State Farm has requested that California allow a significant average insurance premium increase of 22%, citing a “potentially dire situation.”

Following the wildfires that swept through the Los Angeles area in January, the insurer reported having already disbursed over $1 billion to policyholders, with over 8,700 claims filed. The company claims that insurance premiums have remained artificially low for years, leading to a deficit in the necessary funds to cover such payouts.

“Insurance costs will rise for California customers going forward due to increased risk,” the company stated in a press release. “Higher risks must bear greater insurance costs compared to lower risks. Over the past nine years, the discrepancy between pricing and actual risk has meant that for every $1.00 in premiums collected, State Farm General has incurred costs of $1.26, totaling over $5 billion in underwriting losses.”

However, some consumer advocates challenge this rationale.

According to Doug Heller, director of insurance for the nonprofit Consumer Federation of America, which leans left, State Farm has been quite profitable in California in recent years. “They have accumulated significant reserves to manage crises. While they can pursue rate increases if they believe they’re necessary in the future, it feels more like an attempt to intimidate the state into granting them more cash while we are still recovering from disasters,” he stated to YSL News.

Data from industry trade publications indicate that State Farm’s losses in California, its second-largest market by premium volume as of 2023, were lower than average in the industry, Heller pointed out. Furthermore, the company boasts a stable surplus — what’s left after claims and operational costs — amounting to over 10% of the total surplus in the property and casualty insurance sector.

State Farm did not offer comment on YSL News’s inquiries and only referred to a pre-released statement. Last autumn, the LA Times revealed allegations that the company was trying to enhance its parent company’s profits while claiming financial difficulties and requesting a 30% rate hike for California policies.

In June of the previous year, State Farm made three requests for special “relief” from California’s regular rate-setting processes through a legal mechanism known as a “variance,” commonly used by insurers facing solvency threats. These requests included a 30% premium increase for homeowners’ insurance, as reported by industry sources.

“The filings from State Farm General raise significant concerns regarding its financial stability,” said Gabriel Sanchez, press secretary for California’s Department of Insurance, in an email to YSL News.

“To safeguard millions of consumers in California and maintain the integrity of our residential property insurance market, the Department will act swiftly and transparently to determine an appropriate response for Commissioner Lara.”

Although the most significant wildfires impacting Los Angeles have been contained, evaluating the complete financial toll will take time. As of now, the California Department of Insurance reports that over $4 billion in claims have been settled.

Homeowners are increasingly experiencing the impact of growing climate risks reflected in their insurance rates. On Monday, data analytics firm First Street published a report predicting a potential loss of more than a trillion dollars in real estate value due to escalating insurance costs and natural disasters.

Heller emphasized that insurance is fundamentally about forecasting future risks. “You don’t cover past disasters with upcoming premiums. (The company has) already received premiums for this,” he stated. If State Farm deems a rate increase necessary, Heller suggested it should pursue the request through standard channels, allowing for scrutiny by regulators and the public.