In an Expensive and Difficult Market, States Aim to Make Fire Risk Ratings More Transparent
If Colorado’s any indication, more state departments of insurance may be working on legislation to ensure consumer transparency.
Across the U.S., homeowners in high-risk wildfire areas are facing a growing crisis. It’s not just “affordability” though. Many homeowners can’t secure insurance coverage even if they’re willing to pay a high premium. And, it’s not just wildfires: Hurricanes, tornadoes, and floods are also becoming more frequent and more severe, which means homeowners in many states are struggling to insure their property.
The situation has prompted a number of states to introduce Fair Access to Insurance Requirements (FAIR) plans, also known as insurers of last resort. These state-run insurance programs are meant to give homeowners coverage for wildfires when no private insurers will. Colorado is the most recent state to enact a FAIR plan, which will begin providing coverage in 2025.
Current homeowners insurance challenges in Colorado
While certainly not the only state with these issues, Colorado’s on the list of states with record wildfire activity, particularly over the last 20 years. This ongoing and increasing problem has resulted in challenges for insurers, who’ve been unprofitable for eight out of the last 11 years according to data collected by the New York Times. As insurers understandably struggle to stay in business and remain solvent, their remedies take a toll on consumers.
Among Coloradans’ top homeowners insurance concerns are:
- Being dropped by a current insurance carrier with little warning
- Being afraid to file an insurance claim for a covered loss out of fear of being dropped
- Being required to perform fire-mitigating measures with no guarantee of continued coverage
- Incurring rate increases of 100+ percent over the last two years
- Access to homeowners policies only when wildfire is excluded from coverage
- Unreasonable or impossible mitigation requirements such as a homeowner removing trees from neighboring properties
One particularly important concern that’s caught state insurance regulators’ attention is the criteria on which different insurance carriers base their wildfire risk ratings, and thus their willingness to insure a particular property and how much they charge to do so.
Fire risk ratings can vary dramatically from one insurer to another, depending on what criteria they’re using to assess it. For consumers, this presents a major problem because they have little-to-no insight or control over their ability to get insurance (or get it at an affordable rate). The lack of standardization and transparency has caused state regulators in Colorado to take aim at how insurance companies rate fire risks and introduce new legislation to find solutions.
New Colorado laws on insurance rating transparency and standardization
The Colorado Division of Insurance has heard consumers’ pain. The state took a first and important step by creating a new FAIR plan to help homeowners who can’t get insurance through traditional means on the admitted market. Now, the state is going a step further with several new pieces of legislation intended to address homeowners’ woes.
Senate Bill SB23-166: Wildfire resiliency code board
This bill was signed into law on May 12, 2023 and requires the state to establish “a wildfire resiliency code board, and, in connection therewith, requiring the wildfire resiliency code board to adopt model codes, requiring governing bodies with jurisdiction in an area within the wildland-urban interface to adopt codes that meet or exceed the standards set forth in the model codes…”
Stated simply, Colorado doesn’t have building codes that provide a consistent level of fire protection measures for new and remodeled homes. This shortcoming cost the state $101 million in help from the Federal Emergency Management Agency (FEMA), according to reporting by ProPublica. This hurts home owners and contributes to the level of damage a fire can cause in the state, leading to even higher insurance premiums or dropped coverage.
“The bill creates a 21-member board charged with developing standards for new and substantially remodeled homes in high-risk areas, including rules for using fire-resistant construction materials and clearing vegetation around residences.”
The theory is, a board composed of stakeholders from the government, the insurance industry, builders, fire protection agencies, and others will be able to create a set of standards that’ll harden homes to prevent the type of catastrophic losses the state’s seen in recent years, such as the 1,084 homes destroyed by the Marshall Fire.
House Bill HB24-1315: Remediation study
This bill was signed into law June 6, 2024 and requires the division of insurance to conduct a study regarding the remediation of residential premises that have been damaged by smoke, soot, ash, and other contaminants as a result of a fire.
Prior to this law, there were no uniform standards for homeowners to remediate homes that had been damaged by fire-related contaminants. Homeowners were left uncertain about how to best clean and repair their homes after a fire, which can lead to long-term health risks and housing market pressures. Consistent fire remediation practices can also benefit homeowners and insurance companies in the long run by hardening those homes against future fire damage.
It’s important that insurance policies cover full and adequate remediation after a fire, yet there’s currently no universal standard for what this means. This can leave homeowners paying out of pocket or unable to recover from fires at all. The study will consider existing practices, standards, guidelines, indoor air quality standards, and insurance coverage related to residential fire remediation so that the division of insurance can set state-wide standards that all homeowners insurance coverage will have to meet.
House Bill HB24-1108: P&C market study
This bill was signed into law on May 31, 2024 and authorizes the insurance commissioner to conduct a study of the market for property and casualty insurance policies that will assess current market conditions, affordability of coverage, potential measures for sustainability, and the impact of forming captive insurance companies.
One provision of the law is that the commissioner will examine and report back on the criteria insurance companies use to underwrite P&C policies for homeowners and associations like condos and HOAs. These criteria are currently a bit of a black box for consumers, particularly when it comes to rating fire risk and how much to charge for premiums based on fire risk. The Colorado insurance commissioner’s office stated at an Aug. 3, 2024 community meeting that this study will help shed light on how insurers are quantifying risk, with a future goal of standardizing fire risk ratings across companies and geographic regions of the state.
Regulatory changes are always closer than you think
As insurers face the ongoing challenge of setting rates appropriately, consumers struggle to pay those premiums and regulators strive to ensure equity for homeowners and public safety. This means new laws that apply to the insurance industry are regularly being proposed and passed across the U.S.
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