State Farm plans to cancel tens of thousands of homeowners' insurance policies in California this year.

The cancellation plan will affect 30,000 homes and 42,000 apartments and starts to take effect in early July.

What You Need To Know

  • State Farm said this week it will not renew homeowners policies for 72,000 properties in California this year

  • The company insures 20% of all California homes

  • The non-renewals will affect 2% of State Farm policyholders in the state

  • State Farm said it made the decision after careful analysis of its financial health

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs and the limitations of working within decades-old regulations,” the company said in a statement on its website this week.

“State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

State Farm is the largest insurance company in California and the United States as a whole. One in five homes in the state is covered by State Farm. The Illinois-based insurer said the cancellations will affect about 2% of its policyholders in California. The company did not expressly state which properties are likely to experience non-renewals or how it will determine those that are let go, but it’s likely they will be properties located in high-risk areas prone to wildfire.

State Farm’s non-renewals will take effect on a rolling basis, starting July 3 for 30,000 homeowners, rental dwelling, residential community association and business owners policies. Another 42,000 policies for commercial apartments will not be renewed starting Aug. 20.

State Farm said it is working with the California regulators “to establish an environment in which insurance rates are better aligned with risk.” Last year, the company said it would not issue any new policies in California, citing construction costs that were outpacing inflation and “rapidly growing catastrophe exposure.”

About 1.2 million homes in California are at moderate or high risk for wildfire damage, according to CoreLogic, which estimates it would cost $760 billion to rebuild the state’s at-risk homes.

California is currently in the process of reforming the state’s insurance regulations and plans to enact them by December. The California Sustainable Insurance Strategy is designed to make insurance available and affordable, particularly in areas at high risk of fire.

Already, the state has proposed two reforms: improving the oversight and handling of insurance rate filings and allowing forward-looking catastrophe modeling to help predict climate catastrophes.

Later this year, it will propose further reforms that define distressed areas so insurance companies will write new policies in high-risk areas and to modernize the FAIR Plan — a state-operated insurance fund that homeowners turn to when they can’t find insurance anywhere else.

California’s FAIR Plan policies have increased from about 154,000 in September 2019 to about 339,000 in December 2023.

“California is experiencing what a lot of states are going through: the impact of climate change and growing insurance losses,” Deputy Insurance Commissioner Michael Soller told Spectrum News.

Current regulations in the state allow insurance companies to legally increase their rates but limit the policies they write.

“There’s no requirement that insurance companies write policies for everyone,” Soller said.

The result is that insurance companies, including Allstate and State Farm, were allowed to pause writing new policies in California last year. Many companies are also restricting the policies they write to lower-risk properties or issuing non-renewals, as State Farm announced Wednesday.

Over the past year, seven of the top 12 insurance groups writing policies in California have restricted their policy writing in some way, Soller said. Those seven companies represent 85% of the homeowners insurance market in the state.

“There are still a lot of companies writing coverage out there, but where there’s higher risk, that’s where it’s really getting tough to get insurance,” he said.

The Department of Insurance is hoping its reforms will help homeowners on the FAIR Plan transition back to commercial insurance, while helping the state-operated insurer build its financial reserves and prevent it from going bankrupt if an exceptional catastrophe takes place.