SACRAMENTO, Cali. (DDN) – California greenlights a significant 22% increase in rates for the leading property insurance provider in the state.
California’s Insurance Commissioner Ricardo Lara has given provisional approval to State Farm’s request for a 22% increase in property insurance rates, emphasizing the necessity to stabilize the insurance market.
Lara stated that State Farm needs to substantiate its temporarily approved rates with data presented during a public hearing. He urged the company to stop its non-renewable activities and obtain a $500 million cash injection from its parent organization.
“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.”
Following the passage of Proposition 103 in 1998, any increases in insurance rates have required approval from state regulators, leading to a situation where rates have not kept pace with the growing number of claims. Consequently, numerous insurers have ceased to take on new clients, have halted policy renewals, and some have even exited the state entirely.
State Farm defended its increase in rates by stating that it has been disbursing $1.26 in claims for each dollar earned in premiums, leading to a total loss of $5 billion over the past nine years.
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In March 2024, policies for around 30,000 homeowners were not renewed.
When insurers drop homeowners, many find themselves turning to the state-regulated FAIR Plan, which serves as the last resort for fire insurance.
Nonetheless, the FAIR Plan imposes elevated rates for reduced coverage limits, frequently necessitating expensive supplemental insurance to bridge the disparity between coverage and property values.
The state has sanctioned a $1 billion levy on private insurers, including State Farm, to address the substantial losses incurred, particularly with the FAIR Plan facing $6 billion in exposure in the heavily impacted Pacific Palisades area.
Consumer Watchdog, a nonprofit that led the charge for Prop. 103 and pushed for State Farm to provide data to support its rate increases, views the hearing as a significant victory for transparency for consumers.
“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 argues that the increase in rates is unwarranted, citing that State Farm’s parent company possesses a substantial surplus and reserves amounting to $194 billion.
Lara’s proposal for State Farm to obtain a $500 million capital boost from its parent company, alongside his endorsement of a rate increase, indicates that both stories may hold validity: State Farm is facing losses at the state level due to a lack of sufficient rate hike approvals, although the parent company might be able to support its California subsidiary in theory.
Source: CA approves 22% rate hike for state’s top property insurer
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