Please ensure Javascript is enabled for purposes of website accessibility
State Farm Won’t Sell New Home Insurance in CA. Can State Shore up the Market?
gvw_calmatters
By CalMatters
Published 11 months ago on
June 3, 2023

Share

State Farm made national headlines last week when it said it would stop selling new home insurance policies in California. As California’s largest single provider of bundle home insurance policies — the company had 20% of the market in 2021 — the news struck some as the beginning of a fresh emergency, with insurers abandoning a fire and flood ravaged state.


Ben Christopher

Grace Gedye
CalMatters

But the retraction of California’s biggest home coverage provider is only the latest development in a wildfire-fueled crisis that has smoldered beneath the surface of  the state’s insurance market for years.

After the disastrous fires of 2017 and 2018, the number of Californians who were told by their insurer that their policy wouldn’t be renewed jumped up by 42% to almost 235,000 households. The two severe wildfire years wiped out decades of industry profits.

Last year, American International Group let thousands of customers know their home insurance policies would not be renewed, and Chubb, a high-end insurer, said it would continue to non-renew some of its customers.

And late last year, thousands of condo owners also found themselves among the uninsurable as the state’s regulated insurers dropped suburban homeowner association members in droves across San Diego County’s wildfire-prone shrubland.

“State Farm sort of publicly said what they were doing, but I think for the last few years, we’ve all seen insurers restricting and pulling back their business in California,” said Seren Taylor, vice president of Personal Insurance Federation of California, an industry trade group that counts State Farm as a member.

State officials emphasized that State Farm’s current policyholders will not lose coverage.

“It’s important to note that current customers will not lose their insurance,” wrote Michael Soller, deputy insurance commissioner at California’s Insurance department, in an email to CalMatters. This decision will affect people who are shopping for home insurance, in that they will have one fewer provider to choose from.

State Farm in a press release blamed high construction costs that make it extra expensive to rebuild after a home is destroyed in California, growing natural disaster risk — particularly from wildfires — and “a challenging reinsurance market.”

Insurance companies frequently purchase their own insurance — known as “reinsurance” — to minimize the risk of getting hit with millions of dollars of costs all at once, as might happen during a catastrophic wildfire or a major hurricane.

Reinsurance premiums have spiked in recent years in disaster-prone states like fire-ravaged California and storm battered Florida, Louisiana and Texas. California law prohibits insurers from passing along the cost of reinsurance to customers. Industry groups are lobbying to change that.

“This is tough for legislators,” said John Norwood, a lobbyist for independent insurance brokers. “Because the solution is prices going up.”

How California Regulates Home Insurance

High rebuild costs, increasingly severe wildfires and high prices of reinsurance are all risks that insurance companies might be willing to take on.

But only for the right price.

Increases in insurance premiums in California are approved or denied by the state’s elected insurance commissioner, Ricardo Lara. Industry groups have long argued that Lara’s office has not allowed providers to set prices commensurate with the cost of doing business in fire-prone California.

“We have very inexpensive home insurance in California,” compared to other states, said Michael Wara, director of the climate and energy police program at the Stanford Woods Institute for the Environment. “But the thing is, five years ago, we realized ‘oh yeah, actually in California you can burn down 50,000 houses overnight.’”

Five years ago, we realized ‘oh yeah, actually in California you can burn down 50,000 houses overnight.’

MICHAEL WARA OF THE STANFORD WOODS INSTITUTE FOR THE ENVIRONMENT

The consequences of a continued drip-drip decline of insurers from California could be far more costly in the long run, warns Dan Dunmoyer, president of the California Building Industry.

As an illustration, he points to California history. After the 1994 Northridge Earthquake dealt roughly $42 billion in damage across Southern California, many home insurers opted to stop doing new business in California entirely.

Because home insurance is a basic requirement for most home loans, the exodus of insurers caused the state real estate industry to grind to a halt, Dunmoyer recalled.

