The California Department of Insurance began its hearing on Tuesday regarding State Farm General’s emergency request for a 22 percent rate hike on homeowners and other insurance plans in the state.
State Farm General is also seeking increases of 15 percent for renters, 15 percent for condominium unit owners, and 38 percent for rental dwellings.
State Farm General argues that, in the California market, it has been paying more in claims than it collects in premiums for 10 years. During that period, it says its financial condition has steadily declined.
“For every dollar it received in premiums, it has paid $1.26 in claims and expenses,” said Katherine Wellington of Hogan Lovells, the law firm representing State Farm.
State Farm General’s surplus, which is the money available to pay claims, has fallen from about $4 billion in 2015 to about $1 billion in 2024. It expects that number to fall to $600 million as a result of the Los Angeles fires, for which it is estimated that State Farm General will pay about $7 billion in claims. The company has reinsurance to cover the bulk of that amount.
“This is a serious situation that has only been exacerbated by the wildfires in Los Angeles,” Wellington said.
Attorneys for the insurance company requested that the judge recommend approval of an interim rate that would remain in place until State Farm General’s pending rate increase applications have been decided.
“Rate increases were needed before the Los Angeles wildfires, and a rate increase is certainly needed now,” she said.
State Farm General says the approved interim rate poses no risk to taxpayers because if the final approved rate is lower than the charged interim rate, policyholders are entitled to a refund of the difference plus interest.
California Department of Insurance counsel agreed the State Farm General situation constitutes an emergency, noting that 3.2 million Californians rely on the company for their property insurance.
Therefore, the department staff recommended that the judge propose—and the commissioner approve—the emergency request for an interim rate increase.
“This is not based upon a rigid application of the Prop 103 rate-making formula, but rather based upon a holistic assessment of State Farm’s exigent circumstances,” said Nikki McKennedy, assistant chief counsel for the department’s Rate Enforcement Bureau.
The interim rate increase is a stopgap. “It will not solve all of State Farm General’s problems, nor is it intended to,” McKennedy said. Nonetheless, the rate increase will immediately improve State Farm General’s financial situation, she said.
“It will also provide much-needed stability in the California insurance marketplace,” she said.
“We are on the Titanic, and we see the iceberg,” McKennedy said. “Now is not the time to argue about where to put the deck chairs. There is still time, Your Honor, to turn this ship around. If we don’t, over 3 million Californians are going in the water, and there are not enough lifeboats.”
William Pletcher, the legal director at the consumer advocacy group Consumer Watchdog, opposes the rate increase, noting that 2 million State Farm policyholders would face an average increase of $600 per homeowners policy.
“There is a limited question before the court. Has State Farm met its burden to justify an emergency interim rate increase? The answer based on the facts and the law must be no,” Pletcher said.
Consumer Watchdog said it would challenge the approval of an increase.
A decision was not expected to come from Tuesday’s hearing.
An administrative judge will make a recommendation to the insurance commissioner within 10 days of the hearing’s closing; the Commissioner will then make his final decision. The hearing was scheduled to continue on Wednesday.
Since before Tuesday’s hearing, the insurance company has argued that without the rate hike, the company’s dire financial situation could force homeowners into the state’s last-resort insurance option—the FAIR Plan—for those unable to obtain fire insurance in the private market. The FAIR Plan is funded not by taxpayers but by California’s home insurance companies.
“Under the strict review laid out by Proposition 103, the burden is on State Farm to show why this is needed now,” he stated. “State Farm has not met its burden.”
State Farm General said that it might be forced to exit the California market if it does not get approval for the rate increase, and that it is difficult to match price to risk in California.
“The swift capital depletion of State Farm General is an alarm signaling the grave need for rapid and transformational action, including the critical need for rapid review and approval of currently pending and future rate filings,” the company said.
