State Insurance Commissioner Ricardo Lara said that he expects to announce “a solution” to an emergency rate hike request from State Farm this week that could see the insurer shoulder a portion of the financial responsibility to cover losses from the historic Los Angeles County firestorms in early January.

“For me, it’s about why should the State Farm consumers shoulder the majority of any financial difficulties, or issues that the company is in,” said Lara in an interview on Saturday, March 8, on the sidelines of workshops in Santa Monica to assist Los Angeles residents affected by the Jan. 7-8 fires in Pacific Palisades and Altadena.

“Where is the parent company? If there’s a financial crisis, it’s going to be applied fairly to everybody, them as well,” he said. “Hopefully, we’ll come up with a solution.”

Also see: State Farm says LA wildfire losses total $7.6 billion

Lara, who said he is still studying financial data on the rate hike, declined to provide details on the solution he’s considering to help the state’s largest property insurer avoid financial collapse.

“As they’ve said, higher rates are not going to be their only strategy. I want to know what the rest of the strategy is to get their financial house in order,” he said. “They are the largest homeowner writer in the state. I want to know how they’re going to avoid future financial issues in their company. With ongoing climate change we are experiencing, we haven’t even entered the summer fire season.”

Climate change is a major cause of wildfires in the United States, increasing the frequency, length, and size of fire seasons.

“We’ve never seen 100-mile-per-hour Santa Ana winds like this before. We can no longer allow for a regulatory scheme that is cemented for another 30 years. That’s impossible,” he said. “The climate is changing quicker. Social and economic issues are changing rapidly, as you can see now in our country, and all that impacts the insurance market. We want to grow in California. It is a profitable market, but it’s got to be priced accurately to meet the risk.”

State Farm, which is made up of several mutual companies in the U.S., insures more than 1 million policyholders for homeowners’ insurance in California.

See also: State Farm’s rate hike shot down by California regulator

The insurer’s financial straits were discussed during a meeting Feb. 26 in Oakland between the insurance giant and Lara, who has been contemplating the hike since State Farm made the Feb. 3 request when it got hit with thousands of claims to cover property losses stemming from the firestorms.

State Farm executives said at the meeting that it needs a 22% emergency rate hike in California to cover more than $7.9 billion in losses. Lara initially rejected the request, saying in a Friday, Feb. 14, letter to State Farm executives that he needed more information before he can approve an increase.

Dan Krause, California’s president and CEO of State Farm General Insurance Co., said he could request financial assistance from State Farm’s Bloomington, Ill.-based parent, State Farm Mutual Insurance Co., to help keep the insurer financially solvent.

“It is possible, yeah,” Krause told Lara.

State Farm’s CFO Mark Schwamberger said the financial solvency of the California business has grown precarious following the L.A. fires.

“State Farm General, the legal entity, has the ability to pay its claims and move forward with the fires,” Schwamberger said at the Feb. 26 meeting. “However, it’s in a dramatically different and weakened position. As we enter the fire season, it’s in jeopardy,” he said. “It’s a very serious situation, and when you think about risk-based capital, we are just falling into further and further regulatory action levels that might require action from Illinois and others.”

When asked whether State Farm in California should be tapping its capital paid to its parent company to help lighten the financial burden, Lara said that he’s considering several options.

“Once we really look at their numbers, they should be doing a few things, because they themselves have said that increasing rates is not going to solve this financial crisis they’re in,” he said. “If it’s not just rates, what else are you doing to get your financial house in order?”

Also see: FAIR Plan gets 4,400 insurance claims from LA County wildfire victims

Krause has said that reinsurance — a type of insurance on insurance in catastrophic events — would cover a majority of the losses. Reinsurance, State Farm said, would lower its losses to about $612 million.

This includes $212 million in retained losses after reinsurance, and State Farm’s special assessment of $400 million that it must pay into the California FAIR plan, an insurer of last resort.

State Farm General said it has received more than 9,500 claims from the fires and paid more than $1.75 billion to customers.

Democracy works

Lara also defended his Feb. 12 order to have the FAIR Plan charge a $1 billion special assessment to private insurance providers after a record number of FAIR plan claims were filed following the January disaster.

At least half of that assessment is pushed down to property owners across California. The FAIR Plan permits its member insurance companies to collect an assessment from consumers — even those who are not directly affected by the fires.

“By democratizing these rates, it helps keep a market and keeps the rates somewhat low. It’s the same question that I’m getting from people in Northern California. They’re saying, ‘Why should we pay for folks in L.A.?’”

The $1 billion assessment was “important so that we keep insurers writing” policies, Lara said.

This certainty alone — that insurers are not going to bear the brunt of the total loss — “creates consciousness around making hard decisions in the future about where we build, how we build, and instilling mitigation measures,” according to Lara.

Creating a defensible space around homes and other structures is one of the most effective mitigation strategies, he said. This space, clear of vegetation and combustible materials, acts as a buffer zone that slows or even halts the advance of a wildfire, giving firefighters a chance to combat the flames directly.

FAIR Plan now and later

Lara also said that the property insurance industry in California is headed in the right direction with the FAIR Plan.

“When we first started looking at the FAIR Plan in 2019, and getting inklings of what was going on — with a tightening market and rates going up — there was this ongoing fear that if the FAIR Plan goes insolvent, the insurers themselves would be on the hook 100%,” Lara said.

“That fear alone forces the insurance companies to retract from markets. But the consequence of that is where do people go? They go to the FAIR Plan. It’s this kind of cycle of death, where people are getting dropped from their policies, getting put into the FAIR Plan and creating more of a possibility that the FAIR Plan will have further financial issues,” he observed. “The insurance companies continue to say, “Hey, we can’t write anymore because we’re going to be on the hook for the FAIR Plan eventually.’”

Lara said this “cycle of death” phenomena is why his department made FAIR Plan reforms, like raising coverage limits in 2019 (to $3 million) for dwellings, which hadn’t been raised since the 1970s, and gave them additional access to resources, like adding a line of credit.

“We are putting all these safeguards in the FAIR Plan, so that by the time they come to us, we’ll know if they need an assessment,” he said.