Lara’s meeting with State Farm

Editor’s note: In early February, State Farm Insurance requested a significant emergency increase for its fire insurance policies. California Insurance Commissioner Ricardo Lara did not immediately approve the request. He scheduled a meeting on Feb. 26 to discuss the request and to learn more about State Farm’s financial situation.

This a summary of that discussion between Lara, State Farm officials and representatives of Consumer Watchdog.

On Friday, March 14, Lara did announce a provisional decision.

State Insurance Commission Ricardo Lara began the meeting welcoming the attendees. He noted that the meeting was unprecedented because rate increase requests are typically handled by staff and the requesting company. He then stated the purpose and his priorities.

“So, today’s meeting focuses on State Farm’s request for an emergency interim rate increase due to the alarming capital deterioration,” Lara stated. Earlier he clarified his priorities were to hold insurance companies accountable and to ensure stability in the state’s insurance market.

He emphasized that he had read all the correspondence between his staff, State Farm, and the intervenor, Consumer Watchdog.

Dan Krause, the State Farm chief executive officer and president, spoke first for the company, stating its need for the rate increase. “State Farm General is at a crucial point, and timing is of the essence. Its ability to continue to provide coverage to customers in the future first depends on sufficient capital to stabilize its financial condition, which this interim rate approval will certainly help to do.”

Mark Schwamberger, State Farm’s Treasurer and chief financial officer, addressed the financial issues. The first is the continuing decline in the company’s surplus. This dropped $300 billion last year and has fallen 23 % since 2023, leaving a balance of $1 billion, which is now in jeopardy.

The cost of the Palisades, Eaton, and other fires create multiple and immediate demands for the company’s liquid reserves. The direct cost is what the company will have to pay policy holders. Secondly, State Farm, along with other insurers in California, must provide financial support to the State’s FAIR plan. Together, he estimates these will cost the company $400 million this year.

The balance puts them near or in the risk-based balance which financial institutions use to evaluate a company’s safety. He then added that S&P Global has already put State Farm’s credit rating on a negative watch.

“It’s a precarious situation. When you said this was serious, I could not agree with you more about how serious the financial condition is,” Schamberger underlined to the Commissioner.

Lara next asked how State Farm’s financial position continued to deteriorate since 2016 although it has received four rate increases since 2021.

In response, Schwamberger gave two reasons. First, the rate increases were not enough, State Farm has a large number of policies in fire areas; therefore it has begun to cancel renewal of policies to protect its financial status.

Following more discussion of the past increases and current situation, Nikki McKennedy, senior staff attorney for the Department of Insurance, expressed her opinion that State Farm has not been fully responsive to questions from the State.

“We are not currently satisfied that State Farm has proven it is entitled to an overall rate increase at the level that they’ve requested in their rate applications,” she told Lara.

“But what we have determined is that they made a preliminary showing that they can get the interim rates subject to refunds with interest, if necessary,” she added. “·So that’s why we feel confident that we can go ahead and approve the interim rate, subject to refunds with interest, while we then dig into a full rate hearing and fully investigate.”

As the meeting neared its conclusion, Lara made the point that financial help and continuing to cancel more policies will be a problem. During his meetings with the public, he has discerned a desire to help the insurers, but not if they persist to cancel policies.

“This is why I keep asking the question if, you know, we — if I am to grant this rate and emergency rate increase, what certainty can I give the consumers – more importantly, your customers — of what the future’s going to hold, or are they going to have certainty as State Farm customers?” he asked State Farm.

In response, Schwamberger said that implementation of Lara’s “Sustainable Insurance Strategy” — faster rate approval process, catastrophic modeling and other improvements— resulted in a much more stable insurance market in California.

Lara stressed that he would not be rushed into a decision and wanted time for his staff to review the request and its implications.

Summarizing the future, Michael R. O. Martinez, the Department’s chief deputy commissioner, said, “And this is not a final order.· This is a provisional order that is subject to a full rate hearing, in which we will be able to get the additional requests for information, including the quarter 1 data of this year and including the more financial — the more granularity of financial information that we need, again, during a rate hearing that we’ll be able to determine whether the immediate emergency — immediate interim rate increase is valid, or if it’s subject to potential refunds to consumers with interest after, again, that full rate hearing.”