- State Farm wants to hike insurance premiums in California to help pay for LA wildfire damage.
- Insurance affordability has deteriorated with intensifying disasters and home-repair inflation.
- This hurts housing affordability and long-term property values.
The aftermath of the Los Angeles wildfires could exacerbate a mounting challenge for California homeowners: ever-higher insurance costs.
California's largest home insurance provider, State Farm, has asked state regulators for emergency permission to raise homeowners' rates by an average of 22%, starting May 1, to avert a "dire situation" for the company's finances following the fires, according to a Monday letter to the state's insurance commissioner. The company also asked to raise premiums for renters and condo owners by 15% and by 38% for landlords.
State Farm said it had fielded more than 8,700 claims related to the LA wildfires and paid out about $1 billion as of Saturday but expected to spend far more. The fires destroyed some of the priciest real estate in the city, including in the Pacific Palisades, and homes in Malibu. They're set to be the costliest in US history. The company said wildfire payouts were placing "very significant pressure" on its ability to pay claims.
Some analysts estimate the damage could total between $250 billion and $275 billion. But the full cost, which will be split among local and federal governments, insurers, and residents, won't be clear for years.
State Farm said its finances were already strained from previous years' losses, which had led one rating agency to downgrade it.
"Insurance will cost more for customers in California going forward because the risk is greater in California," the company said in the letter, adding that an emergency rate hike is "essential to more closely align costs and risk" and allow the company to rebuild capital.
A spokesperson for State Farm pointed Business Insider to its letter when asked for comment.
Intensifying home insurance market instability
California has long faced home insurance issues spurred by surging costs from more frequent and intense disasters coupled with rising home-repair costs and inflation. Since 2022, major insurance companies — including State Farm, Allstate, and Farmers Insurance — have either stopped writing new policies in the state, pulled back coverage, or, in some cases, dropped tens of thousands of property owners.
State Farm in May 2023 stopped writing new homeowner policies in California. The following March, the company dropped about 29,000 homeowners in the state — including nearly 70% of policies in the Pacific Palisades, where January's blazes caused some of the worst losses. That nonrenewal process is ongoing but was recently paused in Los Angeles County because of the wildfires. As of Saturday, State Farm said, it had more than 1 million homeowner policies in California.
State Farm said its finances had taken a hit over the nine-year period ending in 2024. During that period, the company paid out $1.26 in claims and expenses for every $1 collected in premiums, it said, adding that its after-tax net losses totaled $2.8 billion. State Farm said its financial position would be further weakened by the LA wildfires.
State regulators in August approved Allstate's request to hike home insurance premiums by an average of 34%. State Farm said it filed for a 30% rate increase for homeowner policies last June, which is still pending. That would be on top of rate increases State Farm got approved in 2023, including a 6.9% bump in January and a 20% bump that took effect in March.
Ripple effects on housing across the country
The rising cost of insurance and the growing cancellations of private insurance policies are compounding housing affordability issues across the country.
A Senate Budget Committee investigation found that private insurers' nonrenewals spiked threefold in more than 200 counties between 2018 and 2023. Homeowners who are denied private insurance can often opt for their state's insurer of last resort, though these policies tend to offer more restricted coverage and higher premiums.
Rising insurance costs hurt homeowners and prospective homebuyers alike, as well as renters who face increased costs passed along by their landlords. Some retired homeowners and others on fixed incomes are already struggling to deal with rising premiums, which, combined with rising property taxes, add up to more than the mortgage payments for a growing number of homeowners.
Rising insurance costs are also expected to hurt property values in the longer term. A recent study from the research firm First Street found that a combination of rising home insurance premiums and falling demand, particularly in areas hit hardest by the climate crisis, would erase almost $1.5 trillion in US real estate values by 2055. It also found that 40% of property-value losses would occur in communities it called "climate abandonment areas," which are the most at risk of out-migration and insurance premium spikes.
This trend is particularly alarming given that Americans are increasingly moving into parts of the country most vulnerable to extreme weather. In 2023, tens of thousands more people moved into the most flood- and fire-prone areas of the US rather than out of them, the real estate company Redfin reported.
Have you been impacted by rising insurance premiums or lost your coverage? Reach out to these reporters at erelman@businessinsider.com and cboudreau@businessinsider.com.