State Farm won’t get approval to hike home insurance rates in California by 22% unless it does a better job of demonstrating why it needs the increase.
State Farm “has not met its burden” to show why it needs the emergency increase now, California Insurance Commissioner Ricardo Lara said in a Feb. 14 response to the insurer’s request for the rate hike.
“In examining the information before me, I have additional questions,” Lara wrote.
The commissioner’s questions center on State Farm’s assertions that:
Its surplus capital available to pay claims is already depleted.
The recent Los Angeles wildfires will spur further depletion.
State Farm needs immediate interim approval of a rate hike to continue paying claims in California.
Lara asked State Farm to attend a meeting on Feb. 26 with state regulators and a consumer advocacy group — Consumer Watchdog — that’s acting as an intervenor in the insurer’s emergency request.
State Farm has multiple rate increase requests pending with the California Department of Insurance, which reviews and approves (or denies) any changes insurers operating in the state want to make. California law allows public participants, called “intervenors,” to object to rate requests. This typically triggers the need for a hearing among applicants, regulators, and the intervenor.
In a Feb. 3 letter, State Farm asked Lara to immediately approve its pending rate requests in light of realized and anticipated losses from the recent Los Angeles area wildfires.
“As of Feb. 1, State Farm General Insurance Company has received more than 8,700 claims [related to the wildfires] and has already paid over $1 billion to customers,” the insurer’s letter stated. “We know we will ultimately pay out significantly more, as these fires will collectively be the costliest in the history of the company.”
The insurer further said the current review and approval process will take too long to help keep State Farm financially viable in the state. State Farm estimated that its losses in California since 2016 total $2.8 billion.
State Farm has been trying to reduce its risk in California for years. The insurer stopped writing new home policies in the state in May 2023. And in March 2024, State Farm announced it wouldn’t renew 72,000 existing policies — including 29,000 homeowners policies.
In its emergency approval request, State Farm noted that the wildfires will further deplete its capital. If its capital dwindles even more, the insurer said, the company could face downgrades from industry rating agencies. That could mean homeowners with mortgages would no longer be able to use State Farm for their home insurance, State Farm said.
By the end of 2024, the company’s surplus had decreased by about 75%, State Farm executives said in their letter to Lara. “And its surplus relative to risk it supports dropped nearly 85% by one measure, putting the company below certain minimum regulatory Risk-Based Capital requirements,” they wrote.
“Surplus is a financial cushion, protecting policyholders against unexpected catastrophes,” Betsy Stella, vice president of carrier management and operations at Insurify, said. “It is also related to solvency, which is insurance companies’ ability to fund the payment of claims.”
Financial rating agencies, like AM Best, use surplus amounts to rate a company’s financial strength. “Falling below an A rating is a real issue for a carrier like State Farm,” Stella said.
On Feb. 7, Department of Insurance staff recommended Lara allow State Farm to implement its requested rate hike while regulators continued to review the legality of the request. If regulators ultimately disapproved of the hike, State Farm would have to issue refunds to affected customers, the department said.
On the same date, Consumer Watchdog asked the department for a full hearing on State Farm’s emergency request.
In his letter to State Farm, Lara noted the department has granted the insurer multiple rate increases in the past few years. He said the insurer hadn’t yet proven the emergency rate hike’s necessity and needed to answer several key questions.
Lara questioned why State Farm’s surplus is so low since it had no catastrophic events — other than wildfires — to pay for in 2022 and 2023. He also challenged the insurer to explain what actions it’s taken to shore up its surplus since it halted new policies and began non-renewals.
“Other than rate increases, what other plans does State Farm have to address its financial challenges?” he asked. “For example, would State Farm’s parent company, State Farm Mutual Automobile Insurance Company, be willing or able to provide financial support to State Farm as it has in other similar situations?”
Lara instructed State Farm to attend a meeting with the Department of Insurance and Consumer Watchdog on Feb. 26 and to be ready with answers.
“My goal is to make sure policyholders do not have to pay more than is required,” Lara wrote. “In light of the recent Los Angeles wildfires, State Farm customers need real answers about why they are being asked to pay more, and what responsibility the company’s leadership is taking to get its financial house in order.”
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