State Farm’s Pullback and California’s Home Insurance Crisis
Published Date: 09/30/2024
California’s largest home insurer, State Farm, has sent shockwaves through the industry after warning that it could reduce its homeowners’ insurance book by nearly one-third over the next five years. That projection translates to roughly one million households potentially losing coverage by 2028.
The disclosure, revealed in regulatory filings and confirmed by The San Francisco Chronicle, comes as State Farm seeks approval for a 30% rate increase from the California Department of Insurance (CDI). It is the latest flashpoint in a deepening insurance crisis that has left homeowners in wildfire-prone areas scrambling for coverage and regulators racing to stabilize the market.
In a recent interview with FOX–KTVU, insurance expert Karl Susman explained what is driving State Farm’s warning, how upcoming regulatory reforms could reshape the market, and why the long-term outlook may be more stable than the headlines suggest.
State Farm’s Projection: Nearly One Million Fewer Policies
State Farm currently insures about three million homes across California. In its filings, the company projected that this number could fall to just over two million by 2028.
On its face, the figure appears alarming. But Susman stressed that it represents a worst-case scenario based on today’s regulatory and financial environment, not a fixed outcome.
“They’re projecting to drop about a million policies between now and the end of 2028 assuming nothing else changes,” he explained. “But we are expecting some significant changes, so I don’t think we’ll actually see this number of non-renewals happen.”
The projection, in other words, reflects uncertainty — not destiny.
Why State Farm Is Scaling Back in California
For decades, State Farm has been the backbone of California’s homeowners’ insurance market. That leadership role now carries substantial financial risk.
“They have such a large footprint in California,” Susman said. “They’re responsible for the lion’s share of the California FAIR Plan’s exposure — and we know how over-bloated that organization is right now.”
Several forces are behind State Farm’s pullback.
Reinsurance Costs and Financial Solvency Pressures
After years of catastrophic wildfire losses, reinsurance — the insurance that insurers buy to protect themselves — has become dramatically more expensive. Those costs have surged fastest in disaster-prone regions like California.
“State Farm is having some financial difficulties,” Susman said. “They’d rather have fewer clients and enough money to pay for those claims than too many clients and not enough money.”
This is not unique to State Farm. Nearly all carriers in California are struggling to remain financially “rate adequate” — meaning their premiums must realistically match their risk.
Proposition 103 and Regulatory Gridlock
California’s rate approval system is governed by Proposition 103, which requires insurers to obtain state approval before adjusting most rates. That process can take more than a year.
During that delay, inflation, construction costs, wildfire exposure, and reinsurance prices can rise sharply, leaving insurers operating at a loss.
“Most carriers are looking to get rate adequate right now,” Susman said. “That’s not unique to State Farm. It’s everyone.”
The regulatory lag is a central reason why many carriers have paused new policies or reduced their exposure.
The 30% Rate Increase: Painful but Necessary
State Farm’s requested 30% rate increase has drawn immediate backlash from consumer advocates. But Susman emphasized that denying rates needed for solvency can backfire.
“Do you want a carrier that’s charging 30% more and can pay your claims,” he asked, “or do you want a carrier that doesn’t charge more and the likelihood of them not paying claims is not so good?”
Approving large increases is politically unpopular, but underpricing risk leads insurers to stop writing policies altogether — which is how homeowners end up pushed into the overstressed FAIR Plan.
“It’s bad PR to give that type of large rate increase,” Susman said, “but it’s even worse to be in a position of leaving a company that’s openly saying they’ll become insolvent if there’s a large event without that rate increase.”
The Sustainable Insurance Strategy and Market Reform
Despite today’s volatility, Susman pointed to the CDI’s forthcoming Sustainable Insurance Strategy as the most important stabilizing factor on the horizon.
“It’s possible that the rate increase plays a role,” he said, “but what’s more likely to be a factor is the new regulations from the insurance commissioner.”
