California to consider State Farm emergency rate increase request

The state's insurance commissioner and representatives of State Farm are scheduled to meet Wednesday in Oakland to discuss the insurance company's request for a double-digit rate hike.

A decision could be made by next month on State Farm's request for an emergency rate increases of up to 38% on policies in order to cover the costs associated with the Los Angeles-area wildfires.

A Feb. 3 letter to California's insurance commissioner Ricardo Lara outlined State Farm's request of a 22% rate hike on homeowner policies; 15% more on condominium owners; and an additional 38% on rental units effective May 1.

But Consumer Watchdog, a Los Angeles-based consumer advocacy group, petitioned Lara two days later to challenge the request, calling it "improper" based on procedures and the insurer's financial situation.

Lara had previously sent insurance executives a letter seeking answers to justify the increases and Consumer Watchdog had asked that State Farm respond to the questions prior to Wednesday's meeting.

"The company can't justify rate increases above zero," Consumer Watchdog Executive Director Carmen Balber told the Business Journal.

The group disagrees with State Farm's assertions the increases would help in keeping the insurer financially solvent.

"The bottom line is that State Farm is entitled to a homeowners rate increase only if it can provide actuarial data, subject to public review," Watchdog attorneys said.

As of Feb. 1, State Farm General Insurance Company had received more than 8,700 claims and paid over $1 billion as a result of the Los Angeles area wildfires. The insurer, the state's largest, covers 20% of the state's policies.

"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's Feb. 3 letter to Commissioner Lara read. "Although reinsurance will assist us in paying what we owe to customers, the costs of these fires will further deplete capital."

Reinsurance is coverage one company buys from another.

The company went on to warn of financial consequences of operating without the budget padding, saying that "future downgrades of the company over its "capital deterioration" may result in policyholders losing State Farm as collateral backing for their mortgages.

State Farm has said it wants to "preserve its claims paying capacity," coming off a period of challenging years. It announced in May 2023 it would stop writing new policies in California. In March 2024, it announced it would not renew 72,000 existing policies. A little less than half consisted of homeowners policies.

Julie Tyler of Windsor was among those who was informed she would have to find a new insurance provider.

She was forced to go with a non-admitted insurer, which means the policy was not backed by the state. Her deductible and premium skyrocketed from $1,000 to $10,000 and $1,800 to $7,000, respectively. She ended up with the FAIR Plan.

She's concerned whether that plan will hold up given the huge demands placed to meet its L.A. wildfire claims.

"I told my husband I think we should sell the house and move into our RV. It's crazy," she said.

As a former State Farm policyholder of 45 years (three decades on her home), Tyler wonders if the insurer is "trying to capitalize" on the wildfires by asking for more increases.

"To me, if they ask for rate increases, they need to at least start taking new policies," she said.

State Farm has not recently responded to Business Journal inquiries.

To avert the snowball effect of losing mass coverage, the California Department of Insurance launched last month its sustainability insurance strategy.

A big component of that plan involves a concession made by the state when insurance companies started dropping huge numbers of policyholders a year ago. In exchange for their promises not to leave the state, the insurance companies were encouraged to file for rate increases, using a structure called "catastrophe modeling," based on future events rather than historic analysis.

Rate hikes and policy nonrenewals have pushed residents like Tyler onto the California FAIR Plan, the state-sanctioned insurer of last resort. But the FAIR Plan was not designed to cover the large influx of policies like those seen in Southern California.

State insurance department spokesman Gabriel Sanchez said: "There is no law or regulation that prevents an insurance company from continuing to bill customers for premiums in a wildfire emergency. The commissioner's moratorium authority only applies to cancellations and non-renewals."

As recently as last June, the insurer submitted three rate filings seeking "extraordinary" relief. This variance is used by insurance companies when they believe their solvency is threatened.

Now there's an "interim" filing, which the state has pledged it will swiftly consider.