CA approves 22% rate hike for state’s top property insurer

(The Center Square) - California Insurance Commissioner Ricardo Lara provisionally approved State Farm's request for a 22% property insurance rate hike, citing a need to stabilize the insurance market.

Lara said State Farm must justify its provisionally approved rates with data it provides in a public hearing. He also called upon the company to both halt non-renewables and secure a $500 million cash infusion from its parent company.

"To ensure long-term choices for Californians, I had to make an unprecedented decision in the short term," said Lara in a statement. "It is evident that other California insurers are unable to absorb State Farm's existing customers, which poses a significant risk of these customers ending up on the FAIR Plan — a scenario we all wish to avoid as my Sustainable Insurance Strategy is implemented."

Since Proposition 103 was passed in 1998, insurance rate hikes have had to be approved by state regulators, resulting in rates failing to keep up with rising claims. As a result, many insurers have stopped accepting new customers, renewing policies and have even left the state.

State Farm justified its rate hike by claiming it is paying out $1.26 in claims for every dollar it collects in premiums, resulting in the loss of $5 billion in the last nine years.

In March 2024, it did not renew policies for approximately 30,000 homeowners.

Homeowners who are dropped by their insurers often have no choice but to use the state-regulated FAIR Plan, the fire insurer of last resort.

However, the FAIR Plan does charge higher rates for lower coverage maximums, often requiring costly supplemental insurance to fill the gap between coverage and property values.

Because the FAIR Plan had $6 billion of exposure in the largely destroyed Pacific Palisades alone, the state has approved a $1 billion levy on private insurers, such as State Farm, to help cover its losses.

According to Consumer Watchdog, a nonprofit that spearheaded Prop. 103 and sought that State Farm justify its rate hikes with data, the hearing is a win for consumer transparency.

"It's a victory for consumers that State Farm will now have to make its case in a public hearing before a judge and prove a rate hike is justified," said Carmen Balber, executive director of Consumer Watchdog. "The company has so far failed to back up its request, and unless State Farm proves otherwise, the outcome of a hearing should be a rejection."

Consumer Watchdog has said the rate hike is unjustified because State Farm's parent company has "$194 billion surplus and reserves."

Lara's request that State Farm receive a $500 million capital infusion from its parent company, while he approved a rate hike, suggests both narratives could be true: Insufficient rate hike approvals have created losses for State Farm at the state level, but the parent company could at least theoretically subsidize its California subsidiary.