California Approves State Farm’s 22% Insurance Rate Hike with Conditions
By Matthew Sellers
March 17, 2025
California regulators have given preliminary approval for State Farm Mutual Automobile Insurance Co. to raise home insurance premiums by an average of 22%. This significant decision impacts nearly one million homeowners in the state but includes strict conditions regarding policy cancellations and a requirement for further justification via a public hearing scheduled for April.
Background on the Decision
The approval, announced by California Insurance Commissioner Ricardo Lara, comes amid a troubling insurance crisis in the state, largely linked to the increasing severity of wildfires. Major insurers, including State Farm, have been scaling back coverage options or exiting the market altogether due to heightened risks. This year alone, State Farm has incurred over $2 billion in claims following a series of devastating fires in Los Angeles County, prompting the company to request the emergency rate increase. Without the extra revenue, State Farm has warned it may face financial instability that could lead to its withdrawal from California.
In a statement, Lara acknowledged the difficulties facing the state’s insurance market but stressed that any rate increase must be substantiated in a transparent public hearing. "I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely onto their customers," Lara remarked.
Key Conditions of the Rate Hike
State Farm will be required to meet several conditions before the interim rate increase can take effect on June 1:
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Pause on Policy Cancellations: The company must suspend cancellations and non-renewals of existing policies at least until the end of 2025. 2. Capital Infusion: State Farm Mutual, the insurer’s parent company, is obligated to provide a $500 million capital injection to its California subsidiary to help stabilize its finances.
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Public Rate Hearing: At the April 8 hearing, State Farm will need to present extensive financial data to justify the necessity of the proposed hike.
Consumer advocacy groups, including Consumer Watchdog, have expressed concerns regarding State Farm’s request. They argue that the insurer’s parent company possesses sufficient reserves and should not depend on increasing rates for its California customers. "It’s a victory for consumers that State Farm will have to make its case in a public hearing before an administrative law judge," stated Carmen Balber, the executive director of Consumer Watchdog.
A Troubled Insurance Market
California’s home insurance market has been under significant strain in recent years. Insurers such as State Farm, Allstate, and Farmers have reduced or eliminated new policy offerings primarily due to the escalating risks associated with wildfires and constraints on premium increases imposed by state regulations.
State Farm stopped issuing new homeowner policies in California last year and initiated a plan to drop coverage for approximately 72,000 homes and apartments. The company attributed this drastic step to soaring claim costs, heightened wildfire risks, and increasing reinsurance expenses. Additionally, California’s Department of Insurance has been working on measures to stabilize the market, including rules that allow insurers to factor in future climate risks when establishing rates.
The Impacts of Wildfire Claims
The financial difficulties facing State Farm extend beyond recent claims. The company has reported over $5 billion in underwriting losses since 2016, leading to a depletion of its surplus reserves and raising concerns from credit rating agencies regarding its long-term viability.
Following catastrophic wildfires in January 2025, which caused more than 16,000 buildings to be destroyed and incurred estimated insured losses of $45 billion, State Farm anticipates liability for about $7.6 billion of those claims. The company is also subject to a $1 billion assessment imposed by California’s FAIR Plan, the state’s last-resort fire insurance option.
Looking Ahead
If State Farm successfully substantiates its case at the April 8 hearing, the new rates are set to take effect on June 1. Homeowners may face an average increase of 22% in their premiums, while rental property owners could experience hikes of up to 38%. Conversely, if the administrative law judge determines that the increase is not justified, State Farm may be required to limit its rate hikes or reimburse any excess charges incurred by customers.
Furthermore, the California Department of Insurance is still evaluating State Farm’s previous request for a 30% rate increase submitted last year; a decision on that matter remains pending. For the time being, California’s insurance market continues to navigate a fragile landscape as all stakeholders—policymakers, insurers, and consumer advocates—work towards reconciling affordable coverage options with the financial realities posed by climate-related risks.
