State Farm No Longer Insuring California Homes, Insurance Industry in Climate Crisis

On May 30 2023, The Recount tweeted about a purported decision by insurer State Farm, which would evidently no longer be accepting new applications from California homeowners:

May 30 2023 was the Tuesday following the Memorial Day holiday weekend in the United States. On Friday, May 26 2023 — classically a time that corporations and public figures release information that is anticipated to cause major backlash — State Farm issued a press release (“State Farm General Insurance Company®: California New Business Update”) about the state of California.

It indicated the company would “cease accepting new applications” in California as of Saturday, May 27 2023:

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. State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.

We take seriously our responsibility to manage risk. We recognize the Governor’s administration, legislators, and the California Department of Insurance (CDI) for their wildfire loss mitigation efforts. We pledge to work constructively with the CDI and policymakers to help build market capacity in California. However, it’s necessary to take these actions now to improve the company’s financial strength. We will continue to evaluate our approach based on changing market conditions. State Farm® independent contractor agents licensed and authorized in California will continue to serve existing customers for these products and new customers for products not impacted by this decision.

On May 28 2023, CNN covered State Farm’s withdrawal from California, adding details about the frequency and scope of wildfires in California:

California has seen an average of more than 7,000 wildfires each year, consuming an average of over 2 million acres, over the past five years [as of 2023], according to data from the governor’s office. Scientists and California authorities blame the climate crisis for the intensity of the fire seasons.

While “insurance companies prioritize their short-term financial goals, the long-term goal of the Department of Insurance is protecting consumers,” California Department of Insurance spokesperson Michael Soller said.

The factors behind State Farm’s move are beyond the agency’s control, Soller added.

“It’s important to note that current State Farm customers are not affected, and no non-renewals are being issued as a result of this announcement,” Soller said.

A May 30 2023 Gizmodo.com article (“‘Catastrophe Exposure’ Pushes State Farm to Stop Selling Insurance in California”) cited a January 2023 National Oceanic and Atmospheric Association (NOAA) report:

Since 1950, the area burned by wildfires in California has increased, according to the California Air Resources Board’s website. A report from the National Oceanic and Atmospheric Association outlining billion-dollar disasters that the U.S. experienced in 2022, has further highlighted the rising wildfire risk. 17 of the 20 largest wildfires by acreage in the state’s history have occurred since the year 2000, according to NOAA. 18 of the 20 most destructive fires—which were measured by the number of buildings destroyed—have also occurred since 2000.

“In four of the last six years (2017, 2018, 2020, and 2021), California has experienced historically large and costly wildfires with losses well exceeding $65.0 billion,” the report said.

On January 10 2023, NOAA published “2022 U.S. billion-dollar weather and climate disasters in historical context.” In the report, NOAA described successive year-over-year increases in climate-related damage to life and property:

The NOAA National Centers for Environmental Information (NCEI) has released the final update to its 2022 Billion-dollar disaster report [link], confirming another intense year of costly disasters and extremes throughout much of the country. 2022 tied 2017 and 2011 for the third highest number of billion-dollar disasters. 2022 was also third highest in total costs (behind 2017 and 2005), with a price tag of at least $165.0 billion. This total annual cost may rise by several billion when we’ve fully accounted for the costs of the December 21-26 [2022] Central and Eastern winter storm/cold wave.

[…]

In 2022, the U.S. experienced 18 separate weather and climate disasters costing at least 1 billion dollars. That number puts 2022 into a three-way tie with 2017 and 2011 for the third-highest number of billion-dollar disasters in a calendar year, behind the 22 events in 2020 and the 20 events in 2021. It was another year with a high diversity of destructive disasters …

NOAA’s report included information about the sharp increase in costs in recent decades. In particular, tropical cyclones were the costliest, with an “increase in disasters” linked to “compound extremes”:

The distribution of damage from U.S. billion-dollar disaster events from 1980 to 2022 is dominated by tropical cyclone losses. Tropical cyclones have caused the most damage ($1,333.6 billion) and have the highest average event cost ($22.2 billion per event). Drought ($327.7 billion), severe storms ($383.7 billion), and inland flooding ($177.9 billion) have also caused considerable damage based on the list of billion-dollar events.

[…]

The increase in disasters create ‘compound extremes’ (e.g., billion-dollar disaster events that occur at the same time or in sequence), which are also an increasing problem for recovery. As noted in National Climate Assessment (2017) “the physical and socioeconomic impacts of compound extreme events (such as simultaneous heat and drought, wildfires associated with hot and dry conditions, or flooding associated with high precipitation on top of snow or waterlogged ground) can be greater than the sum of the parts.” … Over the last six years (2017-2022), there were just 18 days on average between billion-dollar disasters compared to 82 days in the 1980s. Shorter time intervals between disasters often mean less time and resources available to respond, recover and prepare for future events. This increased frequency of events produces cascading impacts that are particularly challenging for vulnerable socioeconomic populations.

Five months after NOAA’s January 2023 report, State Farm withdrew from the state of California.

On May 25 2023, a day before the State Farm announcement, Reuters published “Insurers flee climate alliance after ESG backlash in the U.S.,” reporting:

A United Nations-convened climate alliance for insurers suffered at least three more departures on Thursday [May 25 2023] including the group’s chair, as insurance companies take fright in the face of opposition from U.S. Republican politicians.

At least seven members of the Net-Zero Insurance Alliance (NZIA), which launched in 2021, have now left including five of the eight founding signatories.

Departures on [May 25 2023] included AXA , whose Group Chief Risk Officer Renaud Guidée had chaired the alliance. The French insurer said in a statement it was leaving to “continue its individual sustainability journey.” Germany’s Allianz (ALVG.DE) and French reinsurer SCOR (SCOR.PA) also quit.

