A California Administrative Law Judge issued a decision approving a stipulation between State Farm General Insurance Company and the California Department of Insurance that allows significant interim rate increases for three of the company’s major lines of residential insurance. 1 These increases include a 17 percent hike for homeowners non-tenant HO-3 policies, 15 percent for renter and condo policies, and 38 percent for rental dwelling policies. The ruling allows these rate hikes to go into effect immediately, pending a full rate hearing at a later date.
State Farm has agreed to refund any portion of the increase later deemed excessive, with interest. The decision also includes a requirement that State Farm secure a 400-million-dollar surplus note from its parent company and imposes a moratorium on new block nonrenewals through the end of 2025. My wish is that there will be no other wildfires or catastrophes, and maybe California policyholders will get a refund of some amount. My bet is that even State Farm hopes my wish comes true.
The ALJ’s justification for this decision rests on a finding that State Farm presented sufficient preliminary evidence of extraordinary financial distress. The company’s surplus reportedly fell from 2.24 billion dollars in 2022 to approximately 620 million dollars by early 2025, largely due to adverse loss development and the financial shock from the January 2025 Los Angeles wildfires. According to its annual statement, about 72 percent of the drop is attributable to adverse development across multiple lines, not just catastrophe losses. Based on this showing, the judge found that the temporary rate hikes were justified under what is known as Variance 6, a provision that permits deviation from the standard regulatory formula in order to preserve financial stability.
While the ruling was legally reasoned and meticulously documented, it invites significant questions about regulatory philosophy and fairness. The judge acknowledged that the process that led to the stipulation was expedited and occurred largely outside the normal adversarial framework. Consumer Watchdog, the public interest group that intervened in the proceeding, was not a party to the agreement and objected throughout. Although the ALJ concluded that procedural objections amounted to harmless error, the decision nonetheless sets a precedent that regulators can negotiate emergency rate agreements with insurers and obtain judicial endorsement even before a full evidentiary hearing is held. The argument is that consumers are protected because the increases are temporary and subject to refund. But that may be cold comfort to policyholders now struggling with affordability, especially those who may be nonrenewed before any refunds are ever issued.
The deeper issue is what this case reveals about California’s regulatory infrastructure. As I read the history of Proposition 103, it was enacted to prevent precisely the kind of opaque rate manipulation that the stipulation model seems to enable. By allowing interim increases based primarily on unaudited internal documents and financial forecasts, the state risks turning its consumer protection regime into a reactive, discretionary process where insurers dictate the terms by invoking financial distress. The fact that the decision permits such dramatic increases without a full actuarial review is troubling and should prompt a reassessment of the standards for emergency rate relief.
Consumer Watchdog raised concerns that State Farm General had transferred nearly $1 billion in wildfire subrogation recoveries from 2017 and 2018 to its parent company under reinsurance agreements. They argued that these funds, which could have offset wildfire losses, were instead sent to State Farm’s parent company, exacerbating State Farm General’s financial challenges.
In response, State Farm contended that the reinsurance arrangements with the parent company provided substantial coverage at more favorable rates than could be obtained from third-party reinsurers, especially given the volatile California wildfire market. They maintained that the premiums paid for this reinsurance were justified by the coverage received.
Despite these discussions, the ALJ’s ruling focused primarily on State Farm General’s current financial condition and the immediate need for rate adjustments to ensure solvency. The decision did not delve into the specifics of past financial transactions or recoveries between the subsidiary and its parent company. However, these matters may be examined in greater detail during the full evidentiary hearing scheduled for later this year, where a comprehensive review of State Farm’s financial practices is expected. I think it is a major issue.
It is also important to consider whether this outcome, flawed as it may be, is preferable to the alternative. In recent years, major insurers have withdrawn from the California market or significantly reduced their exposure by issuing mass nonrenewals or halting new business. From that perspective, the decision may represent a regulatory triage effort to stabilize a carrier that writes more than twenty percent of the state’s homeowners policies. Allowing State Farm to implement temporary increases, backed by a substantial capital infusion and oversight commitments, might be a better option than risking a further contraction of the market. Policymakers are clearly weighing not just what is ideal from a legal or consumer standpoint but what is necessary to prevent a market collapse. That said, the need to avoid market withdrawal cannot be a blank check for the insurance industry to raise rates.
This case is about pragmatism versus principle. The ALJ’s ruling is grounded in legal precedent and supported by a voluminous record, but it reveals how malleable the system has become in the face of crisis. The standard of “extraordinary financial distress” is not precisely defined. Some may argue that California’s regulatory tools designed to protect consumers are now being deployed to protect carriers. The stipulation may indeed stabilize State Farm in the short term, but the long-term integrity of the rate review process depends on whether the full hearing delivers rigorous scrutiny or merely ratifies what has already been conceded. Insurance rate regulation is a very delicate balance.
This is why the upcoming full rate hearing must not be a formality. It must involve comprehensive discovery, adversarial testing of assumptions, and a complete examination of internal business practices that contributed to the company’s financial condition. If State Farm is granted this interim reprieve without meaningful follow-through, it will only confirm the fears of those who believe that the insurance industry can now set rates by asserting urgency and invoking catastrophe.
Proposition 103 is the law in California. While many have said it does not work since wildfires struck much more frequently starting in 2017, this law demands that we protect consumers not only with refunds after the fact but with a transparent, accountable process before prices go up. Until that happens, the regulatory system will remain one where promises are made publicly, but the real decisions are made in private, as was apparently done with the insurance commissioner and State Farm executives.
Finally, for all my insurance coverage nerds, thanks for putting up with my interest regarding California rate-making law. Many have sent me private messages about Proposition 103. For me, I like that citizens can challenge insurance regulators, who are all too often in the pocket of insurance companies.
Thought For The Day
“California is a place of invention, a place of courage, a place of vision, a place of the future.”
—Nicolas Berggruen
1 In the Matter of the Rate Application of State Farm General Ins. Co., IAHB Decision No. PA-2024-00011 (May 13, 2025).