State Farm speeds California retreat: kills a line, non-renews 72,000
US retail P&C carrier State Farm will further trim its presence in California, fully withdrawing from commercial apartment policies and further non-renewing 30,000 policies in homeowners, moves that cut just over 2% of the group's policy count in troubled state, the carrier has said.
“We will evaluate the need for any additional business actions as market conditions change,” management added. A prior ban on new business including all business and personal lines property and casualty insurance, effective late May 2023, remains in effect.
State Farm will non-renew its full book of 42,000 policies in connection with the withdrawal of its commercial apartment offer beginning August 20. The 30,000 residential non-renewals will include homeowners, rental dwelling, and other property insurance policies such as for residential community associations and business owners in a move starting July 3.
State Farm cited its “responsibility to maintain adequate claims-paying capacity” in declaring that “it is necessary to take these actions now,” despite recent actions steps by regulators to shore up the state's insurance market, improve pricing options and address “vulnerabilities” in the state’s wildfire carrier of last resort, the FAIR Plan.
“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations,” management said of the move.
The State Farm unit dedicated to the California jurisdiction, State Farm General Insurance Company, suffered losses in four of its past five years with an average combined ratio over the period of 114%, including 138% in 2023 (122% for the accident year plus reserving), analysts at insurance sector research group Alirt noted. Those 2023 losses hacked 40% off of policyholder surplus and put solvency within arm's length of the regulatory threshold for intervention.
California regulators, fresh from crafting major concessions towards strapped carriers in the state, responded with a thinly veiled threat of inquiry.
“One of our roles as the insurance regulator is to hold insurance companies accountable for their words and deeds,” deputy insurance commissioner Michael Soller was quoted saying. “State Farm General’s decision today raises serious questions about its financial situation — questions the company must answer to regulators.”
Comments come only days after California's insurance authorities revealed draft regulations which would extend the allowable use of catastrophe models in insurance pricing to cover wildfire and flood. To-date price regulations require rates be set exclusively on historical loss averages for all perils except earthquake and resulting fire losses. Defence and cost containment expenses also sneak into the new equations.
California has laced its new proposals with admission that to-date regulations created market strain.
The to-date rules “have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures,” the commissioner's office admitted in its review of the proposal. The extension of cat modelling in insurance pricing is a centrepiece of the Commissioner Ricardo Lara's “Sustainable Insurance Strategy,” a response to sharp rate hikes and insurer pullbacks from the state.
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