A State Farm logo is seen in front of a State Farm insurance office on February 03, 2025 in Larkspur, California. 

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State Farm is making its case this week for a major rate hike for California homeowners in a hearing that could prove crucial to the insurer’s future.

The state’s largest property insurer needs approval to raise its rates on customers, and it’s applied for an emergency rate increase. The company argues it needs the additional funds to boost capital and avert an increasingly dire financial situation following the devastating Los Angeles wildfires.

State Farm General, which is the California arm of the national parent company, is presenting its case for the rate increases in front of an administrative judge in Oakland after the state insurance commissioner, Ricardo Lara, gave the insurer provisional approval for its emergency request.

The three-day hearing is scheduled to wrap up Thursday.

The situation for State Farm is precarious. An attorney for the California Department of Insurance compared it to the Titanic, saying the iceberg is in sight but there’s still time to turn the proverbial ship around.

“If we don’t, 3 million Californians are going into the water and there are not enough lifeboats,” that attorney, Nikki McKennedy, warned.

The historic wildfires that ripped through Los Angeles in January caused an estimated $250 billion to $275 billion in total damages and broader economic slowdown, according to AccuWeather, making it the costliest natural disaster on record.

State Farm General has about 20% of California’s homeowners market with nearly 3 million policies. The insurer has so far paid out over $2.75 billion on approximately 12,390 claims filed as a result of the L.A. wildfires and estimates direct losses tied to the fires to be approximately $7.6 billion, although reinsurance will lower its losses to around $612 million.

In February, the insurer requested that insurance regulators approve rate hikes on homeowners of 22%. It has since lowered its request to a 17% increase. State Farm is petitioning for an increase of 38% on renter dwelling policies, which is coverage for landlords, and 15% raise for renters.

Attorneys for State Farm General said on Tuesday that it has also agreed to seek $400 million in funds from its parent company if the rate increases are approved.

In February, S&P Global placed State Farm’s California subsidiary and its AA credit rating on a “CreditWatch Negative,” citing 5 years of weak underwriting performance and deteriorating capital capital scenarios.

Even before the devastating L.A. wildfires, insurers were facing big losses in the state due to the uptick in frequency and size of natural disasters over the past decade. Insurance Commissioner Lara, who is elected, not appointed, has been loath to approve significant rate hikes for both homeowners and auto insurance.

Meanwhile carriers pay out more in claims and expenses in the state than they collect in premiums, according to the Insurance Information Institute. As a result, many insurers have limited new business or cut back on their policies in the state.

State Farm decided to stop writing new homeowners insurance policies in California in May 2023. The following year, it announced it wouldn’t renew 72,000 policies, including 30,000 property insurance policies for homeowners and 42,000 commercial apartment policies, citing financial instability and rising risk.

During the administrative hearing this week, economist David Appel called the California market unsustainable and said it’s deteriorated dramatically. He said the state’s insurer of last resort, the FAIR plan, which many homeowners fled to after they were dropped by their insurer, has grown astronomically with insufficient capacity.

The state has crafted a “Sustainable Insurance Strategy” that creates a framework to permit insurers to use catastrophe modeling and the cost of reinsurance when formulating their rates. It also is intended to streamline the process by which those rates are approved.

Janet Ruiz of the Insurance Information Institute said the implementation of that plan this year is crucial to correcting the systemic issues that caused an insurance crisis in the first place and is an essential step toward creating a more stable marketplace in California.

Appel testified that he believes the 17% emergency increase State Farm is requesting will result in financial stability for the insurer.

The California Department of Insurance supports State Farm’s rate increase request, but the advocacy group Consumer Watchdog is advocating against the rate increase.

“The company hasn’t made the case required under the law. Their proposal isn’t even consistent. First they wanted 22%. Now they want 17%,” William Pletcher, Consumer Watchdog’s lead attorney, said in a press release.

“We’re glad the amount went down, but it still needs to be justified, and State Farm has not,” he said.

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