Farmers Caps New Homeowners Policies in California

In a week when the temperature in Death Valley is heading for 130 degrees F., Farmers Insurance became the third major national carrier to pull back on writing new homeowners policies citing rising costs due to inflation and the increasing risk from wildfires.

Unlike Allstate and State Farm, which aren’t writing any new property insurance policies in California other than for motor vehicles, Farmers is capping rather than eliminating all new homeowners insurance policies.

Under a new policy it said was effective July 3, Los Angeles-based carrier said it now is capping the number of new homeowners insurance policies it accepts each month at 7,000—which Farmers said is generally the number of new policies it has written in California annually in recent years.

“We are working diligently with the California Department of Insurance and others interested in improving the availability of property insurance in the state,” Farmers said, in a statement. “With record-breaking inflation, severe weather events, and reconstruction costs continuing to climb, we are focused on serving our customers while effectively managing our business.”

“Effective July 3, Farmers will limit new homeowners insurance policies in California to a level consistent with the volume we projected to write each month before recent market changes,” the statement concluded.

In May, State Farm cited “rapidly growing catastrophe exposure” and rising building costs as the primary reasons it has stopped selling new home and business policies in California. State Farm had requested a 28% increase in premiums.

A week later, Allstate notified California’s Department of Insurance that it has stopped selling new home, condominium or commercial insurance policies in the Golden State. In a statement, the Good Hands brand echoed State Farm’s reason for deserting the market:

“The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher cost for repairing homes and higher reinsurance premiums,” Allstate said, in the statement.

The California Department of Insurance issued a statement on Friday reassuring Californians that existing customers will not lose insurance and that there are still many available options for new homeowners.

“In short: Californians are covered,” said Deputy Insurance Commissioner Michael Soller.

“While both State Farm and Allstate made a business decision to put a temporary pause on new homeowners policies in our state, current customers will not lose their insurance, and both State Farm and Allstate continue to write auto insurance. While the Department of Insurance cannot do anything about rising costs of repairs, materials, and rebuilding, we are not powerless,” Soller said.

According to a report in the New York Times, the retreat of insurance carriers from the California market follows a pattern seen in other parts of the US that have high risk of climate-related catastrophe.

In Florida, the report said, most of the large insurance companies have pulled out of the state, forcing homeowners to turn to smaller carriers with stretched resources.

In parts of eastern Kentucky that saw severe flooding due to storms last summer, the price of flood insurance has quadrupled. Louisiana officials are offering millions of dollars in subsidies to try to draw more insurers to the state, the Times said.

Last month’s announcement marked the third time Allstate has paused new policies in California. In 1994, after the Northridge earthquake, and in 2007 Allstate also stopped issuing new policies in California, but it returned to the market 10 years later.

The moves by State Farm and Allstate are expected to push more property owners to flock to California’s “insurer of last resort” in areas of high wildfire risk: the state’s FAIR Plan, which offers temporary—and more expensive—fire coverage.

The number of FAIR policies has grown exponentially in the past five years, growing to more than 270,000 in 2022, more than double the number issued in 2018. The FAIR Plan requires insurance companies operating in California to cover losses that are proportional to their market share in the state.

The exodus of the insurance giants may weigh heavily on new home sales, as proof of fire insurance often is a prerequisite for obtaining a mortgage in fire-prone parts of California.