State Farm exits California property on rising cat risk & reinsurance costs

Regular catastrophe bond sponsor State Farm is exiting the California property insurance market, ceasing to write business and personal P&C property as it cites exposure growth, rising catastrophe risks and reinsurance market challenges as reasons for the move.

It’s notable as State Farm has been the biggest insurer in California, in terms of premiums written, so its exiting the property space in the State could leave a gap for others to fill, or an insurance issue for policyholders.

State Farm explained, “State Farm General Insurance Company, State Farm’s provider of homeowners insurance in California, will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023. This decision does not impact personal auto insurance.”

The reasons are cited as, “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

State Farm has long utilised catastrophe bonds as a way to lay-off peak zone exposures and continues to be regular sponsor.

Details of every State Farm sponsored Merna Re catastrophe bond can be found in the Artemis Deal Directory.

But, with exposure values rising, as well as construction costs, plus catastrophe risk itself seen to be rising as well, the risk side of the equation is seemingly becoming too much for State Farm.

Added to which, the cost of reinsurance has risen significantly and capacity for California wildfire risks has diminished considerably since the costly wildfire seasons of recent years in the State.

It’s perhaps notable that none of State Farm’s cat bonds have secured it reinsurance for wildfire exposures since 2010, we believe.

The catastrophe bond market has provided some capacity for California wildfire risks in recent years, but it has become relatively minimal.

“It’s necessary to take these actions now to improve the company’s financial strength,” State Farm explained.

State Farm ceasing property insurance in California is a big deal, as the company has a near 21% market share in California homeowners multi-peril insurance, a 3% share of fire insurance, a 7% share of commercial multi-peril, as well as a 13% share of fire lines and home multi-peril, according to rating agency AM Best.

Meanwhile, S&P places State Farm at the top of the list of homeowners insurers in California, in terms of premiums written in 2022.

As a reminder, Allstate had already paused underwriting new homeowners, apartment and commercial property insurance in California last year, further reducing choice for policyholders in the state.

The California Deputy Insurance Commissioner added climate change to the list of issues exacerbating insurers ability to write business in the state.