State Farm cuts 72,000 California policies, citing wildfire risk
(Bloomberg) –State Farm General Insurance Co. will cut about 72,000 policies in California beginning in July, the latest move by the state’s biggest insurer to cope with growing risks from wildfires and other natural disasters.
The move comes just nine months after State Farm announced plans to stop issuing new coverage in the most populous US state. In the latest announcement on March 20, the company also cited reinsurance costs and constraints posed by decades-old insurance rules as reasons why it decided not to renew policies on 30,000 homes and 42,000 commercial apartments. The cuts account for about 2% of the insurer’s policies in the state.
State Farm said it reached its decision following an evaluation of the company’s commitment to uphold its claims-paying capabilities and adhere to financial solvency laws.
“This decision was not made lightly and only after careful analysis of State Farm General’s financial health,” the company said in a statement.
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Policy cancellations will take effect on July 3 for homeowners, renters, and businesses, with commercial apartment policies extended until Aug. 20.
The move is the latest blow to California’s home insurance market, which has been rattled by an exodus of big insurers choosing to pull back from the disaster-prone state, citing the threat of costly wildfires and soaring construction costs.
In the past year alone, seven of some of the state’s largest insurers, including Allstate and The Hartford, have either halted or curtailed new homeowner policies, leaving high-risk area residents with limited and costly coverage options.
As a result, a growing number of Californians have resorted to the FAIR plan, a state-mandated insurance safety net offering minimal coverage. The plan wrote a record 15,000 new policies in February, and it now covers about 370,000 homeowners, more than double the number five years ago.
California’s insurance rates have historically been capped due to Proposition 103, which requires insurers to get state approval before raising premiums, and limiting their ability to adjust rates based on projected risks.
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In an effort to address these concerns and attract insurers back to the state, Insurance Commissioner Ricardo Lara has proposed a series of reforms, including a proposal to allow climate-catastrophe projections to factor into policy pricing. Details are still under negotiation.
Carmen Balber, the executive director of Consumer Watchdog, said the State Farm pullout shows that regulators’ attempts to coax insurance giants back to California by boosting rates and offering other reforms are failing.
“The industry is not going to start covering Californians again without a mandate,” said Balber. “That is why we think the legislature needs to step in and require insurance companies to cover people.”
