California insurance crisis: Why are insurance companies leaving California

Is State Farm leaving California?

State Farm has announced significant changes to its insurance policy offerings in California. The entity, State Farm General Insurance Company, providing homeowners insurance in California, ceased accepting new applications for all business and personal lines of property and casualty insurance.

State Farm's actions reflect broader trends in the insurance industry in California, where other insurers are also withdrawing or reducing their presence due to wildfire risks and other financial pressures.

Why is State Farm leaving California?

Rex Frazier, president of the Personal Insurance Federation of California, says State Farm leaving California is due to several factors impacting other companies as well.

He notes that inflation is driving up the price of building materials and home reconstruction, increasing insurers' costs.

However, insurance companies in California have difficulty passing on these higher costs to customers. Insurers operating in the state are subject to price controls and must file an application seeking approval to raise rates.

"In times of rapid inflation like today, it is difficult to operate a business when underlying costs are rising significantly," Frazier says. "But it takes six months or more to raise rates through the state approval process."

In addition, as other insurers have declined to renew customers' policies in wildfire-exposed California areas, State Farm has absorbed many of these customers, Frazier says. That has raised State Farm’s reinsurance costs.

"California is the only state in the country that does not allow insurers’ rates to be based upon their actual reinsurance costs," he says.

In September of 2023, California lawmakers moved to make changes that would allow insurers to consider the impact of climate change when calculating rates.

Why are insurance companies leaving California?

There are a couple of reasons why some insurance companies are pulling out of California, particularly for property insurance:

Increased risk of wildfires: California has been hit hard by wildfires in recent years, and these events are becoming more frequent and severe due to climate change.
Rising construction costs: The cost of rebuilding homes after a wildfire or other disasters has also been rising. It means that even if an insurance company pays out a claim, it may not be enough to cover the full cost of repairs or replacement.
Reinsurance challenges: Reinsurance is a type of insurance that insurance carriers buy to protect themselves from large losses. The reinsurance market has become more expensive in recent years, making it harder for insurance companies to cover the risks associated with California properties.

What insurance companies are writing homeowners policies in California?

Gabriel Sanchez, press secretary for the California Department of Insurance, says State Farm's announcement is not the first of its kind in the state.

“The Department of Insurance has seen companies pause and then re-start writing policies as conditions change,” he says.

He adds that the factors behind State Farm’s decision to stop writing new policies “are beyond our control,” including worldwide inflation, climate change and reinsurance costs impacting the entire insurance industry.

"While insurance companies prioritize their short-term financial goals, the long-term goal of the Department of Insurance is protecting consumers," Gabriel says.

Although seeing a handful of insurers pull back probably has some California homeowners concerned, State Farm's California insurance departure doesn't leave them without options. There are still plenty of options for those looking for home insurance coverage in the state, including:

Travelers
USAA
Auto Club Enterprises (AAA)
Nationwide
State Farm
CSAA Insurance (AAA)
Mercury Insurance

Gabriel says more than 115 insurance companies currently offer California homeowners insurance.

In addition, he notes that this doesn't mean State Farm is canceling homeowners insurance policies already in force. Existing State Farm California property insurance policies will not change.

"It’s important to note that current customers will not lose their insurance," Gabriel says. "There are no non-renewals taking place with State Farm’s announcement."

Homeowners who live in areas at high risk -- such as places that have traditionally been in the path of wildfires – and who have struggled to secure homeowners insurance coverage can purchase a policy through the California Fair Plan.

However, this coverage is typically more expensive than what homeowners will find in the traditional home insurance market.

Which insurance companies are leaving California?

It's important to note that not all companies mentioned here have entirely left California. Some simply aren't writing any new policies, something that could change. However, so far, we know that these six companies have pulled back in some form from California home insurance:

State Farm
Allstate
AIG
Chubb
Falls Lake Insurance
AmGUARD

How to find the best homeowners insurance policy in California

California can be expensive, but homeowners insurance rates are the second most affordable in the country, according to a recent Insurance.com survey of rates.

In 2022, it cost an average of $1,380 a year -- or $115 a month -- to insure a home in California. That is much lower than the national average annual rate of $2,777.

Whether shopping for homeowners insurance in California or elsewhere, you can do plenty of things to save even more.

Understand your coverage needs before you shop; cutting coverage is not a good way to save.
Compare quotes from several providers before you buy.
Look for companies with strong customer service reputations and solid finances. Using sources such as J.D. Power and AM Best can help you understand which companies are leaders in the industry.

Another great resource is Insurance.com's rankings of the best homeowners insurance companies.

Sources

Newsroom State Farm. "State Farm General Insurance Company" Accessed June 2023

Home insurance FAQs

Is Farmers insurance leaving California?

Farmers hasn't entirely exited the California market. They are still offering policies, but they may be restructuring their offerings, particularly in high-risk areas, or limiting the number of new policies they take on.

Is State Farm leaving California auto insurance?

State Farm is reducing its presence in California's insurance market, but this primarily affects business and personal lines, such as property and casualty insurance, not auto insurance directly. You don’t have to worry because State Farm leaving California will not affect your auto insurance policy.