California home insurance meltdown worsens as State Farm sheds 72,000 policies

State Farm, California’s largest insurer, announced it will discontinue coverage for 72,000 homes and apartments starting this summer, a move likely to sharply inflate housing costs for affected residents in a state that’s reeling from a series of destructive recent wildfires.

The Illinois-based insurance giant, which accounts for a fifth of the California home insurance market and is the largest property and auto insurer in the U.S., cited rising costs, increasing catastrophe risk, and outdated regulations in declaring it won’t renew California policies for 30,000 homes and 42,000 apartments.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health,” the company said in a March 20 statement. “State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

The announcement comes less than a year after State Farm announced it would not issue new policies in California citing similar concerns. And it comes as the state’s elected insurance commissioner embarks on a yearlong overhaul of home insurance regulations aimed at calming California’s imploding market by giving insurers more latitude to raise premiums while extracting commitments from them to extend coverage in fire-risk areas.

The California Department of Insurance said the move raises questions about State Farm’s financial health.

“One of our roles as the insurance regulator is to hold insurance companies accountable for their words and deeds,” said Deputy Insurance Commissioner Michael Soller. “State Farm General’s decision today raises serious questions about its financial situation – questions the company must answer to regulators … We need to be confident in State Farm’s strategy moving forward to live up to its obligations to its California customers.”

But it was unclear whether the department would launch an investigation into State Farm’s move.

Harvey Rosenfield, the Consumer Watchdog founder who authored the state’s insurance regulation system approved by voters in 1988’s Proposition 103, said the company’s announcement comes just after the state Department of Insurance approved a 20% premium increase for the company. That approval was based on State Farm’s existing number of policy holders, and the announced nonrenewals warrant a review, he said.

“The commissioner has the authority and the responsibility to open up an investigation,” Rosenfield said. “The rate we’ve just approved is excessive based on the fact you’re dumping 72,000 policyholders.”

State Farm said the pending coverage cancellations account for just over 2% of its California policies, but did not say where they are and what criteria the company used to mark them for non-renewal.

But Karl Susman, an independent broker and industry expert based in Los Angeles, said those who will be dropped are almost certainly properties in and around wildland areas considered at greater risk of wildfires, where standard coverage has become nearly impossible to get.

“You get rid of the worst risks,” Susman said.

Property owners who lose their coverage almost certainly will be left with no option but the California FAIR Plan, Susman said. The state-created private insurance pool provides minimal last-resort coverage that can cost much more than a standard policy.

Dependence on the FAIR plan has soared as many of California’s largest home insurers began limiting coverage in recent years after a series of destructive wildfires that followed a prolonged drought – 14 of the state’s 20 most destructive wildfires on record occurred in the last 10 years.

The number of FAIR Plan policies has more than doubled in five years, from 154,494 in September 2019 to 339,044 in December 2023. Total liability exposure topped $311 billion in 2023 compared to $112 billion in 2019.

State Farm said non-renewals would roll out starting July 3 for home, business and rental dwelling policies and Aug. 20 for commercial apartments.

Soller said those notified they will lose coverage should call the insurance department at 800-927-4357 or use its insurance.ca.gov website to get help finding new coverage. He said the department “is on track for enacting the state’s largest insurance reform in over 30 years by our December 2024 target date.”

“Changes to outdated regulations will improve choices for all Californians so everyone has options beyond the FAIR Plan,” Soller said.

But that might not come soon enough for State Farm’s cancelled customers.

Susman said the department should just put out all its proposed changes at once, rather than dribbling them out over the course of the year. Consumers are suffering now and it will take time for any regulatory changes to provide improved coverage options, he said.

Soller said “we are moving quickly to implement them while respecting the strong public review and transparency principles of California law.”

Rosenfield, who has defended the state’s regulatory framework and criticized the commissioner’s office as overly deferential to the industry, said “the insurance commissioner has given the industry everything it wants and they’re still not satisfied.”