California’s homeowners insurance market is in crisis again. On March 22, 2024, State Farm, the state’s largest property insurer, announced that it will not renew approximately
72,000 policies across California this summer. This follows their decision less than a year ago to halt all new homeowner and business property policies in the state. The ongoing turmoil highlights the mounting pressures faced by the insurance industry, driven by climate risk, rising costs, and an outdated regulatory system.
Let’s break down the announcement, the broader market implications, and what homeowners can do now.
1. The Announcement: 72,000 Policies Cut Across California
State Farm’s decision not to renew 72,000 policies primarily impacts:
- 30,000 homeowner and rental dwelling policies
- 42,000 commercial apartment policies
While these numbers represent only about
2% of State Farm’s total policy count in California, the impact is significant, especially in wildfire-prone areas where replacing coverage is difficult or expensive. This decision particularly affects areas hit hardest by recent wildfires, with experts suggesting these are targeted withdrawals from high-risk regions.
2. State Farm’s Explanation: Rising Risk, Rising Costs, and Outdated Rules
In a statement, State Farm cited several key factors for the non-renewals:
- Rising construction, labor, and material costs
- Increased frequency and severity of natural disasters, such as wildfires and floods
- An outdated regulatory system that prevents insurers from pricing risk accurately
State Farm’s move aims to "ensure long-term sustainability," acknowledging the need for insurers to adjust their business models to reflect the new climate-driven risk environment. In simple terms, the company is struggling to balance rising claims costs with fixed premiums under California’s current rules.
3. A Decade of Disasters: Why California Became “Uninsurable”
California has faced catastrophic wildfires, storms, and floods in the last decade.
Fourteen of the state’s twenty most destructive wildfires occurred within this period, and the shifting climate is lengthening wildfire seasons and introducing new risks like atmospheric river flooding.
Under current insurance regulations, insurers base their rates on past losses, which are now an unreliable measure for the risks posed by the future. As a result, insurers cannot charge enough to cover projected risks, leading many to exit the state entirely.
4. The Larger Trend: Insurers Retreating from High-Risk States
State Farm’s decision is not an isolated one. Over the past two years, several major insurers have reduced their exposure in high-risk states like California, Florida, Colorado, and Louisiana. Insurers such as:
- Allstate stopped writing new homeowner policies in 2022
- Farmers has capped new business
- USAA, Nationwide, and Liberty Mutual have scaled back their operations in wildfire-prone areas
The broader trend underscores the strain that climate risk and regulatory constraints are placing on insurers, especially in regions prone to catastrophic weather events.
5. Regulatory Pressure: Proposition 103 and the Push for Reform
The heart of this issue lies in
Proposition 103, a 1988 California law that heavily regulates how insurance companies set rates. Under Prop 103, insurers can only base their rate increases on historical data, which prevents them from using more modern catastrophe models that consider future risk.
However, this is beginning to change. The
Sustainable Insurance Strategy proposed by Commissioner Ricardo Lara aims to overhaul California’s insurance framework. Key reforms include:
- Allowing insurers to use
forward-looking catastrophe models to better price risk
- Addressing
reinsurance costs more transparently
- Streamlining
rate review processes
If successful, these reforms could encourage insurers to return to California and restore competition, although it’s expected that it will take 12 to 18 months before real relief is felt.
6. Who’s Most at Risk?
While State Farm has not disclosed specific locations, experts believe that the policies being dropped are concentrated in
wildland-urban interface (WUI) zones, which are areas where urban development meets wildfire-prone brushlands. Properties with prior claims or inadequate wildfire mitigation (e.g., defensible space) are also likely to be affected.
These high-risk areas are the hardest to insure, and homeowners with
captive agents (those who only work with one insurer) may find it even more difficult to secure replacement coverage.
Independent brokers, however, can shop around for specialty or surplus lines carriers that may still be willing to insure properties in these areas.
7. What Homeowners Should Do Now
If you are one of the 72,000 policyholders receiving a non-renewal notice, here’s what you should do:
- Start shopping immediately: Finding a new policy can take weeks, especially with underwriters overwhelmed by the volume of requests.
- Don’t wait for your policy to expire: If you find a new policy that works for you, take it immediately. Even if there’s an overlap in coverage, maintaining continuous coverage is critical.
- Contact the California Department of Insurance (CDI): The CDI can assist you in finding a broker and navigating alternative options like the
California FAIR Plan.
4. Consider the FAIR Plan, but be aware of its limitations: The FAIR Plan offers basic fire coverage. You may need to buy a
Difference-in-Conditions (DIC) policy to cover other risks like water damage, theft, and liability.
8. The Economic Ripple: Higher Housing Costs
State officials warn that these non-renewals could further drive up
housing costs. When insurance becomes scarce or unaffordable, buyers may struggle to secure homes, and
mortgage lenders might require expensive alternative coverage. This could lead to rising home prices, increased dependency on the FAIR Plan, and delays in post-disaster recovery.
9. The Silver Lining: Reform Momentum
Despite the grim short-term outlook, California is finally moving toward meaningful
regulatory reform. Commissioner Lara’s
Sustainable Insurance Strategy aims to:
- Use
modern risk models to set fairer rates
- Reflect
reinsurance costs transparently
- Revive competition in high-risk zones
As insurance expert Karl Susman noted, once insurers are able to price risk more accurately, competition will increase, and premiums should eventually come down.
10. The Bottom Line: A Market in Transition
State Farm’s decision to drop 72,000 policies is yet another chapter in California’s ongoing
insurance crisis — one that has been worsened by climate change, inflation, and outdated regulations. However, this move may also be a turning point, signaling the urgent need for reform.
For now, homeowners should:
- Stay informed
- Maintain active coverage
- Work with trusted brokers to navigate this challenging market.
As KTLA’s Omar Lewis aptly put it: “Start shopping for a new policy immediately... because it’s very difficult, if not impossible, to get certain types of coverage right now.” While the situation is tough, the
regulatory reforms in the works could pave the way for a more stable and competitive market in the near future.
