Like an Old Neighbor, State Farm Won’t Be There

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In a move that felt like an inevitability, insurance companies are beginning to rationalize where and how they do business.  For the last several years, many insurance companies have either priced insurance packages so high that they were unaffordable or decided not to do business at all. 

In general, that activity has taken place in small regions where one risk or another is difficult for actuaries to price.  So when we see State Farm leaving home insurance business in California in its entirety, we take note.  

For the most part, when an insurance company backs away from a region, they cite things like risk of hurricanes or seismic activity.  As we see in the Wall Street Journal article below, State Farm did something similar here in citing wildfire risk and rapid inflation of constructions costs.  Environmental issues like wildfires are par for the course, and part of what Californian residents need insurance against.  But inflation costs?  This is something that is clearly not unique to California.  So what gives?  

We believe that the one thing that State Farm didn’t want to say is that the regulatory environment in California is so difficult, that insurers (including AIG a few years before) are doing everything they can to avoid interacting with the respective agencies. 

When the deputy insurance commissioner suggests that the factors driving State Farm’s decision was beyond their control, it is not difficult to understand why State Farm and others would leave.  The regulators lack self-awareness.  Wildfire risk is clearly a problem in California.  Hurricane risk is clearly an issue in Florida.  Volcano flows are a risk in Hawaii.  But these risks generally do not cause insurance companies to totally avoid entire states.  

This topic has come up more often with every passing day, but business friendly regulatory environments result in healthier economies, and many states are missing this point.  Sorry California, but it’s your fault… again. 

Source: The Wall Street Journal


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