State Farm to stop writing new property insurance policies in Calif.

Obtaining adequate homeowner and auto insurance in California has been problematic for a while but became even more so this week when one of the state’s largest insurers, State Farm, said it will no longer write new property insurance policies in the state.

State Farm joins AIG, which is withdrawing at least partially from the state, as other insurers have ceased advertising and closed offices in response to huge losses from growing wildfire catastrophes and an unforgiving regulatory environment.

“State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” the company said in a statement, referring to its decision to stop writing property insurance policies.

'Pretty much lost all' underwriting profit

A spokeswoman for the Insurance Information Institute, put it more succinctly.

“With the five years of intense wildfires and losses that we’ve had, we pretty much lost all our underwriting profit that we had from the last 20 years,” said the institute’s Janet Ruiz.

State Farm’s displeasure with the California market has been brewing for years. In 2016, the giant insurer, which provides about 20% of the state’s fire insurance to homeowners, wanted to raise rates 6.9%. Instead, the California Department of Insurance ordered the company to cut rates by 7% and rebate policyholders more than $100 million.

Quite simply, insurers like State Farm have not been allowed to charge rates that adequately reflect their risks in a state where wildfire incidents are exploding and home building costs are literally going through the roof.

The action by State Farm and others to stop or limit writing property insurance policies have created a dangerously contracting insurance market in the state where competition, which generally helps keep rates low, is disappearing. Consumers unable to find affordable coverage are forced to turn to the government-run marketplace that rarely fully protects against potential losses.

Insurance industry struggling with 'inadequate rates'

“The reality is inflation has increased the cost of every aspect involved in a homeowners’ insurance claim,” said Mark Sektnan, vice president for state government relations at the American Property Casualty Insurance Association (APCIA). “It is costing more and taking longer to rebuild homes after a covered loss. The admitted market continues to struggle with inadequate rates that don’t cover the increased risks caused by climate change and the growing number of communities in wildfire-prone areas.”

While wildfires and inflation are no doubt contributing factors to the insurance company discontent, the real problem, they say, is the state’s Proposition 103, a voter-approved ballot question from 1988 that boosted the state’s insurance commissioner’s power to set rates and artificially keeps rates low. Backed by tort lawyers and consumer advocates, Prop 103 requires prior approval from the Department of Insurance before a company can raise rates. It also required each insurer to roll back its rates 20%.

The 35-year-old regulation needs to be amended or rescinded, insurers say.

“California insurers operate under an outdated 1988 statute and regulatory structure that does not allow them to adapt to 2023 climate-change created increased risks,” said Sektnan.

But the department of insurance essentially says “don’t blame us.”

“The factors driving State Farm’s decision are beyond our control,” said department spokesman Gabriel Sanchez. “We have been here before and after major wildfires. What’s different is the actions that we are taking with the first-ever insurance discount program for wildfire safety and unprecedented wildfire mitigation investments from the Legislature and governor.”

Current customers will not lose their insurance

Sanchez noted that no current State Farm customers will lose their insurance.

“There are no non-renewals taking place with today’s State Farm announcement, and State Farm continues to write new private passenger auto insurance policies,” he said.

But Sanchez didn’t speculate on whether State Farm’s actions will start a cascade of insurance company withdrawals from the state, worsening an already crisis situation.

Two other major insurers, AIG and Chubb, have notified homeowners that they will not renew some home coverage. Auto insurers, too, have already begun exiting the state. Progressive has stopped advertising in the state and GEICO has closed all of its California offices. Companies said losses increased 25% in one year while premiums rose only 4.5%.

To stabilize the market and initiate some regulatory flexibility, Sektnan said, insurers must be able to charge rates that reflect the increasing risk of loss. The APCIA also wants the state to allow insurers to include the cost of reinsurance in their rates and use forward-looking models to accurately assess future risk.

“Finally, we all have one common goal: mitigate properties and reduce risk,” Sektnan said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].