US primary insurance giant State Farm is ceasing to underwrite commercial and residential property in the State of California, citing exposure-related issues and a challenging reinsurance market environment.
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The company said that its State Farm General Insurance Company, the largest homeowners insurer in California, will “cease accepting new applications, including all business and personal lines property and casualty insurance, effective May 27, 2023.”
But note that this does not affect personal auto coverage in California.
The company cited a range of issues that have affected its willingness to do business in the state.
First, State Farm said that there have been “historic increases in construction costs,” and interestingly, while many other insurers have cited inflation as a driver, here State Farm notes construction costs in California have been “outpacing inflation.”
In addition, State Farm said that “rapidly growing catastrophe exposure” is another driver for its choice to cease writing property insurance in California.
The insurer did acknowledge efforts to enhance “wildfire loss mitigation” by the Governor’s administration, legislators, and the California Department of Insurance (CDI).
But it seems these have not been enough, or effective enough, in the insurer’s view, and catastrophe exposure is outrunning any efforts to mitigate it in California.
Finally, State Farm cited the “challenging reinsurance market,” which has been making it difficult for insurers to secure sufficient reinsurance at an affordable cost in heavily wildfire-exposed areas.
The insurer said it will continue to work with officials and stakeholders to “help build market capacity in California.”
But she explained that “it’s necessary to take these actions now to improve the company’s financial strength.”
We saw some moves like this by insurers in California after the 2018 wildfires in the state. But since then, moves to reduce catastrophe exposure have been more evident in Florida and coastal wind-exposed regions.
State Farm’s move signals that all is not well in the California property insurance market, with reinsurance costs perhaps the straw that breaks the business model for some, making writing certain businesses untenable at this time.
Demonstrating what a big deal this insurer's pulling back is, State Farm has a near 21% market share in California homeowners multi-peril insurance, a 3% share of fire insurance, a 7% share of commercial multi-peril, as well as a 13% share of fire lines and home multi-peril, according to AM Best.
Meanwhile, S&P listed State Farm as the top homeowners insurer in California in terms of premiums written in 2022.
The California Department of Insurance provided an emailed statement to publisher AXIOS, with spokesperson Michael Seller, the deputy insurance commissioner, saying, “The factors driving State Farm’s decision are beyond our control, including climate change, reinsurance costs affecting the entire insurance industry, and global inflation.”
We’ve seen moves in Florida, another peak catastrophe peril-exposed state, by insurers lately to reduce their exposure on a go-forward basis, limiting coverage and stopping writing older structures.
But State Farm’s move to exit a region it was a market leader in is unusual, perhaps underscoring the significant challenges California’s homeowner insurance market may face over the next few years, especially while reinsurance capital remains so averse to expanding and taking on more risk there.
In California, there is the FAIR Plan Association, a syndication of insurers established to meet the needs of California homeowners unable to find insurance in the traditional marketplace, especially for fire coverage.
Designed as a temporary safety net as wildfires have devastated California in recent years and some insurers have pulled back from these markets, there’s now a strong chance the FAIR Plan will grow to pick up the slack from State Farm’s exit from the state.
It’s worth also remembering that Californians choice of insurer was reduced as Allstate paused underwriting new homeowners, apartment, and commercial property insurance in the state last year.