State Farm: No New Home Policies Due to Climate Risks

May 26, 2023

Florida, Louisiana, Texas, California – Climate-driven Insurance squeeze spreading across America.
Insurance companies have been on the leading edge of climate concerns since the 70s. Fun fact: I called in, and got thru, to Rush Limbaugh back around 1998 or so, and told him about those concerns, and that the clash between Insurers and oil companies was going to get interesting.
I was unfortunately, too optimistic about the courage of Insurers and their Boards, but, inevitably, markets are forcing action.


Wall Street Journal:

State Farm is stopping the sale of new home-insurance policies in California effective Saturday, because of wildfire risk and rapid inflation in construction costs.

The move by one of California’s biggest insurers is a blow to the state’s efforts for years to maintain a vibrant market for homeowners in the wildfire-prone state. Nationally, inflation has been a serious problem for home and car insurers since last year, and many have posted underwriting losses as they continue to seek regulatory approvals for rate increases that they say they need for catching up with the surging costs.

State Farm is the nation’s biggest car and home insurer by premium volume. It said it “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” It posted the statement on its website and referred questions to trade groups.

The insurer’s move doesn’t affect existing home-insurance policyholders, whose policies will remain in effect, according to the statement and a representative of the state Department of Insurance.

The insurer said it would also quit accepting new applications for business policies, but it would continue selling new personal auto policies.

Worried about wildfire exposure and frustrated by state regulations, insurers in California have cut back on their homeowner businesses. Mostly, those cutbacks and restrictions apply in wildfire-prone areas of the state, or to individual properties that lack fire-resiliency features, such as fire-resistant building materials and techniques, and cleared-back brush.

In its statement, State Farm said it takes “seriously our responsibility to manage risk.” It said it was “necessary to take these actions now to improve the company’s financial strength. We will continue to evaluate our approach based on changing market conditions.”

Many home insurers operating in California don’t think they are being granted appropriate-enough rates “for the risks we are facing,” said Janet Ruiz, a representative for trade group Insurance Information Institute in California. Insurers generally have continued “to sell at least some new policies, but they are shrinking in areas where there is wildfire,” she said.

For 2022, State Farm’s auto-insurance companies reported record underwriting losses, totaling $13.4 billion, due primarily to rapidly increasing claims severity. Its homeowners’ business reported an underwriting gain. State Farm is a mutual company, meaning it is owned by its policyholders, and it has deep pockets. It ended 2022 with net worth of $131.2 billion.

Another big insurer, American International Group, last year notified thousands of high-net-worth clients in California that their home policies wouldn’t renew. The notices were part of a plan by AIG to cease selling home policies in California through a unit regulated by the state’s insurance department.

Instead, it said it would make insurance available to some of the policyholders via another AIG unit that operates in the so-called excess-and-surplus-lines market. This excess market has more freedom on policies’ rates and terms than do insurers in the broader, tightly overseen home-insurance market.

State Farm said it recognized various wildfire-loss-mitigation efforts by the governor, lawmakers and the state insurance regulators. Those efforts include community fire-prevention grants, building of fire breaks, and other measures to control the spread of wildfires, said Michael Soller, a deputy insurance commissioner.

In an interview, Soller said that the state is “really going after the root causes of the insurance issues, which is the wildfire risk” and is putting into effect an insurance-discount program that takes into consideration wildfire-mitigation investments by consumers.

He said the state still has “a large market here,” and the insurance department helps consumers navigate their options with tools to identify carriers selling policies in their areas.

“The factors driving State Farm’s decision are beyond our control, including climate change, reinsurance costs affecting the entire insurance industry, and global inflation,” Soller said in a statement following the interview.

State Farm said it would “work constructively” with insurance regulators and policy makers to “help build market capacity in California.”


One Response to “State Farm: No New Home Policies Due to Climate Risks”

  1. neilrieck Says:

    The USA backed the wrong side during the Egypt-Israeli war in 1973 so OPEC retaliated in 1974 by increasing the world price of crude oil from $3 to $12 per barrel. North American countries accepted this new realty whilst some northern European countries (like Denmark and Norway) focused on developing alternatives like wind power. Quadrupling the price signaled to large oil producers that they, too, can also act like OPEC (just keep raising prices and most westerners will take the financial abuse because they love their gas guzzlers). Meanwhile, OPEC countries continued to notice that there was no downside to raising prices so many middle-eastern countries nationalized their oil fields (Saudi Arabia did this in 1980). National western economies continued to do well so there appeared to be to be no downside (well, the world appeared to be warming but like the national debt, that is someone else’s problem). But today, consumers are seeing that insurance companies do not want to issue new residential insurance policies due to the additional risk. Perhaps the invisible hand of capitalism is going to (finally) cause consumers to realize that they have been pawns in a war for their minds as well as their pocket books.

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