California Insurance Commissioner Ricardo Lara has provisionally approved State Farm General’s request for an emergency 22% increase in homeowners insurance rates. However, the rate hike will not take effect until after a formal hearing scheduled for April 8, where an administrative law judge will evaluate the necessity of the increase.
Background on the Decision
State Farm initially sought the emergency increase following significant financial losses attributed to wildfires and other factors. Commissioner Lara had previously denied the request in February, citing insufficient evidence. However, he allowed the insurer to provide additional justification for its rate increase. Alongside the approval, Lara requested that State Farm halt nonrenewals for existing policyholders and that its parent company, State Farm Mutual, contribute $500 million to stabilize the California subsidiary’s financial position.
“The role of insurance commissioner involves balancing a stable and sustainable insurance market that serves consumers with effective oversight,” Lara stated. “To ensure long-term choices for Californians, I had to make an unprecedented decision in the short term.”
State Farm responded to the announcement, emphasizing the need for stability in California’s insurance market. “The provisional nature of today’s decision does not improve that certainty, but it’s a step in the right direction,” the company said in a statement.
Financial Impact and Justification
State Farm General has faced substantial losses due to wildfires, particularly following the January 7 fires in Los Angeles County, including the Palisades and Eaton fires. The insurer has reported over 12,000 fire and auto claims from the incident, amounting to more than $2.2 billion in payouts. The total estimated cost of these fires is expected to reach $7.9 billion, though State Farm’s net losses will be lower due to reinsurance coverage.
The insurer has also experienced cumulative losses of $2.8 billion over the past decade, reducing its surplus by approximately $5 billion. Last month, S&P Global placed State Farm General’s financial rating on a negative watch, citing continued underwriting losses and concerns over its ability to maintain financial stability.
Consumer and Regulatory Concerns
The rate increase request has drawn scrutiny from consumer advocacy groups, particularly Consumer Watchdog, which argues that an emergency rate hike outside of a formal hearing process sets a concerning precedent under Proposition 103, a California initiative regulating the insurance industry. The group contends that State Farm Mutual should provide direct financial support to its subsidiary rather than increasing customer premiums.
Consumer Watchdog Executive Director Carmen Balber described the upcoming hearing as a positive step for policyholders. “It’s a victory for consumers that State Farm will have to make its case in a public hearing before a judge, and the judge will decide if a rate hike is justified,” she said.
Next Steps
In addition to the April 8 hearing, a second hearing is scheduled for June 1 to address a separate rate hike request State Farm filed in June 2024, seeking a 30% increase for homeowners insurance along with increases for condo and renters insurance.
State Farm has stated that if policyholders pay rates exceeding the final approved amount, they will be refunded with interest. Meanwhile, the company has reiterated that its ability to provide financial assistance to its California subsidiary is contingent on receiving the emergency rate hike.
Despite the provisional approval, State Farm has confirmed it will not resume writing new homeowners policies in California, citing ongoing financial pressures and regulatory requirements.