State Farm seeking 22% rate increase

Rising wildfire costs drive insurance giant to request steep premium hikes

State Farm General Insurance has requested that the California Department of Insurance grant a 22% rate increase due to the magnitude and devastation of the recent wildfires last month in Los Angeles County. SFG made the request in a Feb. 3 letter to California’s Insurance Commissioner Richardo Lara.

SFG has already received 8,700 claims and paid more than $1 billion to customers, Dan Krause, President and Chief Executive Officer of SFG, wrote in the letter. “We know we will ultimately pay out significantly more, as these fires will collectively be the costliest in the history of the company.”

SFG is asking for the proposed increases – 22% for homeowners, 15% for renters, 15% for condominium unit owners and 38% for owners of rental properties – to become effective on May 1.

The SFG rate increase request made in June 2024 is still pending. Krause acknowledged that if the final rate increase approved is lower than this interim request, SFG would issue refunds to policy holders.

The need for additional cash is paramount to SFG. Their financial reserves were falling before this fire catastrophe and are now being drained more rapidly. According to Krause, “By year-end 2024, SFG’s Policyholder Protection Fund – i.e. surplus, or capital available to pay claims – was approximately a quarter of what it was in 2016, and its surplus relative to the risk it supports dropped nearly eighty-five percent by one measure, putting the company below certain minimum regulatory Risk-Based Capital requirements.” And this is half of the 2022 level.

Since 2016, SFG has paid $1.26 in claims and expenses for every $1.00 collected in premium, resulting in over $5 billion in cumulative underwriting losses.

Its deteriorating capital balance resulted in AM Best, a rating agency, downgrading SFG’s financial status a year ago. As the cost of the Los Angeles fires continues, Krause is worried about possible future downgrades and how that will affect SFG’s ability to raise additional capital.

He wrote that continuing downgrades of the company’s financial strength may cause mortgage lenders to decide that SFG’s fire insurance is insufficient collateral for mortgages. Policy holders would then have to find new insurers.

SFG is the largest insurer in the State with more than 3 million policies, nearly 20% of the market. But in 2023, because of declining financial position, SFG stopped writing new policies in the state. One year later, SFG announced it would not renew 72,000 existing California policies, including 29,000 that were for homeowners.

Other insurance companies have also released their costs from these fires. Chubb Limited said in its Fourth Quarter 2024 earnings report that the Los Angeles fires have cost the company $1.5 billion. These will be taken in the first quarter of 2025. Chubb reported net income of $2.5 billion in the 2024 fourth quarter.

On Feb. 6, Allstate reported its losses would be $1.1 billion, before taxes and after re-insurance payments. The report added that losses were limited to this amount because the company had begun reducing is share of the California fire insurance market in 2007.

Both Chubb (2.7%) and Allstate (5.8%) have smaller shares of the state fire insurance market than SFG.

The enormous cost of the Los Angeles fires demonstrates the conundrum for policy holders and insurers. Cal Fire’s preliminary data show more than 16,000 structures were destroyed in just the Palisades and Eaton Fires. Property owners and renters want insurance in case of a fire destroying their property. But they are concerned about the premiums.

SFG and other insurance companies will provide the security if they can make a profit.

California, as these fires demonstrated, is a high fire risk area and consequently insurance rates will increase to balance this risk. Simply, SFG stated, “We must appropriately match price to risk. That is foundational to how insurance works. Higher risks should pay more for insurance than lower risks.”

“SFG needs your urgent assistance in the form of emergency interim approval of additional rate to help avert a dire situation for our customers and the insurance market in the state of California,” Krause stressed to Lara.

“State Farm General’s rate filings raise serious questions about its financial condition,” said department spokesman Gabriel Sanchez to the media. “To protect millions of California consumers and the integrity of our residential property insurance market, the department will respond with urgency and transparency.”