Navigating the State of Insurance in Colorado

The Pinewood Lake Wildfire Action Group (PLWAG) extends a heartfelt thank you to Eric Weedin and Roxane Chagolla from the Weedin Agency in Loveland, for their time and expertise. On August 19th, they met with over 60 neighbors at Belinda's barn, providing a highly informative presentation on the current state of insurance in Colorado. Their clear and detailed answers to numerous questions from community members were invaluable, shedding light on a complex and pressing issue for homeowners. Below is a summary of their talk.

Colorado is a state of stunning natural beauty, but over the last decade, it has become an increasingly challenging environment for the insurance industry. A confluence of factors, from devastating weather events to evolving financial markets, has created a "perfect storm" that is making it difficult for homeowners to find affordable and comprehensive coverage.

Weathering the Unprofitable Tides

Colorado has historically been a profitable market for insurance companies. However, in recent years, this has changed dramatically. A significant portion of the unprofitability can be traced back to severe weather. The state has seen a major increase in catastrophic events, from massive hailstorms to record-breaking wildfires.

This is especially evident when you look at the numbers. While no one is shedding tears, insurance companies once had healthy profit margins in Colorado, data from recent years shows a shift to unprofitability. For example, in 2023, for every $1 in premiums collected, insurers paid out an average of $1.15 in claims, resulting in a significant loss ratio. The high frequency and severity of these "secondary perils" (like hail and wildfires) are now the primary drivers of losses for insurers.

The Problem with Pricing Models

Adding to the complexity is the way insurance models are built. Traditionally, these models are based on the probability of partial losses—like a roof damaged by hail or a small fire. But as climate change fuels more intense and widespread events, the industry is seeing an increase in complete devastation claims. A home on a wooded slope, for instance, is more susceptible to total loss in a wildfire. Current models often fail to adequately price for this catastrophic risk, leaving insurance companies exposed and unprofitable.

The profit margins for claims and expenses are incredibly slim, often hovering around 4% in a normal market. When a single wildfire can destroy hundreds of homes, the financial burden on insurers becomes immense, pushing them into the red.

Reinsurance: The Industry's Safety Net is Getting Snagged

Insurance companies don't just hold all the risk themselves; they buy insurance for their own companies, a practice known as reinsurance. These "reinsurance treaties" are typically a stable investment for large investors. Historically, they were a safe haven, offering a reliable, albeit small, return.

However, the increasing frequency and severity of natural disasters are changing the calculus for these investors. Reinsurers are now "carving out" or adding specific exclusions for high-risk areas and events, or refusing to cover them at all. As these investments become riskier, investors are moving their capital to safer, more predictable markets. This flight of capital from the reinsurance sector makes it more expensive for insurers to offload their risk, a cost that is inevitably passed down to the policyholder.

One potential bright spot on the horizon is the interest rate environment. If interest rates were to lower, it might entice some investors to return to reinsurance, as the relative return on investment would become more attractive.

Legislative Efforts: FAIR and SB-1182

In response to this crisis, Colorado lawmakers have stepped in. One significant piece of legislation is the Fair Access to Insurance Requirements (FAIR) Plan, established by House Bill 1288 in 2023. The Colorado FAIR Plan is designed to be a "true insurer of last resort," providing a safety net for homeowners who have been denied coverage by the traditional market.

While a welcome development, it’s important to understand the limitations of the FAIR Plan. It is designed to be the most expensive option and provides only a basic property fire policy, typically on a DP1 form. This form is very restrictive, covering only a limited number of "named perils." Key gaps in coverage include things that are common in Colorado, such as weight of ice and snow, freezing pipes, or the need for additional living expenses if a home is uninhabitable.

Another legislative effort, House Bill 1182 (Risk Model Use in Property Insurance Policies), aims to address the issue of mitigation. This bill requires insurers to be more transparent about how they use wildfire risk models and to consider mitigation efforts, both at the property and community level, when determining risk scores and premiums. The bill essentially rewards homeowners for taking proactive steps to harden their homes against fire, though many argue it doesn't go far enough in forcing insurers to comply.

Admitted vs. Non-Admitted Insurance

When seeking insurance, homeowners will encounter two main types of carriers: Admitted and Non-Admitted.

• Admitted Carriers are licensed and regulated by the state. Their rates and policies are subject to state approval, and they are backed by the state's guarantee fund.

• Non-Admitted Carriers, also known as the "surplus lines" market, are not licensed in the state. They operate with greater flexibility, setting their own rates and policy terms. This often makes them the only option for insuring high-risk properties. The Colorado FAIR Plan is a type of admitted plan, but unlike a typical admitted carrier, it is a non-profit association of all admitted carriers in the state.

The presentation provided a clear and sobering look at the challenges facing Colorado homeowners and the insurance market. The main points of the discussion were:

• Unprofitability for Insurers: Insurance companies are finding it difficult to turn a profit in Colorado due to the high frequency and severity of weather-related events, particularly hailstorms and wildfires. This has led to higher premiums and more restrictive coverage options for consumers.

• The Reinsurance Crunch: A major driver of these problems is the reinsurance market, where insurance companies buy their own coverage. As catastrophic events have become more common, investors who fund reinsurance are pulling out, making it more expensive for insurers to offload their risk, a cost passed directly to the homeowner.

• The FAIR Plan: A Last Resort: The Colorado FAIR Plan, a state-mandated program, serves as an "insurer of last resort" for those who can't find coverage on the open market. However, it's designed to be the most expensive option and offers very basic, limited coverage that may not be sufficient for many homeowners' needs. But it is better than nothing.

• Mitigation is Key: While legislative efforts like SB-1182 are a step in the right direction, rewarding homeowners for mitigation, they still lack the teeth to force insurers to act. For now, the primary power homeowners have is to take proactive measures to harden their properties against fire and other perils.

The talk underscored that the Colorado insurance landscape is a complex and evolving issue, with solutions requiring both individual action and legislative change.

The Pinewood Lake Wildfire Action Group (PLWAG) wants to once again extend our sincere gratitude to Eric Weedin and Roxane Chagolla of the Weedin Agency for their highly informative presentation. We also want to thank Belinda for generously hosting us at her barn and to the over 60 neighbors who attended. Your presence shows the importance of this issue to our community.