A decision by California's largest homeowners insurer to stop writing new property and casualty policies has hastened calls to revise the state insurance regulator's rate approval mechanism.

State Farm Mutual Auto Insurance Co. said in a news release that, as of May 27, it would no longer honor new applications for property and casualty insurance in either its business lines or its personal lines, except for auto coverage, in the Golden State. That decision by State Farm, which had the largest share of the California homeowners market in 2022 at 20.6%, made it the fourth major insurer to either restrict or cancel homeowners coverage in the state's admitted market since November 2021.

American International Group Inc. exited the market in January 2022, while Chubb Ltd. reduced its exposure to the California market in November 2021, and The Allstate Corp. announced that month that it would not write any new homeowners business in the state. Both Chubb and Allstate said their decisions were driven by the inability to achieve sufficient rate increases to cover wildfire losses.

State regulations governing rate increases need several changes, Rex Frazier, president of the Personal Insurance Federation of California, said in an email to S&P Global Market Intelligence. One such change is using forward-looking models to project losses instead of the current rule that requires insurers to take the average of actual losses for the previous 20 years to determine their rate requests.

"Earthquake insurers currently build their earthquake rates using these very same models, so it's not like these models are scary black boxes," Frazier said.

Claims inflation outpacing rate hikes

The broader issue for California insurers is that claims inflation for home and auto insurance is rising at a "double-digit pace," said Piper Sandler analyst Paul Newsome, while state regulations "essentially limits price increases to 6.9%," an outgrowth of the state's Insurance Rate Reduction and Reform Act, known as Proposition 103.

Insurers can request whatever percentage rate increases they desire, but the risk in requesting an increase in excess of 6.9% in California is that it triggers public hearings that include consumer reviews, which lengthens an approval process already exacerbated by a moratorium on rate hikes during the COVID-19 pandemic.

Any changes to the existing regulatory regime will not help "unless there is a speedy path to justified rate approvals," Fraizer said, noting one case where Allstate was forced to wait 773 days to get a 4% rate increase.

Michael Soller, the California Department of Insurance's deputy commissioner, said Allstate's initial responses to questions from the regulator were "inadequate and added unnecessary time to the process with repeated requests for the same information."

The rate filing in question was first submitted on April 30, 2021, and approved on June 12, 2023. CDI was compelled to send 13 requests to Allstate for more information between June 2021 and April 2022, Soller said in an email.

Most homeowners rate filings are approved within six months, Soller said, but noncompliance with the CDI's filing process, which includes the withholding of requested information, has led to long approval times "in many instances since 2020."

Allstate spokeswoman Brittany Nash said the company complies with state regulations and responds promptly to questions.

According to an S&P Global Market Intelligence analysis of rate filings for homeowners insurance in California, the number of filings approved by the regulator decreased in 2021 and 2022, while the average wait time for approval increased.

The state regulator in 2022 approved 41 rate filings, with an average length of time to approval of 349 days. In 2021, 47 rate filings were approved with an average wait time of 309 days. A total of 97 filings were approved in 2020, with an average wait time of 274 days.

Quick fix elusive

There is no apparent easy solution with Proposition 103 on the books.

"You have a situation that's very difficult for the insurers because they simply can't catch up even if they kept putting in for 6.9% increases," Piper Sandler's Newsome said in an interview.

Issues with pricing and the regulatory process were at the root of Chubb's pullback. CEO Evan Greenberg said decisions made by the state of California led to the insurer's inability to achieve "adequate price for the risk, and not by a small amount."

"Someone else will have the pleasure of writing that business, unfortunately," Greenberg said during a conference call.

Even if companies put in for 6.9% increases every six months, the time it takes to get those hikes is "significantly longer" than in other states, Newsome said, so insurers are "always falling behind."

California's state regulator has approved several requests for homeowners rate hikes greater than 10% this year, according to an S&P Global Market Intelligence analysis, though a majority of companies in this analysis received increases of 7% or less. The one thing all of the companies had in common was that their approved rate increase was, in most cases, significantly lower than their indicated rate change, which is the actuarial justified rate needed by the insurer based on expected premiums, losses and expenses.

GEICO Corp. on June 16 submitted a request for a 20.8% rate increase for private auto policies, even though a 6.9% increase approved by the regulator on May 4 will not take effect until June 27. The indicated rate change on that filing was 18.6%.

The Berkshire Hathaway Inc. subsidiary did not respond to a request for comment on the filing.

In response to a piece in The Wall Street Journal lamenting the state of the California market, state insurance commissioner Ricardo Lara said it is up to insurers to decide when to ask for rate changes and how often.

"Yet for decades, insurance companies have decided to request minimal rate increases, something our department pointed out early in my term in this office," Lara said. "Many are now requesting increased rates, driven by historic losses."