In Expensive and Difficult Market, States Aim to Make Fire Risk Ratings More Transparent

This post is part of a series sponsored by AgentSync.

If Colorado is any indication, many state insurance departments may be working on legislation to ensure consumer transparency.

Across the US, homeowners in high-risk areas for wildfires are facing a growing problem. It’s not just about “affordability” though. Many homeowners cannot afford insurance even if they are willing to pay a high premium. And, it’s not just wildfires: Hurricanes, tornadoes, and floods are also becoming more frequent and severe, meaning homeowners in many states are struggling to insure their property.

This situation has led many states to introduce Fair Access to Insurance Requirements (FAIR) programs, also known as insurers of last resort. These government insurance programs are designed to provide homeowners with protection against wildfires where private insurance is not available. Colorado is the latest state to implement the FAIR program, which will begin providing coverage in 2025.

Current challenges for homeowners insurance in Colorado

Although it is not the only state with these problems, Colorado is on the list of states with a history of wildfires, especially in the last 20 years. The ongoing and growing crisis has created challenges for insurers, which have been unprofitable for eight of the past 11 years, according to data compiled by The New York Times. As insurers understandably struggle to stay in business and stay afloat, their remedies hurt consumers.

Among the top homeowners insurance concerns for Coloradans are:

• Dropped by the current insurance company with little warning
• Fear of filing an insurance claim with a covered loss for fear of being downgraded
• You are required to take fire mitigation measures with no guarantee of continued installation
• The rate of increase is 100+ percent in the last two years
• Access to homeowners policies only if wildfire is excluded from coverage
• Unreasonable or impossible mitigation requirements such as a homeowner removing trees from neighboring properties

One of the most important concerns that has drawn the attention of state insurance regulators is the process by which different insurance carriers base their wildfire risk ratings, as well as their willingness to insure a particular property and how much they charge to do so.

Fire risk ratings can vary greatly from one insurer to another, depending on what criteria they use to assess it. For consumers, this presents a major problem because they have little-to-no understanding or control over their ability to obtain insurance (or obtain it at an affordable rate). The lack of standardization and transparency has prompted state regulators in Colorado to take aim at how insurance companies estimate fire risk and introduce new legislation to find solutions.

Colorado’s new laws on insurance rate transparency and suspension

The Colorado Division of Insurance has heard the pain of consumers. The state has taken the first and most important step by creating a new FAIR program to help homeowners who cannot obtain insurance through conventional means in the regulated market. Now, the state is going one step further with several new laws aimed at addressing homeowners’ concerns.

Senate Bill SB23-166: Wildfire resilience code board

The bill was signed into law on May 12, 2023 and requires the state to establish a “wildfire resilience code board, and, in that regard, requires the wildfire resilience code board to use model codes, which require governing bodies with jurisdiction over the interior.” wildland-urban interface to implement codes that meet or exceed the standards set forth in the model codes…”

Simply put, Colorado does not have building codes that provide a consistent level of fire protection measures for new and remodeled homes. These deficiencies cost the state $101 million in aid from the Federal Emergency Management Agency (FEMA), according to a ProPublica report. This hurts homeowners and affects the level of fire damage in the state, leading to even higher premiums or reduced payments.

“The bill creates a 21-member board charged with developing standards for new and remodeled housing in high-risk areas, including rules for using fireproof construction materials and clearing residential areas.”

The theory is that, a board made up of stakeholders from the government, the insurance industry, builders, fire protection organizations, and others will be able to create a set of standards that will harden homes to prevent the type of catastrophic losses the country is experiencing. in recent years, such as the 1,084 homes destroyed by the Marshall Fire.

House Bill HB24-1315: Remedial study

The bill was signed into law on June 6, 2024 and requires the insurance department to conduct a study on the repair of residences damaged by smoke, soot, ash, and other pollution from a fire.

Before this law, there were no uniform standards for homeowners to repair homes damaged by fire. Homeowners are left unsure of how to best clean and repair their homes after a fire, which can lead to long-term health risks and pressure on the housing market. Consistent fire repair practices can also benefit homeowners and insurance companies in the long run by strengthening those homes against future fire damage.

It is important that insurance policies cover full and adequate compensation after a fire, however there is currently no standard for what this means. This can leave homeowners paying out of pocket or unable to recover from fires at all. This study will examine existing practices, standards, guidelines, indoor air quality standards, and insurance coverage related to residential fire repair so that the insurance classification will set statewide standards that should meet all homeowner’s insurance needs.

House Bill HB24-1108: P&C market research

The bill was signed into law on May 31, 2024 and authorizes the insurance commissioner to conduct a market study of property and casualty insurance policies that will examine current market conditions, affordability, potential sustainability measures, and construction impact. captive insurance companies.

Another provision of the law is that the commissioner will examine and report on the conditions used by insurance companies to underwrite P&C policies for homeowners and associations such as condos and HOAs. These criteria are currently a black box for consumers, especially when it comes to estimating fire risk and how much to charge for fire risk-based premiums. The Colorado insurance commissioner’s office said at a public meeting on August 3, 2024 that the study will help shed light on how insurers rate risk, with the future goal of standardizing fire risk ratings across companies and states.

Regulatory changes are always closer than you think

As insurers face an ongoing challenge to set prices correctly, consumers struggle to pay those premiums and regulators struggle to ensure equity for homeowners and public safety. This means that new laws affecting the insurance industry are constantly being proposed and passed throughout the US

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