, California’s largest property insurer, saw its surplus plummet from $2.24 billion in 2022 to $620 million this year, with the vast majority of that drop being due to the L.A. fires.
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“In the middle of this insurance crisis, we want to make sure that companies continue to do business in California, and that more companies actually come back,” Michael Soller, a spokesperson at the California Department of Insurance, told KQED.
California’s agreement with State Farm comes with some stipulations: an infusion of $400 million from its parent company, a halt to large-scale non-renewals until the end of 2025, and the possibility that customers could receive a refund with interest if further review reveals that this price hike isn’t necessary.
The Department of Insurance will continue to study the necessity of the rate increase. A full hearing is expected no earlier than October 2025.
A home destroyed by the Boyles Fire in Clearlake on Sept. 9, 2024, after the wildfire swept through the area on Sept. 8. (Beth LaBerge/KQED)
“State Farm must now justify its financial condition and detail its recovery plan in a full rate hearing before a neutral judge and my Department’s experts,” Lara said in a statement.
The company first requested to significantly raise rates in June 2024 to prevent insolvency. Those rate requests, which sought an average 30% increase in homeowners insurance and a 52% increase in renters insurance, were not approved before the L.A. fires saddled the company with enormous payouts.
Then, in February, State Farm went back to the state and requested an emergency rate hike to go into effect by May 1 to avoid a “dire situation for our customers and the insurance market in the state.” While the company would be able to pay claims related to the L.A. fires, State Farm said, it might not be able to pay claims stemming from future fires.
State Farm’s February request sought an average increase of:
22% for homeowners’ insurance
15% for renters’ or condominium tenants’ insurance
38% for rental dwelling insurance
Regulators approved:
17% for homeowners
15% for renter/condo
38% for rental dwelling
The changes will go into effect on June 1. Some policyholders will pay more, some will pay less, depending on what State Farm thinks their individual risk is for wildfire and other dangers.
The rate increase is sure to be painful for Californians already struggling to afford housing. Insurance markets have been rocked in recent years, particularly by the increase in climate-driven disasters and what many insurance experts characterize as a state that has waited too long to update insurance regulations.
State Farm received a heavy dose of criticism from some L.A. fire survivors, who accuse the company of slow-walking or denying claims they should pay. And the stipulation that the company halt large-scale non-renewals comes after 70% of State Farm policyholders in Pacific Palisades found themselves scrambling for new coverage last summer, just months before the westside L.A. neighborhood burned.
The company said it remains “focused on helping our customers recover from the wildfires.”
“As of May 12, we have already paid more than $3.51 billion and are handling more than 12,692 claims,” it said in a statement on Tuesday. “We thank the Commissioner for this approval and look forward to continuing to work with the Commissioner and others on a more sustainable insurance market in California.”
While State Farm may be heaving a sigh of relief, the solution is a near-term one. Rate hikes alone cannot solve the insurance crisis.
As the Department of Insurance seeks to promote home hardening and the state evaluates new regulations regarding cleared space around homes, others, such as advocacy group California Environmental Voters and former state Insurance Commissioner Dave Jones, have sought to spread the cost for addressing climate and insurance woes to the oil industry. None of these efforts has found enough traction to significantly drive down risk or bring insurance costs down.
“Today’s rate hike is a taste of what’s to come for millions of Californians already struggling with cost-of-living challenges,” California Environmental Voters CEO Mary Creasman said in a statement. “There is no path forward without getting Big Oil, the responsible party, to the table to pay their fair share. The alternative is a never-ending assembly line of rate increases and state budget cuts to pay for recovery.”
Her group sponsored legislation aiming to make insurance more affordable by allowing California insurers to sue big oil companies for their role in making fires worse. State lawmakers declined to advance the bills.
“California is at a tipping point,” Creasman said. “Without affordable insurance, businesses will cease to operate, families won’t be able to get mortgages, and construction to develop our state will stop.”
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