California regulators have given State Farm Mutual Automobile Insurance Co. preliminary approval to raise home insurance premiums by an average of 22%, a decision that could affect nearly a million homeowners in the state. However, the rate hike comes with strict conditions, including a pause on policy cancelations and a requirement that the insurer justify the increase at a public hearing in April.
The decision by California Insurance Commissioner Ricardo Lara is the latest development in the state’s ongoing insurance crisis, exacerbated by increasingly destructive wildfires that have led major insurers to scale back coverage or exit the market entirely.
State Farm, the largest home insurer in California, sought the emergency increase after paying out more than $2 billion in claims following a series of devastating fires in Los Angeles County earlier this year. The company argued that without the additional revenue, it could face financial instability and might be forced to withdraw from the state.
Lara acknowledged the precarious state of California’s insurance market but emphasized that any rate increase must be justified through a transparent public hearing process.
“I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely on to their customers,” Lara said in a statement. “The facts will be revealed in an open, transparent hearing.”
The April 8 hearing will determine whether State Farm’s interim rate increase - which would go into effect on June 1 - is warranted. An administrative law judge will oversee the proceedings and issue a recommendation, but Lara will make the final decision.
State Farm had already stopped issuing new homeowner policies in California last year and announced that it would drop coverage for 72,000 homes and apartments. The company cited higher-than-expected claims costs, increased wildfire risks, and rising reinsurance expenses.
The California Department of Insurance has been under pressure to stabilize the market, introducing new rules that allow insurers to factor in future climate risks when setting rates. However, these regulations have yet to take full effect, leaving insurers frustrated with a system that, they argue, does not allow them to charge premiums that reflect actual risk.
State Farm’s financial troubles predate the recent wildfires. The company has reported more than $5 billion in underwriting losses since 2016, depleting its surplus reserves and prompting warnings from credit rating agencies about its long-term financial health.
State Farm executives have emphasized that the company’s California subsidiary, State Farm General Insurance Co., has been operating at a loss for years and needs financial relief. The company said that without a rate increase, it would need to continue cutting expenses, which could include further non-renewals of policies.
In approving the rate hike on a provisional basis, Lara set clear conditions that State Farm must meet before it can charge customers higher premiums:
Consumer advocates, including Consumer Watchdog, have criticized the approval, arguing that State Farm’s parent company has ample reserves and should not need to raise rates on customers.
“It’s a victory for consumers that State Farm will have to make its case in a public hearing before an administrative law judge, and the judge will decide if a rate hike is justified,” said Carmen Balber, executive director of Consumer Watchdog.
State Farm has defended its request, saying that the company needs “certainty” in California’s volatile insurance market.
“The provisional nature of today’s decision does not improve that certainty, but it’s a step in the right direction,” State Farm spokesperson Sevag Sarkissian said in a statement.
The Los Angeles wildfires in January, which destroyed more than 16,000 buildings and resulted in an estimated $45 billion in insured losses, have intensified concerns over the stability of the state’s insurance industry.
State Farm has reported that it will be responsible for approximately $7.6 billion of those claims, further straining its finances. In addition to wildfire payouts, the company also faces a $1 billion assessment from California’s FAIR Plan, the state’s last-resort fire insurance provider.
California lawmakers have proposed overhauling state regulations to make it easier for insurers to raise rates and adjust policies based on climate risks, but consumer groups fear these changes could lead to skyrocketing premiums.
If State Farm successfully proves its case at the April 8 hearing, the new rates will take effect on June 1. Homeowners can expect to see an average 22% increase in their premiums, while rental property owners could see hikes of up to 38%.
However, if the administrative law judge finds that the increase is not fully justified, State Farm may have to scale back its rate hikes or return any excess charges to customers.
California’s Department of Insurance has also indicated that it will continue reviewing State Farm’s previous request for a 30% rate increase, which was filed last year but has yet to be decided.
For now, the state’s insurance market remains in a fragile state, with policymakers, insurers, and consumer advocates all grappling with how to balance affordable coverage with the financial realities of increasing wildfire risks.