“The whole world stopped,” he said. “That’s the worst case scenario. We’re not quite there yet.”

Can California Block State Farm’s Retreat?

There are various ideas circulating about what the state can do to keep State Farm in the market, some more drastic than others.

The advocacy group Consumer Watchdog on Tuesday argued Insurance Commissioner Lara has the power to order State Farm to reverse its decision. That authority, the group said, comes from Proposition 103, a voter-backed initiative passed in 1988 that gave the department the power to approve or deny premium increases.

Wara, from Stanford Law, said the idea was a “non-constructive approach to this problem.”

He said the entire insurance industry likely would sue the state if the California insurance department were to assert that authority, and the lawsuit would take several years to resolve. He said he finds it “hard to believe” that a court would force the industry to keep issuing new insurance policies during the years the case was in court.

“That is a recipe for the entire market falling apart, potentially overnight,” Wara said. “That would undo not just the insurance market, but everybody that has a home mortgage in California, everybody that wants to buy or sell a home in California.”

Last Resort for California Homeowners

Another sword hanging over the state’s insurance industry: The possible demise of the FAIR Plan, the limited insurance plan Californians can turn to when no standard private company will cover them. It’s funded by levies on private insurance companies that do business in the state.

“A lot of other insurers have stopped selling,” said Amy Bach, executive director of United Policyholders, a consumer group. “If you talk to an agent or broker today, they’re going to tell you it can be pretty hard to find insurance” outside of the FAIR plan, Bach said.

As the risk of catastrophic wildfire ramps up across California, that risk falls disproportionately on the FAIR Plan. And if an especially severe fire season renders the plan bankrupt, the tab will fall on those insurers still doing business in the state in proportion to their share of the market, said Wara, from Stanford.

State Farm, as the largest insurer, would have to chip in the most. That’s one reason the company might have decided to not issue new policies anywhere in California rather than just limiting new policies to places with low wildfire risk. “State Farm is saying ‘we want less of that,’” Wara said.

That problem isn’t unique to California.

In Texas, the increasing severity of Gulf Coast hurricanes has driven tens of thousands of homeowners onto that state’s chartered backstop insurer leading to talk of an inevitable crisis.

In Florida, the crisis may have already arrived. This week, Florida’s insurance commissioner authorized a $1.25 billion line of credit to that state’s insurer of last resort — now the single largest insurer — in preparation for the coming storm season.

About the Author

Ben covers housing policy and previously covered California politics and elections. Prior to these roles at CalMatters, he was a contributing writer for CalMatters reporting on the state’s economy and budget. Based out of the San Francisco Bay Area, he has written for San Francisco magazine, California magazine, the San Francisco Chronicle, and Priceonomics. Ben also has a past life as an aspiring beancounter: He has worked as a summer associate at the Congressional Budget Office and has a Master’s in Public Policy from the University of California, Berkeley.

Grace covers California’s economy for CalMatters. Previously, she was an editor at the Washington Monthly. She is a graduate of Pomona College.

About CalMatters

CalMatters is a nonprofit, nonpartisan newsroom committed to explaining California policy and politics.

 

RELATED TOPICS:

DON'T MISS

Boeing’s Financial Woes Continue, While Families of Crash Victims Urge US to Prosecute

DON'T MISS

Police Tangle With Students in Texas and California as Wave of Campus Protest Against Gaza War Grows

DON'T MISS

Meet the Valley Republican Predicting a November Win Over Esmeralda Soria

DON'T MISS

Wired Wednesday: Construction Workers on 2018 Fresno Unified Project Still Not Paid

DON'T MISS

Slumping California Risks Losing World’s ‘5th Largest Economy’ Title

DON'T MISS

Ukraine Uses Long-Range Missiles Secretly Provided by US to Hit Russian-Held Areas, Officials Say

