On Friday, California’s insurance commissioner rejected an urgent request from State Farm General for a 22% increase in home insurance premiums in response to the Los Angeles wildfires, stating that the proposed hike was not justified.

Commissioner Ricardo Lara emphasized that the state’s leading home insurer didn’t adequately demonstrate the necessity for this increase or clarify how the additional premium funds would impact its previous decisions, which included halting new home policy sales in California and refusing to renew existing policies.

“My priority is to ensure that policyholders are not overcharged. Following the recent wildfires in Los Angeles, State Farm’s clients deserve clear explanations regarding the proposed rate increase and information on what accountability the company’s leadership is taking to stabilize its finances,” Lara noted in a letter addressed to State Farm, which has been made available on the insurance department’s website.

Earlier this month, State Farm sought emergency approval for not only the 22% hike but also for rate increases of 38% for rental properties and 15% for renters and condominium owners, aiming for these new rates to start on May 1. The company argued that these funds were essential for restoring its capital due to wildfire-related expenses while awaiting a decision on a pending rate increase request from the previous year.

A subsidiary of State Farm Mutual Automobile Insurance Company from Bloomington, Illinois, State Farm General reported receiving over 8,700 claims and disbursing more than $1 billion to its policyholders. According to S&P Capital IQ, total losses are expected to reach $6.5 billion, not including reinsurance payments.

“We have made significant efforts to thoroughly answer the questions raised by the Commissioner. Although we are prepared to manage all claims resulting from the recent wildfires, State Farm General must carefully evaluate its pathways within the California insurance landscape moving forward,” the insurer stated on Friday.

In March, State Farm announced it would not renew 72,000 homeowner, apartment, and other property policies in California, citing wildfire risks and other issues. This decision followed its previous announcement in May 2023 regarding the suspension of writing new homeowners and personal property insurance in the state, except for personal auto policies.

In June, the company requested a 30% increase in homeowners’ rates along with other pending adjustments, surprising state officials. At that time, Lara highlighted that this raised “serious questions about its financial status.”

State Farm continues to assert that the urgent rate increase is vital to rebuild its capital reserves to ensure it does not have to further limit its ability to offer home insurance in California. Analysts within the insurance sector have indicated that premium hikes were anticipated due to the wildfire crisis.

The company has reported a loss of $2.8 billion over the last nine years, inclusive of investment income gains, and noted that AM Best downgraded State Farm General’s financial rating last year. Conversely, the overall State Farm Group, under the parent company, received a strong financial rating from the agency in December.

In his correspondence, Lara requested that State Farm provide additional documentation justifying its rate request, more details about its reportedly declining financial condition, and an explanation as to why State Farm Mutual cannot extend financial support to its California branch.

Lara also proposed a meeting on February 26 with State Farm to discuss these issues, which would also include representatives from Consumer Watchdog, an advocacy organization based in Los Angeles that has been involved in the rate review process and urged Lara to deny the rate increase. The group’s reaction to Lara’s decision was mixed.

“We concur that the company needs to offer more transparency, but this should occur in a formal hearing process where we have the right to access information and examine State Farm’s financial records,” stated Jamie Court, president of Consumer Watchdog. “We believe it is inappropriate for him to approve an interim rate increase without a formal hearing.”

State Farm has indicated that it is ready to refund customers who pay the interim emergency rates if the department approves lower increases for the requested hikes from the previous year. The insurer had previously secured a 6.9% increase in homeowner rates in January 2023 and a 20% hike that took effect in March.

With approximately a 20% share of the homeowners insurance market in 2023, State Farm General covers about 1 million homeowners in California, along with 1.8 million other active policies.

The devastating wildfires that occurred on January 7 have significantly impacted a California insurance market that was already facing challenges from multiple large-scale wildfires over the past decade, although none as destructive as the recent L.A. fires, which are expected to incur costs for insurers of up to $45 billion.

On Friday, the insurance department announced a set of fire-related legislative proposals introduced by various lawmakers. This includes measures designed to offer tax-free grants to residents for enhancing fire resistance in homes, obligate insurers to process fire claims without requiring a detailed inventory, and impose a 15% cap on fees charged by public adjusters hired by policyholders to file claims.

Another proposal would empower the commissioner to impose moratoriums preventing insurers from non-renewing or canceling coverage for businesses and other policyholders after significant wildfires, extending a power already in use for homeowner policies, which Lara has enacted following the L.A. incidents.