By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/state-farm-home-insurance-19753446.php
State Farm General (opens in new tab), California’s largest home insurer, says it does not plan to lower executives’ pay or seek relief from its parent company even as it faces potential insolvency. (opens in new tab)
The revelations come from information the insurance giant — which covers a fifth of the California homeowners market — submitted to the California Department of Insurance to support its bid to increase prices across the state (opens in new tab) by 30% for homeowners, 36% for condominium owners and 52% for rental homes.
State Farm, which had raised average homeowner rates by 20% statewide in March (opens in new tab), argues that another hike is necessary to keep the company from running out of money — a stunning acknowledgement even amid California’s explosive insurance crisis.
Under normal proceedings, State Farm General, the insurer’s California-only subsidiary,would actually have been due to cut its home insurance rates by 9%, the company wrote in filings. But as it seeks to regain financial footing, it’s asking to use a rarely utilized part of California’s insurance code to raise rates significantly now as long as it reduces rates in the future to compensate consumers for the excess charges.
Even so, State Farm also hinted that it could, in theory, justify higher rates in coming years as the Department of Insurance pursues reforms on how insurance companies are able to price wildfire risk (opens in new tab). State Farm noted in a filing this past week that its “initial testing” of the reforms found they would warrant a “higher maximum” rate.
As State Farm navigates its shaky financial situation, the state’s insurance code requires the company to prove it has a plan to regain stability. The plan the company has proposed does not include suspending executive bonuses or reducing agent commissions, according to filings.
In 2022, the top-paid executive across all State Farm entities made about $2.5 million with bonuses of just under $22 million, the company disclosed. The next three top-paid executives each made about $1 million with bonuses totaling between $7 million and $8 million each.
A State Farm spokesperson told the Chronicle that the company “maintains a competitive, market-based compensation structure.”
State Farm General also isn’t planning to turn to its deep-pocketed national parent for help. In filings, it stated that the solvency of each State Farm affiliate is managed separately and that funds are “not freely transferable” among them.
Instead, the company wrote that it plans to cut costs through “the execution of technology modernization and continued optimization of its operating model.” It did not specify what type of technology or optimizations it would pursue.
“State Farm General is dedicated to and focused on streamlining processes and uncovering cost reduction opportunities to create value for its customers,” the company stated.
Over the past decade, State Farm General’s surplus — its assets minus its liabilities — has plummeted, going from just over $4 billion in 2016 to about $1.3 billion in 2023. In its filings, the company wrote that a sharp decline from 2022 to 2023 was mostly due to unexpectedly high liability claims and losses from catastrophes other than wildfires.
State Farm General is working with regulators in Illinois, where both the subsidiary and its national parent company are headquartered, on measures to restore its financial stability in the wake of its March announcement that it would not renew approximately 72,000 residential and apartment landlord policies across the state (opens in new tab).
The California Department of Insurance is still gathering information for its review of State Farm’s rate hike request and its financial plan, according to Deputy Insurance Commissioner Michael Soller. The type of rate increase requested by State Farm, with its backdrop of potential insolvency, is rare, Soller noted; the last one to be filed was withdrawn before it ever went through.
Harvey Rosenfield, founder of the consumer advocacy group Consumer Watchdog, said the nature of the 30% across-the-board rate increase request in California is “unprecedented.”
When State Farm first filed for the increase in June, Insurance Commissioner Ricardo Lara pledged to complete a thorough investigation, including potentially calling for a rate hearing. Such hearings are rare. Since 2019, when Lara took office, only one rate filing has resulted in a hearing, though the matter was eventually settled before any witnesses testified, Soller said.
If a hearing occurs, an administrative law judge would be appointed to make decisions such as what information State Farm would be required to disclose, Rosenfield said.
California law allows consumer advocacy groups to participate in the rate filing process and request hearings. Rosenfield’s group, Consumer Watchdog, has asked for a hearing in the State Farm case. The department has not scheduled one, but could choose to do so depending on how the filing progresses, according to Soller.
Consumer Watchdog is seeking more detailed information about State Farm General’s surplus funds and its arrangements with its parent company on reinsurance, meaning insurance for insurance companies, according to Carmen Balber, Consumer Watchdog’s executive director.
The department, Consumer Watchdog and State Farm also could come to an agreement for an acceptable rate change without a hearing.
“Our overall goal is protecting consumers and ensuring market stability,” Soller said. “State Farm’s request invites scrutiny.”
