State Farm seeks enormous rate increases in California to prevent insolvency

State Farm requested massive increases to its California residential insurance rates, which calls its financial stability into doubt amid an ongoing crisis in the state’s insurance market.

The company’s California subsidiary, State Farm General, the state’s largest writer of homeowners insurance, according to the Insurance Information Institute, submitted a request on Thursday to the California Department of Insurance for the following rate hikes:

• 30% increase in homeowners insurance
• 36% increase in condominium owners insurance
• 52% increase in renters insurance

With California’s property insurance market already facing an availability and affordability crisis, driven largely by rising wildfire risk, the timing could hardly be worse.

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Millions potentially affected

“This has the potential to affect millions of California consumers and the integrity of our residential property insurance market,” California Insurance Commissioner Ricardo Lara said in a statement provided to KQED.

The department will closely examine State Farm’s financial stability, Lara said.

“Using my authority under Prop. 103, I will investigate State Farm’s financial situation, including a rate hearing on these applications if necessary. My Department’s experts and I have serious questions.”

For the last year, State Farm has not written new policies in California, and it has not renewed tens of thousands of existing policies.

Documents from AM Best, a company that rates insurance companies’ financial solvency, show a troubled situation for State Farm. Its financial strength was downgraded this spring, and its long-term outlook is considered negative.

“Financially speaking, State Farm is very, very much apparently in trouble. And I think that their request for rate increases will be met with a lot of frustration by consumers because the last thing anybody wants is to be paying more money right now,” said Karl Susman, an insurance broker. “And since there’s still not the ability for people to shop around for other options, what are they going to do but pay that higher rate? But I think that it’s probably going to show pretty quickly that it’s necessary to keep State Farm from literally going insolvent.”

What's next for policyholders

Lara sought to reassure State Farm policyholders that nothing would change immediately as a result of these filings. Under California’s regulatory process, rate filings should take two months to be reviewed, although they have dragged on for years in some cases — a process set for a major overhaul by regulators this year.

Lara also said the Department of Insurance had already made tough decisions in approving significant State Farm rate increases recently, including a March hike averaging 20% across the state.

He continued by inviting the public to get involved via the intervenor process, which allows the public to weigh in on changes to their insurance.

Susman predicts the Department of Insurance will have no choice but to approve the requested rate increases.

“Because the alternative is literally — what’s the point of having a carrier with lower rates that can’t pay claims?” he said. “And they are basically at that place right now where if they’re not able to get this rate and they’re already in such a bad place financially, I don’t see how we can expect them to possibly weather the storm.”