I was working on my LinkedIn article on visibility bias and its impact on the 401k world when I saw that State Farm has filed an emergency request with California Department of Insurance for a 22% rate increase on non-tenant homeowner property insurance. The insurance company is also asking for a 15% increase for renters and condominium owners, and up to 38% in rate increases for rental dwellings. This stems from the amount the company is paying for the recent Los Angeles fires.
A bunch of questions swirled through my brain as I read the State Farm request. What might this mean for homeowners? Will this result in evictions for renters who cannot afford the increase? Will there be a rush of foreclosures in the condo market? Is it appropriate or fair to pass along higher expenses to consumers? State Farm insures 250,000 homes in Los Angeles but 1,000,000 homes in California.
This situation reminds me of the utility, Pacific Gas and Electric (PG&E) raising its rates for all customers in 2016 to help it pay for the financial settlements stemming from the San Bruno gas pipeline explosion. PG&E's customer base ranges from the Bakersfield at the far southern tip of California's Central Valley to Eureka in the far north, west to the Pacific Ocean and east to the Sierra Nevada mountains. This is an even more egregious case of passing along costs associated with bad business practices.
In the case of State Farm, the company states that over a nine-year period ending 2024, it would pay $1.26 in claims and expenses for every $1.00 collected in premium, resulting in more than $5 billion in cumulative underwriting losses. Its after-tax net loss totaled $2.8 billion over that period. Given that the topic of climate change had its first major international discussion at the 1972 UN Conference on the Human Environment in Stockholm, might someone have seen this coming?
One might hope that the California Department of Insurance looks carefully at this request and does the right thing.