Mercury Insurance has become the latest company to request a rate hike for policyholders in California. 

The third-largest insurer in the state has asked regulators to approve an average statewide rise of 6.9 percent. 

The company blamed the hike on inflationary cost pressures and the risk of catastrophic events such as wildfires in the state.

Mercury is the first insurer to take advantage of a new package of reforms introduced by Insurance Commissioner Ricardo Lara. 

With the introduction of the Sustainable Insurance Strategy in California, insurance companies like Mercury are now allowed to use catastrophe models to project the potential financial impacts of future disasters, instead of relying solely on past claims data.

This matters because California is facing more frequent and severe wildfires, plus other extreme weather events. 

Using a cat model, Mercury can show regulators that the risk of future losses is higher than past claims suggest. 

That gives them a stronger justification for raising premiums, even if past years didn’t see massive payouts.

The goal of the Sustainable Insurance Strategy is to increase the availability of insurance in California, particularly following the severe wildfires that occurred earlier this year (such as the Franklin Fire in Malibu, pictured above).

Mercury CEO Gabriel Tirador said: ‘Our filing is the first step toward Mercury’s goal of expanding insurance options for California homeowners’

Gabriel Tirador, CEO of Mercury, stated: “While other companies reduced their presence in California, Mercury expanded offerings for our agents and clients. We are dedicated to continuing to protect our California community for the long term.”

Mercury said the rate increase will not be allocated evenly across all policyholders.

It said residents in higher risk areas could see larger increases, while customers in lower risk areas could see decreases.

To combat hikes for customers in higher risk areas, it added, there will be discounts in place. This includes, for example, expanding existing discounts for homeowners who take steps to reduce wildfire risks.

Mercury said the hike would ‘strengthen the company’s ability to offer coverage to Californians in distressed areas prone to wildfires, many of which are currently limited to the high-cost, limited-coverage California FAIR Plan.’

Over the last several years, the Los Angeles-based company has scaled up its presence in the California home insurance industry, rising to become the third largest insurer in 2024 behind State Farm General and Farmers Insurance Group. 

The company has also raised home insurance rates four times since 2021, according to the San Francisco Chronicle, including a 12 percent increase which went into effect in March. 

But Mercury is not the only company which has requested a rate hike in the state. 

Insurance Commissioner Ricardo Lara has faced backlash from consumer advocates over his handling of the insurance crisis in the state

Mercury blamed the hike on inflationary cost pressures and the risk of catastrophic events such as wildfires in the state (Pictured: A Malibu home destroyed in the Franklin fire)

In May, State Farm General — which is the largest insurer in the state — requested an average rate hike of 17 percent.

This triggered a fierce backlash from consumer advocates, who were outraged at the company’s actions so soon after after so many families in the area were affected by deadly wildfires. 

As a result of the new reforms, more companies are expected to follow suit in hiking prices for homeowners. 

The reforms also allow companies to pass on the cost of reinsurance to customers.  

Reinsurance is effectively the insurance taken out by insurers. It transfers some of the risk so that no company has too much exposure to a potential catastrophe. 

The cost of reinsurance has boomed in recent years, due to the increased risk of natural disasters in the state. 

This, in part, is why insurers have been pulling out of California, and regulators hope the reforms will make the market more attractive to home insurers. 

This is also the first time that insurers have been able to pass on the cost to consumers in California, which is a common practice in all other states. 

Consumer advocates warned in January that this change would likely lead to immediately higher prices for homeowners, many of whom are already struggling to afford soaring premiums.