(Airdate: 2024-07-03) FOX - KTVU- PROPOSED STATE FARM INSURANCE RATE HIKES

Published Date: 07/03/2024

State Farm’s Proposed Rate Hikes: What They Mean for California’s Insurance Market

California homeowners are once again bracing for higher insurance costs — this time from one of the state’s biggest players. State Farm, which insures roughly 27% of all residential properties in California, has filed for significant premium increases across multiple policy types.

According to recent reports, the proposed hikes could reach as high as 50% for some customers — including homeowners, condo owners, and renters.

In an interview with FOX KTVU, insurance expert and Insurance Hour host Karl Susman broke down what’s driving these increases, how the California Department of Insurance (CDI) fits into the process, and what the potential ripple effects could mean for consumers statewide.

The Situation: State Farm’s Steep Request

State Farm’s proposal includes:

• A 30% increase for homeowners policies.
• A 36% increase for condominium owners.
• A 52% increase for renters policies.

These numbers follow a turbulent year for the insurer, which already made headlines in 2023 for pausing new homeowners policies in California, citing “historic increases in construction costs and wildfire risk.”

“In March, they were downgraded for their financial solvency by AM Best,” Susman explained. “Then in April, they non-renewed a little over 72,000 policies. And now they’ve submitted a request for this increase.”

The timing, he said, underscores the financial stress insurers are facing in California’s current environment.

Why the Request Is So Significant

State Farm’s rate filing is more than just a company-specific issue — it’s a litmus test for the entire California insurance market.

With over a quarter of the state’s properties under its umbrella, State Farm’s pricing and availability decisions have a massive downstream effect on both competitors and consumers.

“When you have a company as large as State Farm — that has the majority of properties insured in California — it’s going to have an effect,” Susman noted. “If they’re in that kind of financial strait, I can’t imagine how the Department of Insurance wouldn’t approve the increase.”

The logic is straightforward: if the state denies the request and State Farm can’t maintain solvency, millions of policyholders could be at risk of losing coverage altogether.

That’s the regulatory dilemma — one Susman calls “a rock and a hard place.”

Between Solvency and Affordability

The California Department of Insurance (CDI) is tasked with a delicate balancing act. It must ensure insurers remain financially solvent — able to pay claims in the event of disasters — while also protecting consumers from unjustified or excessive rate increases.

Under Proposition 103, passed in 1988, insurers must receive CDI approval before changing rates. Each request requires detailed financial documentation proving the company’s need for the increase.

“Remember, they have to show documentation to the Department of Insurance that they actually need this money to stay solvent,” Susman said. “If the Department looks at that and says, ‘We understand you need it, but we’re not going to let you take it,’ they’re basically telling consumers, ‘We hope there’s not a big event — because State Farm won’t have the money to pay.’”

This makes State Farm’s case particularly high stakes. Denying the increase could backfire, potentially destabilizing the largest insurer in the state. Approving it, however, would burden millions of Californians already struggling with cost-of-living pressures.

The Broader Context: A Market in Crisis

State Farm’s request doesn’t exist in a vacuum. Nearly every major insurer in California is facing similar pressures.

In 2023 and 2024:

• Allstate and Farmers imposed stricter underwriting rules or paused new policies.
• AAA non-renewed thousands of homeowners.
• Many regional insurers pulled back entirely from wildfire-exposed areas.

All cited the same factors:

1. Skyrocketing construction and labor costs.
2. Record wildfire losses.
3. Reinsurance expenses — the cost insurers pay to insure themselves against catastrophic events.
4. Regulatory bottlenecks that prevent timely rate adjustments.

“All insurance carriers are taking pretty significant increases,” Susman said. “It’s not just State Farm — we’re all suffering.”

Why Rate Increases Are Becoming Unavoidable

At the heart of the problem is the regulatory lag built into Proposition 103.

California’s system requires every insurer to submit and justify rate changes through a lengthy approval process. While this ensures consumer protection, it also means that insurers can’t react quickly to inflation, supply chain disruptions, or evolving climate risks.

As a result, their rates don’t reflect real-time costs, leaving them financially squeezed.

For example:

• Wildfire cleanup and rebuilding costs have doubled in some areas since 2019.
• The cost of reinsurance has jumped 30–50% in a single year.
• Inflation continues to push up repair and materials costs, with construction inflation remaining above 20% in parts of California.