The strategy, expected to roll out in late 2024 and into 2025, represents the most significant modernization of California’s insurance framework in decades.
Catastrophe Models and Modern Risk Pricing
Under longstanding California law, insurers have been prohibited from using forward-looking catastrophe models to price risk. Instead, they were required to rely on historical loss data — a method that has become dangerously outdated in a climate-driven wildfire era.
The new rules will allow insurers to use catastrophe models with strict transparency and oversight.
“As the regulations roll out,” Susman said, “companies will be able to underwrite more — and when they underwrite, that means they’re able to write business again.”
Recognition of Reinsurance Costs
Insurers will also be allowed to incorporate reinsurance costs into rate calculations. This change acknowledges economic reality: reinsurance prices have risen exponentially, and excluding them from pricing has distorted the market.
Writing Requirements in High-Risk Areas
In exchange for new pricing flexibility, insurers must agree to write more policies in wildfire-prone regions. This prevents carriers from using new tools solely to boost profitability while continuing to avoid high-risk communities.
The goal is to expand both availability and stability — not just rates.
How the Reforms Could Help State Farm and Homeowners
For a company as large as State Farm, these changes could be transformative.
“When these regulations go into effect, they’ll be able to use these new tools to set rates more accurately on a home-by-home basis,” Susman explained. “That means more fairness for homeowners and more confidence for insurers.”
Homeowners who have invested in mitigation — clearing brush, upgrading roofs, or hardening their homes — may finally see those efforts reflected in lower premiums.
And for insurers, accurate pricing restores the ability to compete and expand.
“When insurers can properly assess risk,” Susman said, “they can compete effectively — and that’s how you bring stability back to the market.”
The Hidden Role of the California FAIR Plan
An often overlooked piece of State Farm’s exposure is its responsibility for the California FAIR Plan. Because the FAIR Plan is funded by admitted carriers based on market share, State Farm bears a disproportionate share of its losses.
As more homeowners are forced into the FAIR Plan, State Farm’s indirect financial liability grows.
By reducing its own policy count, the company also limits its FAIR Plan exposure. But Susman views this as a temporary survival strategy — one that reforms could eventually reverse.
“As people start leaving the FAIR Plan and that exposure stops growing, State Farm’s position improves,” he said.
What Homeowners Should Expect Through 2025
State Farm’s projection is based on today’s conditions. If the Sustainable Insurance Strategy is implemented as planned, the actual number of non-renewals may be significantly lower.
Still, homeowners should brace for continued market instability in the near term:
- Rate increases are likely to continue.
- Some non-renewals will persist as insurers rebalance risk.
- FAIR Plan enrollment may rise before it eventually falls.
Beyond that window, however, industry observers see room for cautious optimism.
“As time goes by,” Susman said, “and the rates start to work their way through the system — and as the new regulations are available for carriers to come back into the market — it won’t be as significant a hit for the policies they do non-renew.”
The Big Question: Reform or Retreat
State Farm’s warning raises a fundamental issue for California’s future: can the regulatory system modernize fast enough to keep insurers from retreating further?
The company’s projection serves as both a financial signal and a policy deadline. Without reform, the market continues to shrink and homeowners grow more dependent on the limited FAIR Plan. With reform, competition and availability can slowly return.
“Nothing is done until it actually starts to happen,” Susman said. “But I don’t think we’re going to be looking at numbers like this in reality.”
Final Thoughts: A Market in Motion
California’s insurance market is under extraordinary strain, but it is not frozen in place. State Farm’s projected pullback reflects a company navigating today’s risk while anticipating tomorrow’s reforms.
As the Sustainable Insurance Strategy takes effect, both insurers and homeowners will endure short-term disruption. But with balanced regulation, transparent pricing, and shared accountability, the market can recover.
“At the end of the day,” Susman concluded, “you want insurance companies that can pay their claims. And that means giving them the tools to do business responsibly. That’s what these reforms are all about.”
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