State Farm Insurance Company recently announced that it would no longer sell homeowners insurance in California due to the increasingly large payouts over the past two years, according to the Los Angeles Times.
The company is the largest insurer of homes in California, covering 20 percent or 1.5 million homes. Due to declining reserves and financial strength ratings, State Farm will no longer accept new homeowners policies, but will continue to honor existing policies, even if the policyholder moves to a new home.
Payouts from claims have increased significantly over the past two years as much as 30 percent.
The company named a number of issues that may have attributed to the rising costs, including increased construction costs and replacement costs for homes, costly amenities such as marble countertops and high water damage costs, which can potentially lead to toxic mold liabilities.
While State Farm said the cutbacks were temporary, their withdrawal will open the door for competitors such as Farmers and Allstate.
Although the withdrawal won’t affect the underwriting of State Farm’s automobile policies, the recent losses have attributed to rate hike requests, with an approved 6.9 percent increase last year, an additional 6.9 percent early this year, and another 6.7 percent request pending approval by stat regulators.
Each increase takes a year to phase in, so the company is only starting to see a boost in premium income.
Additionally, State Farm’s policyholder protection fund has seen a decline from $605 million to $425 million in the past two years, causing A.M. Best to lower it’s rating to B-plus from its long-standing A rating.
Bloomington, Ill.-based State Farm Mutual Automobile Insurance Company, the parent company to State Farm in California, posted a loss of a record $5 billion last year due to increases in homeowners and automobile claims as well as decreased investment returns.
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