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State Farm asks California for huge insurance rate hike as home coverage halts

Two men in State Farm insurance shirts speak to woman in front of State Farm vehicle
State Farm Insurance agents Charlie Pierce, left, and Larry Gustavson, center, help Sherry Collins, right, with an insurance claim at a makeshift office on Oct. 30, 2003, at the Scripps Ranch Recreation Facility in San Diego, California. | Sandy Huffaker/Getty images | Source: Sandy Huffaker/Getty Images

Insurance company State Farm has asked to hike rates on homeowners by an average of 28.1% in response to wildfire risks and skyrocketing construction costs, according to the California Department of Insurance, which is charged with evaluating rate increase requests.

The request, which was filed in February and is public, was not widely reported at the time.

But its significance grew when State Farm announced it would cease accepting new applications for homeowners insurance in California on May 26. The company will continue to service its current customers and sell auto insurance in the state.

If the rate hike is approved, a process that usually takes at least six months, State Farm’s current customers would face increased monthly premiums when they renew their policies. In March, the company was granted a 6.9% rate increase for auto insurance customers. 

State Farm declined to comment for this story. But several employees, insurance industry groups and the Department of Insurance say that climate change and soaring inflation have made the insurance giant’s position in California untenable.

“Insurance companies are trying to catch up and make changes to their business model so they can stay profitable and keep promises to customers,” said one Bay Area State Farm employee, who asked to remain anonymous as she is not authorized to speak to the press.

Justified or not, State Farm’s decision will make it significantly more difficult for Californians to insure their homes and will hit the company’s agents particularly hard.

And industry professionals say it could be part of a wider insurance company trend. On Thursday, it came to light that Allstate stopped writing homeowner and commercial insurance policies last year; previously, it had only been mentioned in industry publications.

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Firefighters from across California battle flames, protecting Volcanoville, California, from the Mosquito Fire on Sept. 11, 2022. | Tayfun Coskun/Anadolu Agency via Getty Images

Rate Tensions

State Farm is not the first insurance company to extricate itself from California due to these factors. Rather, it announced the move publicly, said Rex Frazier, president of the Personal Insurance Federation of California, an industry lobbying group.

“Even the insurance giant State Farm cannot ignore the laws of economics,” he told The Standard.

According to insurance professionals, extreme weather and regulatory policy are at the core of the issue. 

In 1988, California passed Proposition 103, a law requiring insurance companies to get approval from the Department of Insurance to change property and casualty insurance rates.

“​​Department of Insurance rate regulation experts always represent consumers’ interests,” said Michael Soller, the department’s spokesperson. “They use every tool available to ensure consumers are not paying more than they should and that, as the law dictates, rates are not inadequate, excessive or unfairly discriminatory.” 

But this system has kept the state’s insurance rates “artificially low” relative to the risks that insurers are taking on, said Janet Ruiz, a spokesperson for the Insurance Information Institute, an industry group.

Dark orange skies hang over the San Francisco skyline on Sept. 9, 2020, due to multiple wildfires burning across California and Oregon. | Jessica Christian/The San Francisco Chronicle via Getty Images

California’s rules for formulating insurance rates are also unique among U.S. states and put insurers at a disadvantage, Frazier said.

Whereas other states consider the current risks associated with the area where the insurer is operating, California calculates rates based on the average of how much a company has paid in claims over the past 20 years. 

“How would you do business in a wildfire-prone area where you’re not allowed to look at fuel density around you?” said Frazier, referring to uncleared brush that could fuel a wildfire near homes.

Longer wildfire seasons and increasingly disastrous blazes have made it significantly more expensive for insurance companies to operate in California.

In 2017, the state clocked one of its worst wildfire seasons to date—bad news for insurers, but within the realm of their expectations.

But the next year was also one of the worst. Wildfire decimated nearly 25,000 structures, killing over 100 people and burning the town of Paradise to the ground. The 2020 and 2021 seasons were also particularly bad.

Insurance companies began to quietly stop insuring properties in these areas after the slew of near-successive catastrophic wildfire years.

But not State Farm. During that period, it grew its market share from 17.6% to 21% of the homeowners insurance market in California, Frazier said.

For the Bay Area employee who requested to remain anonymous, State Farm’s insurance premiums have been surprisingly low given the risks and the costs of home construction and auto repairs. 

“A lot of insurance companies got out of California two years ago,” she said. “State Farm managed to stay, and our rates have been very competitive.”

Problem for California

View of the Sunset District of San Francisco. | Adobe Stock

While no one denies the risks and challenges facing insurance companies, State Farm’s home insurance halt will have significant consequences for Californians.

According to the Department of Insurance, there are 115 insurance companies continuing to write residential policies in California.

But several insurance professionals told The Standard that most of these companies are small. They are unlikely to be able to handle the onslaught of customers who can no longer turn to State Farm.

Frazier said he believes that many homeowners will have to avail themselves of the California Fair Access to Insurance Requirements (FAIR) Plan, the insurance option of last resort for high-risk properties that cannot get commercial insurance. It costs more and covers less, but meets the minimum requirements to allow a buyer to get a mortgage and close on a home.

State Farm employees will also feel the pinch. The company’s insurance agents are independent contractors known in industry parlance as “captive agents”—they are only allowed to sell State Farm insurance products. All have built careers around doing just that.

Now, they find themselves captive to the company’s decision to stop binding new homeowners policies across the state. Some may have to lay off employees.

Mary Schade Wood has been a State Farm agent in San Dimas, outside Los Angeles, for 30 years.

She sings the company’s praises for treating customers and employees well and being ahead of the curve on issues like diversity in the workplace. 

But when she learned of the decision to stop selling new homeowner policies, Wood experienced “utter and complete shock,” she said. 

Wood’s agency had just five hours to write new policies. She got on the phone and frantically called all the people whom the agents had given quotes. 

When Wood’s future son-in-law called and announced he needed insurance for the house he and her daughter are moving into this month, it was already too late.

“I can’t even write that policy for my own child,” Wood said.

She will now be “basically retired,” servicing her current clients and taking payments and claims.

“I actually just got off the phone with a friend of mine, and she was just hiring someone,” Wood said. “She had to call him this morning and tell him his job is no longer available.”

She blames Prop. 103 and the Department of Insurance’s resistance to raising rates for the problems State Farm is now facing. That—combined with climate change and inflation—has depleted State Farm of California’s reserves. She believes it will take the company years to rebuild that reserve. State Farm of California is a separate entity from the firm’s umbrella company, known as Mother Mutual among agents. 

Despite her shock at the news, Wood has no doubt that the company had a serious reason to stop signing new homeowners policies.

“I just really love this company. They have treated us so well,” she said. “For them to go and do something like this, it has to be really bad.”

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