California Insurers Already Spreading The Cost Of Fire Claims On To Policyholders--Home Insurance Premiums Could Spike By 22%

Bad news is the last thing California's beleaguered homeowners need more of right now, but they could be about to get some anyway. Millions could soon be on the receiving end of a double-digit home insurance premium increase after State Farm Insurance requested permission to impose an average 22% rate increase for California homeowners.

In addition to being the largest single insurer in California, State Farm is one of a rapidly dwindling number of major insurers who will even write policies in the state at all. The recent fires in Pacific Palisades and Altadena have destroyed thousands of buildings and caused damage that many estimate will total hundreds of billions of dollars by the time all the claims are paid.

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That cost of paying California fire claims and what will surely be a mountain of legal bills from claim-related lawsuits has left State Farm in a position where they were forced to ask the state's Insurance Commission to approve its proposed rate hikes. The proposed increase would also include a 15% rate hike for condo owners and a 38% increase in renter's premiums.

State Farm justified the size of the proposed increase by saying it was necessary to avoid a "dire situation." The request, which was signed by State Farm's executives, said, “We are requesting that you take emergency action to help protect California’s fragile insurance market by immediately approving interim rate increases on these filings.”  It also comes on the heels of State Farm's 2023 decision to stop writing new policies in California.

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Newsweek reported that State Farm's cash reserve for policy claims was $1 billion in early 2024, but that the cost of covering claims from the Palisades and Eaton (Altadena) fires had exhausted those reserves by February. The company said it lost $880 million covering claims in 2023 due to natural disasters like fires, floods, and mudslides continually hitting the state with increasing frequency and power.

The frequency and power of those natural disasters are just one part of the crisis. California's place in America's collective imagination and the state's booming economy are also driving the crisis. The state's two largest population centers, the Los Angeles and San Francisco metropolitan areas, are home to America's entertainment and tech industries.

The earning potential both industries offer for top-tier employees is almost unmatched, and they both draw millions of people to the state. Historically, that's been a good thing, but an unintended side-effect is that real estate values up and down the state have skyrocketed in the last several decades. As recently as the mid- to late-1980s, $1 million brought you a single-family home that resembled a mansion in much of California.

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Today, it gets you a starter home in the Los Angeles or San Francisco metropolitan areas. That's great for long-time homeowners, but a potential nightmare for insurers because it makes even an "everyday" insurance policy a potential million-dollar risk. The per-policy exposure on multimillion dollar California estates in wealthy areas like Pacific Palisades can easily be 10 to 15 times higher. State Farm says it covers 2.8 million homes in California.

The price of covering disasters that wipe out thousands of homes worth millions of dollars is high enough to leave even the biggest insurers facing bankruptcy. This explains State Farm's proposed rate increases and why so many other big insurers have decided it's not worth the cost of doing business in Southern California anymore.In other words, California homeowners should brace themselves for a lot more bad news.

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