Insurance Commissioner Lara To Question State Farm on 22% Rate Increase Justification

In a statement Friday, Insurance Commissioner Ricardo Lara announced that he will be meeting with State Farm Insurance later this month over their proposed 22% emergency rate hike on rental homes, non-rental homes, rental units, and condos, asking them to justify the raise.

Faced with staggering payouts totaling into the billions coming from the Eaton Fire and Palisades Fire last month, State Farm announced earlier this month that they are asking the Department of Insurance to approve an emergency rate hike for all home owners and renters. According to the company, they are asking for an increase of 22% for non-tenant homeowners, 15% for renters and condominium owners, and up to 38% for rental dwellings. Doing so would help avert “a dire situation” in the state. In addition, the company said that over 8,700 fire claims have been filed so far, with over $1 billion paid out by February 1st. They also said the fires will likely go down as the costliest disaster in company history.

“The costs of the January 2025 wildfires will further deplete capital from State Farm General,” State Farm said on February 4th. “Capital is necessary so an insurance company can pay for any future claims for the risks it insures. Last year, one rating agency downgraded State Farm General’s financial strength rating due to its capital position. With further capital deterioration as a result of the wildfires, additional downgrades could follow. If that were to happen, customers with a mortgage might not be able to use State Farm General insurance on the collateral backing for their mortgage.

“State Farm General asked the California Department of Insurance today to immediately approve interim rate increases to help avert a dire situation for the more than 2.8 million policies issued by State Farm General, including 1 million State Farm General homeowners customers, and the insurance market in the state of California. State Farm General has had an outstanding filed rate increase pending since June 2024. Pending CDI approval, rate changes will be effective upon renewal on or after May 1, 2025.

“Insurance will cost more for customers in California going forward because the risk is greater in California. Immediate emergency interim approval of additional rate is essential to more closely align cost and risk and enable State Farm General to rebuild capital. We must appropriately match price to risk. That is foundational to how insurance works. Higher risks should pay more for insurance than lower risks. Over the last 9 years, the lack of alignment between price and risk means that for every $1.00 collected in premium, State Farm General has spent $1.26, resulting in over $5 billion in cumulative underwriting losses.”

However, many have questioned if State Farm’s rate hike is warranted. Many insurance holders have pointed out that rates from the company have gone up several times in the past few years already, with the company also halting all new homeowner policies in the state. With policyholders not seeing the justification in the rate increase, Commissioner Lara announced that he would be questioning the company on February 26th over the proposed raise, with approval or non-approval coming afterwards.

Rate hike questions

“Under the strict review laid out by Proposition 103, the burden is on State Farm to show why this is needed now. State Farm has not met its burden,” said Lara. “State Farm currently has three rate applications filed with the Department since June 27,2024, seeking increases in the four lines of business noted in the present request for an emergency rate increase, as follows: 30% for Non-Tenant homeowners, 41.8% for Tenants (Renters/Condominium Unitowners) and 38% for Rental Dwelling. These applications included a variance rarely utilized unless an insurer’s solvency is at issue, and Consumer Watchdog has filed a  petition to intervene in these applications. These applications raise serious questions about State Farm’s financial condition, and are still pending before the Department.

“Now, State Farm has requested an emergency interim rate approval. When insurers request a rate change, only the Commissioner has the authority to approve it. However, the Commissioner may receive recommendations from the Department and from public participants such as intervenors, regarding the rate application. Therefore, on February 5, 2025, Watchdog submitted a preliminary response to State Farm’s letter disapproving of State Farm’s request for an emergency interim rate. On February 7, 2025, the Department submitted to the Commissioner a stipulation and proposed order to provide State Farm with interim rates subject to refunds with interest pending a final decision of the legality of the rate in a rate hearing. Watchdog then submitted a second letter on February 7, 2025, seeking a full rate hearing regarding State Farm’s pending applications in lieu of approving an interim rate.”

In addition, Lara added several questions that he would be asking State Farm, including:

• State Farm’s financial stability: Why has the company’s financial position deteriorated despite previous rate increases, and what other steps—beyond raising rates—has the company taken to restore stability?
• Justification for the emergency rate increase: What has changed since State Farm’s last rate filings that now requires urgent relief?
• Consumer impact: How would granting this request affect policyholders, especially those who have already faced premium increases and non-renewals?
• Transparency in decision-making: Has State Farm provided adequate documentation to justify its claims, and is it considering financial support from its parent company?

In response, Consumer Watchdog praised Lara for calling the meeting.

“The Commissioner is right to call for more scrutiny of State Farm, which has so far stonewalled information requests,” said the group in a statement on Friday. “However, the outstanding issues need to be raised and answered in a formal hearing, which Consumer Watchdog has called for, where there is formal discovery and due process rights.”

Others noted that this will likely result in a compromise rate, as State Farm has nearly two weeks to prepare their case and show why the rates are needed.

“Lara doesn’t want to anger insurance holders in the state anymore than they already have been by this,” explained Trevor Connery, a lobbyist who has worked for insurance companies in the past, to the Globe on Friday. “But, he also doesn’t want to completely stonewall State Farm either, as they could send out more non-renewals of policies in California.

“State Farm has some time on this to help sell it. And it shouldn’t be too hard. They’ve paid out a lot of policies so far and it will be fairly easy for them to show the high amounts they have paid out. Expect at the very least a compromise.”