In a move to boost its presence in inner-city Los Angeles, State Farm Mutual Automobile Insurance Co. said Monday that it will relax its no-growth policy in a large section of the central city and Compton, making available up to $2.2 billion of new homeowners and renters insurance.
State Farm, easily California's largest property insurer, said it adopted the program in response to community concern that the industry's moratorium on sales of new homeowners insurance--imposed after the Northridge earthquake--was hitting poor and minority neighborhoods particularly hard.
Unveiling the program at a news conference Monday in Downtown Los Angeles, State Farm said it will encourage agents to open new offices in the affected area, a swath of 40 ZIP codes stretching 22 miles from the California 134 near Griffith Park to just south of the California 91 in Compton.
But whether people will buy the insurance is an open question. State Farm said it is not offering any price breaks or loosening its underwriting standards.
"Availability is not affordability," said Los Angeles City Councilman Mark Ridley-Thomas, who attended the news conference at the Ronald Reagan State Office Building.
Insurance Commissioner Chuck Quackenbush acknowledged the affordability problem but said the presence of a big competitor such as State Farm might cause other insurers in the area to defend their turf by cutting rates. He said the program should also challenge other major insurers to do more business in underserved areas.
State Farm Vice President Roger Tompkins, the Bloomington, Ill.-based company's top California executive, said he doubts whether the target area can absorb another $2.2 billion of insurance, which would approximately double the amount State Farm now has in the area.
However, community activists who prodded State Farm to develop the new program predicted that business will far exceed the company's expectations.
Bob Gnaizda, general counsel for the Greenlining Institute, a San Francisco-based urban affairs think tank, noted that Bank of America's community development bank, which operates in low-income areas, is growing at triple the rate the bank originally projected.
Many homeowners in such neighborhoods are forced to rely on coverage from undercapitalized--even downright fraudulent--insurers, Gnaizda said. Demand for quality insurance is greater than State Farm suspects, he said.
State Farm settled on the Los Angeles target area after a comprehensive analysis of 21 urban areas in California, Tompkins said. Los Angeles stood out as the one place where State Farm had a lower-than-expected level of business in lower-income areas, he said.
The company, like nearly all other large insurers, has imposed a virtual freeze on new homeowners insurance since the 1994 Northridge quake. The 6.7-magnitude quake has caused estimated insurance losses of more than $10 billion.
Because California law requires insurers to offer earthquake coverage to their fire and homeowners policyholders, insurers concluded that the only way to reduce their earthquake exposure was to curtail most new homeowners insurance sales.
As a result, the insurance--required as a condition of most mortgages--has become harder to find and more expensive.