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 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.

Unless home insurance companies can find ways to balance costs, they will stop offering coverage.

"California is the only state in the country that does not allow insurers’ rates to be based upon their actual reinsurance costs," Rex Frazier, president of the Personal Insurance Federation of California says.

California lawmakers have moved to make changes that would allow insurers to consider the impact of climate change when calculating rates. Raising rates is the main method by which insurers make up for increased losses, and many insurers have applied for, and been granted, rate increases in California. While that makes it less likely insurance companies will leave the state, it means homeowners are facing huge rate increases.

Why is State Farm leaving California?

Frazier notes that inflation is driving up the price of building materials and home reconstruction, increasing State Farm's costs.

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.

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."

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
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."

However, some homeowners have received nonrenewal notices as companies decide they no longer want to assume the risk.

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 have this list of insurance companies leaving California:

State Farm
Allstate
AIG
Chubb
Falls Lake Insurance
AmGUARD
Tokio Marine America Insurance Co.
Trans Pacific Insurance Co.

How to find homeowners insurance in California

As homeowners insurance rates in California rise and insurance becomes more difficult to find, homeowners need help getting the coverage they need. Here are some steps to follow to make sure your home is covered.

Follow up on a nonrenewal or cancellation. If you get a notice that your homeowners insurance is being nonrenewed or canceled, contact your home insurance company immediately. Ask for an explanation and if there is anything you can do to reverse the decision.
Take steps towards fire mitigation. Home insurance companies prefer to insure homes where the risk of damage is lower, so taking steps to fireproof your home can make it easier to keep your current coverage or find a new policy. You can even earn a discount for wildfire mitigation.
Work with a local agent. A home insurance agent who lives and works in your area will know which companies are more likely to provide a policy.
Ask your neighbors. Find out which insurance companies are insuring other homes in your neighborhood and contact those companies for quotes.
Consider the California FAIR plan. If you can't get insurance any other way, the state insurer of last resort may be your only option.

Legislators are working to keep home insurance options available for California residents, but it is likely to mean rate increases. As you look for coverage, make sure to ask about any discounts you may qualify for that can mitigate the costs.

Sources

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

Home insurance FAQs

Can you get home insurance in California?

Yes, you can get home insurance in California, but in wildfire-prone areas it may be more expensive or difficult to find.

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.