“When you’re seeing this kind of inflation, insurers are literally losing money on every claim they pay out,” Susman explained in a previous interview. “They’re required by law to cover replacement costs — but they can’t adjust rates fast enough to match reality.”

This economic mismatch is why insurers like State Farm say they’re “forced” to pursue higher rates — not to boost profits, but to maintain solvency.

The AM Best Downgrade: A Warning Sign

In March 2024, AM Best, the insurance industry’s top credit-rating agency, downgraded State Farm’s financial solvency outlook.

That move sent ripples through the market, signaling that even industry giants aren’t immune to California’s financial stress.

AM Best cited increased exposure to catastrophic risk, inflation-driven losses, and rising reinsurance costs — all of which have strained profitability across the board.

The downgrade also makes it more expensive for State Farm to buy reinsurance, creating a feedback loop that worsens financial pressure.

“If a company’s rating drops, it becomes more expensive for them to operate,” Susman said. “That cost ultimately trickles down to consumers.”

What the Department of Insurance Can (and Can’t) Do

While the Department of Insurance holds authority over rate approvals, its options are limited by law.

If State Farm provides credible financial evidence showing that a 30–50% rate hike is necessary for solvency, the CDI can’t simply deny it without risking consumer harm through company insolvency or withdrawal.

“You’re stuck between a rock and a hard place,” Susman reiterated. “Do you approve a rate increase that high, or do you risk letting the company not have enough money to pay claims?”

In practice, the Department may negotiate smaller increases or impose phased adjustments, but it rarely rejects major filings outright when solvency is on the line.

The Consumer Impact

If approved, these increases would mark one of the most substantial single-year premium jumps in California history.

For example:

• A homeowner paying $2,500 annually could see that rise to $3,250 or more.
• Renters might see $150 policies jump to over $220.

The ripple effect could also extend beyond State Farm customers. Competitors may seek similar approvals, leading to a wave of parallel rate hikes across the market.

For renters — who often assume they’re insulated from the crisis — the reality is sobering. State Farm’s 52% proposed increase on renters insurance highlights how rising property and reinsurance costs are trickling down even to non-property owners.

“This affects homeowners, but it could affect renters too,” Susman confirmed. “Everybody’s feeling it.”

What Homeowners Can Do Right Now

Even if the rate hikes go through, there are practical steps consumers can take to protect themselves:

1. Review Your Policy Annually

Make sure your coverage limits accurately reflect your home’s rebuild cost — not its market value. Many homeowners are underinsured due to inflation.

2. Explore Discounts and Mitigation Credits

Programs under the Sustainable Insurance Strategy are beginning to reward fire-hardening and defensible space efforts. Check if your insurer recognizes these.

3. Bundle Coverage

Bundling home and auto policies (when available) can still offer savings, even in a tightening market.

4. Work with Independent Brokers

Independent agents can access surplus lines carriers and specialty markets that may still write high-risk policies.

5. Stay Informed About FAIR Plan Options

While not ideal, the California FAIR Plan remains a safety net for those who lose private coverage.

The Bigger Picture: Reform or Retreat

State Farm’s filing is a symptom of a larger problem — a market structure that’s unsustainable under current laws.

Without reform, more insurers may follow State Farm’s lead by requesting large increases or further limiting their exposure in California.

The CDI’s ongoing efforts under Commissioner Ricardo Lara’s Sustainable Insurance Strategy aim to modernize rate regulation, allowing insurers to use forward-looking catastrophe models to assess risk and price coverage more accurately.

That modernization, coupled with incentives for mitigation, could finally stabilize the market — but implementation takes time.

Final Thoughts: The Pain Before the Progress

The short-term outlook for California insurance consumers is challenging. Premiums are rising faster than inflation, availability remains limited, and major carriers are operating under financial stress.

But there is cautious optimism that regulatory modernization will restore competition and balance over the next two years.

Until then, consumers should brace for higher premiums — but also recognize that these increases, while painful, may be necessary to preserve the system itself.

“In the short term, we have to grin and bear it,” Susman said. “Because the alternative — insurers not having enough money to pay claims — would be far worse.”