State Farm Insurance’s decision last week to cease accepting new applications — including all business and personal lines property and casualty insurance — has potential consequences for both homebuyers and small business owners in the Bay Area.
The company — the largest property and casualty insurance provider in the state as of 2021 — said it was necessary to take the actions now to improve the its financial strength. But it could spell trouble for some local real estate transactions by limiting the buyer pool in heavily wooded areas. Buyers getting a mortgage typically are required to have insurance that covers losses from fire, and brokers have said this had already gotten more difficult before State Farm’s announcement. All-cash transactions are less affected.
Rob Salvo, president at Mt. Diablo Insurance Brokers, Inc. in Lafayette, said that the insurance market — especially on the property side — has been “hardening” over the past two years, and that State Farm’s trouble on its automobile side has spilled over into the real estate and business side of the game.
He noted that State Farm was one of the major companies covering homeowners in fire prone areas of the East Bay over the past two years, and it may have caught up to the company.
“They were one of the last real players that were writing homeowners anywhere near brush,” he said. “And I pretty much think they got inundated because so much business rolled into them that they had to put the brakes on. We saw it across the board — they were able to write in a lot of places where nobody else could.”
Private fire insurance is expensive, but it has been an option for buyers of luxury properties. Now that’s drying up as well.
In 2021, Chubb Ltd. — a major international insurance company that had been routinely covering fire insurance for luxury homes in the East Bay Hills — significantly reduced its homeowners insurance exposure in wildfire-prone areas of California because it could not get sufficient rate increases to balance out the risk.
Department of Insurance Press Secretary Gabriel Sanchez said that while insurance companies prioritize their short-term financial goals, the factors driving State Farm’s decision are beyond the state’s control, including climate change, reinsurance costs affecting the entire insurance industry and global inflation. And in terms of options, Sanchez noted that more than 115 insurance companies currently offer homeowners’ insurance in California.
Nevertheless, State Farm’s decision has led to frustration amongst many local real estate agents.
“I think homeowners will be feeling squeezed out by this insurance company’s decision not to insure their biggest and most important investment,” Compass broker Denise Laverne Paulson said. “It’s time for the insurance industry to figure out how to insure real estate in a format that their insureds can live with.”
Meanwhile on the small business front, Salvo said Bay Area entrepreneurs may start to see their business insurance rates begin to rise with fewer companies in the mix.
“You are definitely seeing carriers even on the commercial side backing out of the state. You have Nationwide that’s basically ceasing to write commercial insurance for new business in the state as well, and they’re one of the largest in the country, and that has to do with rate filings in California, along with catastrophic exposure. Then you add that to how litigated the state is. I mean, they’re just not making money in California,” he said. “You’re definitely having players back out … so you’re seeing prices go up considerably.”