Reuters indicated NZIA faced “growing political opposition from some Republicans in the United States, who say the group could be violating antitrust laws by working together to reduce clients’ carbon emissions.”

On May 24 2023, the same organization separately reported that “Republican federal and state lawmakers, governors, and attorneys general have been pushing back on growing efforts by investors and executives to include environmental, social and governance (ESG) factors in their business decision making.”

On May 30 2023, Reuters published “Insurers’ climate alliance loses nearly half its members after more quit,” attributing the “exodus” to pressure from Republican lawmakers in the United States:

Three more insurance companies including Tokio Marine have left a United Nations-backed net-zero climate alliance, leaving the group with about half the number of members it counted two months ago [in March 2023] as insurers take fright at U.S. political pressure.

Some Republican politicians have mounted a campaign against financial institutions collaborating to try to curb carbon emissions, and a group of Republican attorneys general have turned their focus on insurers by accusing them of potentially breaching antitrust laws in the United States … The NZIA, which was formed in 2019 to get insurers to commit to reducing greenhouse gas emissions in their underwriting portfolios to a net-zero level by 2050, is now down to 17 members, according to its website, against the 28 it had two weeks ago [in May 2023] and 30 in late March [2023].

Legal experts say it would be hard to make a case against insurers on antitrust grounds, but cautious international insurers are worried about being sucked into a tussle with U.S. Republicans.

A May 29 2023 article in an insurance trade magazine also attributed the NZIA “exodus” to pressure from Republicans in the United States, reporting that Australian firm QBE and British firm Lloyd’s had also left NZIA:

A flurry of insurers and reinsurers have exited the United Nations Environment Programme (UNEP) convened voluntary alliance in the past month [of May 2023], some citing anti trust concerns. AXA, Scor, Allianz, and Sompo all left the group last Thursday [May 25 2023], following departures from big names including Zurich, Swiss Re, Hannover Re, and Munich Re.

Antritrust [sic] violation accusations from US Republicans have been blamed for the exits, with UNEP having noted that the exodus has been led by carriers with “significant US business and exposure[.”]

“Regardless of the situation, UNEP reaffirms its conviction ever since it initiated, convened, and launched the NZIA—that in order to successfully tackle the climate emergency, there is a fundamental and urgent need for collaboration, not just individual action,” UNEP said in a May 24 [2023] update.

On May 30 2023, the British newspaper Financial Times published “Insurance industry turmoil over climate alliance exodus,” analyzing financial aspects of the “turmoil” outside the United States’ partisan view of climate change. More specifically, Financial Times framed the conflict as existing at the intersection of climate policy and insurance industry profit:

[The Glasgow Financial Alliance for Net Zero] warned on [May 26 2023] that the “political attacks are now interfering with insurers’ independent efforts to price climate risk, which will harm policyholders, main street investors and local economies”.

The NZIA faced criticism from the start — but more frequently that its collective action was too weak, rather than too strong. Climate campaigners questioned why a policy banning the insurance of coal projects was not a condition for entry. At the time, the NZIA’s leadership cited “antitrust issues[.”]

Even with what many climate activists saw as a low bar to membership, it failed to attract US insurers as members. Soon after its launch, the secretary-general of the public-private Insurance Development Forum said it was uncertain that the industry could “make much progress” without the backing of the vast US insurance sector.

At the same time, industry intentions to reduce their underwriting exposure to climate risk have come up against arguments about energy security and the impact on coal-dependent economies.

Journalist Hamilton Nolan published an analysis on May 30 2023, openly articulating the tension at which Reuters and Financial Times hinted. In “Insurance Politics at the End of the World,” Nolan clearly and unambiguously explained how two powerful lobbies –fossil fuels and insurance — predictably landed at cross purposes:

At its core, insurance is a simple business. Companies figure out how much they will likely have to pay out, and then set their rates to ensure they make a profit. Success is dependent upon the ability to accurately assess risk. There is a huge financial incentive to have the most clear-eyed possible understanding of reality. Wishful thinking or misguided ideology will do nothing except lose an insurance company money.

Because of this, insurance can tell you things about reality … these firms do their very best to operate according to what is true, whereas politicians, for example, often do their very best to lie … The insurance industry is going to serve a very useful role in the climate apocalypse. It is going to be the tip of the spear that punches through all of the bullshit of climate denialism once and for all. Indeed, the process is very much underway already. Politicians and oil lobbyists can lie all they want, but their homeowners insurance rates are going up.

Watching this process unfold is going to expose the hidden bedrock of many people’s belief systems in a rather violent way … We are well on the road to the inevitable political crisis that will be sparked by insurance. State Farm just stopped selling home insurance in California [in May 2023], due to wildfire and other climate-driven risks. Coastal states in the path of hurricanes have seen tons of insurers pull out altogether in recent years, and the ones left are handing down eye-watering premium increases to homeowners. Florida property insurance rates are rising 40% in a single year(!). In Louisiana, it was even worse—the state insurance of last resort bumped its rates 63% this year. Increases like this prompt predictable outrage. “Louisiana needs a healthy, competitive insurance market,” a typical editorial went, “but not at the cost of making it difficult-to-impossible for Louisianans to remain in their homes.”

On May 26 2023, State Farm issued a statement announcing it would “cease accepting new applications … effective May 27, 2023” in the state of California, citing “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” At the same time, the United Nations-led Net-Zero Insurance Alliance (NZIA) lost “nearly half its members” due to “political pressure” from Republicans in the United States. Broadly, both issues boiled down to insurers’ ability to “price climate risk” against a backdrop of compounding and costly disasters exacerbated by climate change.