State Farm emergency rate hike request raising alarm bells for some
It's been less than a month since wildfire decimated entire neighborhoods in Pacific Palisades and other communities in Los Angeles, and now the losses are being tabulated. State Farm General, California's largest insurer, said they have received more than 8,700 claims and already paid out more than a billion dollars from its nearly depleted cash reserves.
In a letter to CA Insurance Commissioner Ricardo Lara, the company said, "Although reinsurance will assist us in paying what we owe to customers, the costs of these fires will further deplete capital from SFG...We are requesting that you take emergency action to help protect California's fragile insurance market by immediately approving interim rate increases on these filings, with rates to be effective May 1, 2025..."
Karl Susman, a broker and industry expert, explained the situation.
"The problem is the industry in California has pretty much been upside down for about a decade," he said. "And it's been slowly getting eroded because the prices have not been matching the exposure that we've had."
Most people are surprised to learn that California has some of the cheapest home insurance in the country despite now ranking second for risk of loss. Homeowners here pay an average of $2,000 a year, while in Oklahoma it's three times that amount.
So now, State Farm is requesting an average rate hike of 22 percent for homeowners, 15 percent for renters and condo owners and 38 percent for those owning rental properties, no matter where they are located in the state. The company said it needs the money to refill its capital reserve and said its credit rating has taken such a hit that State Farm insurance may no longer be accepted by some mortgage companies.
"And this rate increase is really just the beginning of that," said Susman. "And I wouldn't say that it's backfilling premiums to be able to have the ability to pay claims, but it's really bringing the rate to where it should have been all along, considering the exposures that we have here. And now, we're going to start seeing all the carriers starting to do that. So, we're not in a situation when the next wildfire comes, where companies are running out of money and having to look to see how they're going to pay their claims."
But Harvey Rosenfield, who wrote Prop 103, which regulates the state's insurance market, said he doesn't buy the hysteria. He said State Farm already had a request to the state for a 30 percent increase in June, well before the L.A. fires.
"Now that the wildfires have happened," said Rosenfield, "State Farm is trying to take advantage of this tragedy to say that they need an immediate, emergency rate increase of 22 percent which could be, like, 3/4 of a billion dollars. We really don't know because they haven't justified that."
Rosenfield said State Farm General, the company that insures properties in California, is claiming to be broke while its parent company, State Farm Mutual is worth hundreds of billions of dollars.
"But State Farm wants to leverage — with the threat that it's the biggest company in the state and its financial condition is terrible — wants to leverage a bailout," he said. "This is forcing the public to capitalize, to fund, a private corporation that actually has access to resources of its parent company. And it's the parent company that should be bailing out State Farm, not the public."
Who should bear the cost of the LA wildfires is up for debate, but there is no question that the risk of fire in California has grown in general. And it seems clear that insurers won't resume writing policies in the state until they are sure they won't be losing money by doing so.
If Insurance Commissioner Lara approves the rate increases, which could happen in the next few days, they would go into effect when policies are renewed, as of May 1 of this year.
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