SACRAMENTO, Calif. — California Insurance Commissioner announced his intention to approve a significant premium increase request by State Farm, the state’s largest insurer, as long as the company could substantiate the need during a public hearing. The insurance firm, which covers around one million homeowners in California, is seeking a 22% surge in premiums to recover its capital after devastating wildfires in Los Angeles destroyed over 16,000 buildings, primarily homes.
State Farm is striving to circumvent a severe financial predicament that might compel it to cease offering California policies. Commissioner Ricardo Lara expressed concern that no other insurers in the state would be able to absorb State Farm’s customer base if it exits the market. He requested a detailed financial justification from State Farm, demanding that the insurer present its case publicly by April 8. A judge is expected to evaluate and propose a decision, after which Commissioner Lara will issue a final ruling.
“State Farm has pledged its dedication to its Californian clientele, aiming to regain financial equilibrium. I anticipate that both State Farm and its parent entity will uphold their duties and not transfer the entire burden onto policyholders,” Lara declared in a statement. He stressed that the public hearing will ensure the transparency of the process.
The decision comes amidst an ongoing effort by California to encourage insurers to operate in the state despite the increasing threat of wildfires that obliterate entire neighborhoods. In 2023, some prominent insurers, including State Farm, stopped underwriting new residential policies due to the elevated fire risk. Last year, Lara introduced a series of regulations intended to permit premium increases while ensuring more coverage in high-risk regions, regulations which take effect this year.
According to Consumer Watchdog, which opposes the rate hike, California has authorized significant rate expeditions for most of its large insurers in recent years. State Farm executives revealed that the company was already encountering financial challenges before the wildfires in Los Angeles. The company received a downgraded financial rating last year and has seen a dramatic reduction of $5 billion in its surplus over ten years. Last year, the firm proposed a 30% increase, which is still under state consideration.
The recent LA wildfires, now regarded as one of the costliest natural disasters in U.S. history, have exacerbated the situation for State Farm. Last month, the insurer paid out approximately $1.75 billion across 9,500 claims, estimating overall losses exceeding $7 billion. The company’s surplus witnessed a decline from $1.04 billion at the end of 2024 to $400 million post-fires, further straining its financial health.
State Farm argues that without swift capital rebuilding, banks might refuse insurance as mortgage collateral, requiring policyholders to seek alternative coverage. Should policyholders fail to secure a replacement, they might resort to the FAIR Plan, a stopgap measure meant only as temporary coverage. The FAIR Plan has seen unprecedented enrollment numbers, despite state efforts to minimize reliance on it, needing a $1 billion bailout recently to cover fire-related claims.
In light of the developments, State Farm referred to Lara’s decision as a “positive step.” The company also pledged to suspend policy cancellations or non-renewals for at least a year upon approval of the rate increase. Last year, State Farm discontinued coverage for 72,000 properties, having already ceased issuing new policies.
Consumer Watchdog predicts that, should the rate increase pass, policyholders might face $600 higher annual premiums, with rental owners and tenants looking at respective 38% and 15% increases. Carmen Balber, the group’s executive director, praised the decision to hold a public hearing, underscoring the opportunity for public involvement and scrutiny.
State Farm has committed to refunding emergency rates if California subsequently approves a lower rate than the company’s previous request. The insurer received state consent for a 20% rate increase in December 2023. The current request stems from ongoing financial strains, coupled with State Farm Mutual recently dismissing an executive for comments perceived as orchestrating the rate request—a claim the subsidiary strongly refutes.