DON'T MISS

Upward Bound: Edison High’s Garcia Headed to Johns Hopkins

DON'T MISS

Boxing Star Ryan Garcia Wants to Meet Netanyahu, Pledges Aid for Gaza Children

DON'T MISS

Fong Won’t Debate Boudreaux, but We Get Hot Topic Answers Anyway

DON'T MISS

Legislation Pandering to Tribal Casinos Is a Bad Bet for Fresno Cardroom Employees

UP NEXT

Police Tangle With Students in Texas and California as Wave of Campus Protest Against Gaza War Grows

UP NEXT

Meet the Valley Republican Predicting a November Win Over Esmeralda Soria

UP NEXT

Slumping California Risks Losing World’s ‘5th Largest Economy’ Title

UP NEXT

Ukraine Uses Long-Range Missiles Secretly Provided by US to Hit Russian-Held Areas, Officials Say

UP NEXT

Upward Bound: Edison High’s Garcia Headed to Johns Hopkins

UP NEXT

Boxing Star Ryan Garcia Wants to Meet Netanyahu, Pledges Aid for Gaza Children

UP NEXT

Fong Won’t Debate Boudreaux, but We Get Hot Topic Answers Anyway

UP NEXT

Legislation Pandering to Tribal Casinos Is a Bad Bet for Fresno Cardroom Employees

UP NEXT

About 1 in 4 US Adults Over 50 Say They Expect to Never Retire, an AARP Study Finds

UP NEXT

Biden Signs a $95 Billion War Aid Measure With Assistance for Ukraine, Israel and Taiwan

Wired Wednesday: Construction Workers on 2018 Fresno Unified Project Still Not Paid

6 hours ago

Slumping California Risks Losing World’s ‘5th Largest Economy’ Title

6 hours ago

Ukraine Uses Long-Range Missiles Secretly Provided by US to Hit Russian-Held Areas, Officials Say

8 hours ago

Upward Bound: Edison High’s Garcia Headed to Johns Hopkins

Local Education /

10 hours ago

Boxing Star Ryan Garcia Wants to Meet Netanyahu, Pledges Aid for Gaza Children

10 hours ago

Fong Won’t Debate Boudreaux, but We Get Hot Topic Answers Anyway

10 hours ago

Legislation Pandering to Tribal Casinos Is a Bad Bet for Fresno Cardroom Employees

11 hours ago

About 1 in 4 US Adults Over 50 Say They Expect to Never Retire, an AARP Study Finds

11 hours ago

Biden Signs a $95 Billion War Aid Measure With Assistance for Ukraine, Israel and Taiwan

12 hours ago

Ancestry Website to Catalogue Names of Japanese Americans Incarcerated During World War II

12 hours ago

Boeing’s Financial Woes Continue, While Families of Crash Victims Urge US to Prosecute

Boeing said Wednesday that it lost $355 million on falling revenue in the first quarter, another sign of the crisis gripping the aircraft ma...

5 hours ago

5 hours ago

Boeing’s Financial Woes Continue, While Families of Crash Victims Urge US to Prosecute

5 hours ago

Police Tangle With Students in Texas and California as Wave of Campus Protest Against Gaza War Grows

CA District 27 Assembly candidate Joanna Garcia Rose
6 hours ago

Meet the Valley Republican Predicting a November Win Over Esmeralda Soria

6 hours ago

Wired Wednesday: Construction Workers on 2018 Fresno Unified Project Still Not Paid

6 hours ago

Slumping California Risks Losing World’s ‘5th Largest Economy’ Title

8 hours ago

Ukraine Uses Long-Range Missiles Secretly Provided by US to Hit Russian-Held Areas, Officials Say

Local Education /
10 hours ago

Upward Bound: Edison High’s Garcia Headed to Johns Hopkins

10 hours ago

Boxing Star Ryan Garcia Wants to Meet Netanyahu, Pledges Aid for Gaza Children

MENU

CONNECT WITH US

Search

Send this to a friend