Heavy lies the crown: Why California's largest home insurer hit pause
State Farm is expected to maintain its leading market share in California even without writing new business, according to Fitch Ratings.
“This is temporary,” is the message from the California Department of Insurance (CDI) as it attempted to assuage policyholder fears following news that State Farm, the largest home insurer in California (and the U.S.), would stop accepting new home insurance applications in the state.
State Farm, which has 20% of the California home insurance market, reported its decision to stop seeking new business in California was driven by growing construction costs, increasing catastrophe exposure and a difficult reinsurance market.
“As observers that aren’t in the state, you kind of wonder how they do it,” says Bill Martin, president and CEO of Plymouth Rock Home Assurance. “We know that the cost of reinsurance is higher and the wildfire costs have been ruinous.”
In a consumer alert, CDI reinforced that State Farm’s decision only affects potential new customers, as the insurer is not taking non-renewal actions at this time. The company also continues to write personal auto policies in California. State Farm was the largest writer of personal auto policies in the U.S., according to 2022 market share data from the National Association of Insurance Commissioners.
Martin explains that insurance carriers address these challenging market conditions by either buying a lot of reinsurance, which has grown in cost, or reserving capital for that specific area or risk.
“State Farm, because of their size, is probably more in the latter,” Martin says. As such, the question becomes “Is the surplus assigned to the state growing faster than market share in the region?”
“I’m sure they (State Farm) realized that they aren’t. Their home insurance customers don’t leave them very often, so the renewal book they have is one of the biggest under any regulator in any state in one company,” Martin says. “So, they’ll do just fine to serve their current customers, and it is probably smart for them to say, ‘let’s not take on any new customer until we have more certainty.’”
To this end, Martin says State Farm is likely looking for rates in California to stabilize, instead of always having to play catch up.
State Farm is expected to maintain its leading market share even without writing new business, according to Fitch Ratings. The company writes around $2.6 billion in direct premiums in California. Its closest competitor in the state, Farmers Insurance, has a 14.5% market share and has around $1.8 billion in direct written premiums.
Tough regulatory environment
Also adding to market challenges are state regulatory pressures, such as rate moratoriums following wildfires, that have attempted to rein in growing premiums, but have left rate adequacy on rocky footing. According to Robb Lanham, chief sales officer for HUB Private Client, current market conditions should be leading insurance regulators to reassess the situation.
“This is a chance for the insurance regulator to step back and say ‘if the largest insurance company in the U.S. can’t make it work with its spread of risk, no one can,’” Lanham tells PropertyCasualty360.com.
He says the real issue in California is the inability to raise rates to an adequate level due to insurance regulations.
“They (insurers) know they are paying more in claims than they are collecting in premiums, therefore, they should collect more premium. In the state of California, they can’t. So their hands are being forced by the government,” Lanham says. “The role of an insurance commissioner is to protect consumers from overpaying for insurance, but there is also a caveat that says they also have to make certain that insurance companies can collect enough premium for them to stay in the state.”
While State Farm’s pullback in California is big news, Lanham says the issue is much bigger than the Golden State.
“This is happening not just in California, it gets a lot of the press, but it is moving east. It is Colorado, it is Oregon, it is Montana, it is Wyoming,” Lanham says.
Policyholders will also have a role in helping stabilize the market by being proactive in reducing the threats their properties face.
He says brokers today are having to “dress clients up” and sell carriers on why a home is a risk worth taking on. This rings double for the high-net-worth individuals and their pricey abodes that HUB Private Client serves.
This dressing up can include wildfire mitigation steps, such as clearing brush and installing ember-proof attic vents, as well as leaning on technology that can help limit the damage during a loss, such as water detection systems.
“This is now in consumers’ hands. If they want to pay less, they are going to have to spend more of their own money to make themselves more attractive,” Lanham says.
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