Nation's Largest Insurer Refuses to Insure Homes In California Any Longer, Cites Three Reasons

California, the nation’s largest property and casualty insurance market, faced another blow to its economy as State Farm, America’s largest personal lines insurer, announced the immediate suspension of new home insurance policies in the state.

State Farm cited three key factors for this decision: “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

Reinsurance allows insurers to transfer some of their risk to other insurers.

While existing policies will remain in effect for now, there is concern that State Farm may choose to “non-renew” current policyholders if conditions worsen, similar to what AIG did last year.

This action left many high-end homeowners scrambling to find new coverage.

State Farm is stopping the sale of new home-insurance policies in California effective Saturday, because of wildfire risk and rapid inflation in construction costs https://t.co/paabFCiV1C

— Senator John Cornyn (@JohnCornyn) May 27, 2023

The timing of the announcement, just before a long holiday weekend, appears deliberate, aiming to minimize publicity.

In a statement, State Farm declared that it “will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023.

Will more companies leave California?

This decision does not impact personal auto insurance.” While not explicitly stated, it seems that renters insurance is also included in the halt.

Insurers have been grappling with the severe impact of inflation, prompting them to seek approval for rate hikes to compensate for rising claim costs. Just this month, San Antonio-based USAA experienced its first-ever annual loss in its century-long history, amounting to a setback of $1.3 billion.

In California, insurers face the additional challenge of high wildfire risks, leading many to reduce coverage in wildfire-prone regions or impose stricter criteria for insuring homes, such as specific fire-thwarting characteristics like building materials and clearance space around structures.

State Farm expressed its appreciation for the California government’s efforts to make the state more attractive for property insurers but implied that these efforts have fallen short thus far: “We take seriously our responsibility to manage risk. We recognize the Governor’s administration, legislators, and the California Department of Insurance (CDI) for their wildfire loss mitigation efforts. We pledge to work constructively with the CDI and policymakers to help build market capacity in California. However, it’s necessary to take these actions now to improve the company’s financial strength.”

The dire state of property insurance in California is leading to a crisis, with numerous distressing stories emerging.

Can’t get homeowners insurance any longer either. State farm dropped out this week as far as new applicants. I expect more insurance companies to follow. Congrats Gavin! You have wrecked what was once a great economic state. Stay in California. I have no idea how they tolerate U.

— Tom S (@TomSportsInc) May 27, 2023

For example, a homeowners association (HOA) in San Diego County comprising 187 townhouses previously paid $54,000 for property insurance. However, after the policy was not renewed, the HOA found a new carrier demanding a premium of $293,000, necessitating an emergency assessment from each owner.

California already faces a notorious high cost of living, ranking second only to Hawaii in the percentage of homeowners (29.7%) spending over 30% of their gross income on housing costs.

State Farm’s departure, as the largest home insurance provider, will only exacerbate this financial burden.

The repercussions of State Farm’s decision may extend to the insurance market, as homeowners who would have been insured by State Farm now need to seek quotes from companies that are increasingly reluctant to expand their exposure in the state.

In a worrisome cycle, some insurers might follow State Farm’s lead.

This development is likely to place more strain on California’s FAIR plan, a state-run program designed to offer coverage to those who cannot obtain protection from private insurers.

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