California Grants State Farm’s Emergency Rate Hike After Billions in LA Fire Damages

Updated 1:30 p.m. Friday

State Farm policyholders in California are likely to soon see sizable increases on their bills after Insurance Commissioner Ricardo Lara approved the company’s request for an emergency rate hike, state regulators announced Friday morning.

The approval comes with provisions: The insurer will have to present financial records at a public hearing on April 8 to establish its “dire financial condition” before the rate increase can take effect, the California Department of Insurance said in a statement. Additionally, Lara is asking State Farm’s California arm to pause non-renewals and ask for a $500 million infusion of capital from its parent company. State Farm has said it would continue all existing policies for “at least one year” if the rate increase is approved.

“It’s time for certainty in the California insurance market for our customers,” State Farm General, the company’s California arm, said in a statement Friday. “The provisional nature of today’s decision does not improve that certainty but it’s a step in the right direction.”

State Farm requested its emergency rate hike in February, saying it was needed to avert financial disaster after January’s Los Angeles County wildfires forced it to process more than 2,000 claims and pay out an estimated $7 billion in losses and damages. The average increase would be 22% for homeowners insurance, 15% for condominium owners insurance, and 38% for renters insurance.

The company said that although it can pay out current claims, another bad fire season could cause it to risk insolvency.

One credit rating agency already downgraded State Farm in May, and further downgrades could place people at risk.

“If that were to happen, customers with a mortgage might not be able to use State Farm General insurance as collateral backing for their mortgage,” a letter from State Farm said, requesting the emergency increase.

In its Friday statement, State Farm said it “will continue to monitor capacity to support its risks and build sufficient capital for the future.”

State Farm, the largest insurer in California with more than 20% of the state’s homeowners insurance market, has more aggressively been seeking sizable rate hikes in the past year, even after being granted several increases in recent years. 

In June, the company requested increases ranging from 30% to 52% to prevent insolvency, but new rates did not go into effect before the L.A.-area fires.

The news of the emergency rate hike approval brought a sigh of relief for insurance broker Karl Susman, of Susman Insurance Agency, who was worried about the prospect of State Farm pulling out of California if it couldn’t raise rates.

“We don’t have a market in California right now able to absorb millions of policies,” he said. “The fact that they have so many policyholders means they have so much more to lose. And if they did decide that they’re not going to be able to survive [in California] without these rates, they absolutely would have left.”

But while increased rates can help insurance companies stay afloat in the short and medium term, ultimately, there are larger problems to be solved, said Dave Jones, director of the Climate Risk Initiative at UC Berkeley’s Center for Law, Energy, and the Environment and a former California insurance commissioner.

“In the long run, increased rates are being outrun by the increased risk and losses from climate change,” Jones said. “So insurance is really the climate crisis canary in the coal mine, and the canary is dying. Unless we focus on what’s actually driving this problem, it’s only going to get worse.”