Colorado may let utilities pay millions into home insurance fund in exchange for less wildfire liability

Colorado utilities would be less financially liable for causing wildfires if they invest tens of millions of dollars into a program aimed at driving down home insurance costs under a bill backed by Gov. Jared Polis and a group of Democratic state lawmakers.

The money — up to $100 million every five years paid as bonds — would be used by the state to buy reinsurance for home insurers. Reinsurance is insurance for insurers that kicks in under extraordinary circumstances, such as when a natural disaster causes enormous losses.

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The approach seeks to reduce private insurers' financial risk and therefore drive down premiums paid by homeowners. Backers of House Bill 1302 also hope it prevents insurers from exiting the state, which would make it even more difficult for Coloradans to get coverage.

The concept is borrowed from a health insurance program adopted in Colorado in 2019 that has helped drive down costs — albeit with some caveats.

"This is something that we've been doing in health insurance for a number of years," said Rep. Kyle Brown, a Louisville Democrat and one of the lead sponsors of the bill. "We need to make sure that we have a similar approach here so that when we have these giant spikes and losses in a given year, there's a backstop by the state that would pay."

But insurers are pushing back on the proposal, a first-in-the-nation concept, saying it could actually further weaken Colorado's already shaky home insurance market. They also argue that health insurance and home insurance are very different animals.

"It doesn't make financial sense to us," said Carole Walker, who leads the Rocky Mountain Insurance Information Association, an industry trade group. "It's complex. It's confusing. So much of it is based on what we think are un-actuarially sound principles. We have major concerns."

One of insurers' biggest complaints is how the bill would impose fees on them if the reinsurance fund doesn't have enough money to cover the reinsurance premiums.

The measure is the legislature's latest effort in recent years to rein in rising property insurance costs caused by increased wildfire and hail risks tied to a warming climate. Polis sees it as a cornerstone of his wildfire policy push.

"I think it can be a win-win for everybody," Polis told The Colorado Sun recently. "There are currently Coloradans that only have access to one insurance product for their home or are being cut off altogether. By reducing risk through reinsurance — a distinct but similar approach to what we took in health care and helped reduce rates — we feel this can help put downward pressure" on the home insurance market.

But it's also the latest example of how complicated the issue is.

The details of House Bill 1302 remain in flux. Its sponsors say the measure is likely to change a lot at its first hearing, which is scheduled for early April.

Brown said utilities, for instance, are a bit uneasy about the bonding mechanism, which is loosely defined in the measure right now. Officially, they are currently neutral on the measure.

"We're continuing to work with both the utilities, as well as the insurance companies and affected constituents, to try to come up with a funding source that makes sense," Brown said.

Xcel Energy, Colorado's largest utility, has been blamed in part by officials for igniting the Marshall fire, the state's most destructive wildfire, in 2021. It denies responsibility.

The company, which is facing about 300 Marshall-fire-related lawsuits, said last year it needs to spend $1.9 billion to prevent future blazes. That's roughly the same amount as the estimated damage caused by the Marshall fire.

Power companies in California have been repeatedly blamed for causing large wildfires.

The bill says utilities that purchase bonds as part of the wildfire reinsurance program wouldn't be able to pass the costs of the bonds onto their customers. In exchange for purchasing the bonds, an insurer would not be able to hold the utility as financially liable for starting a wildfire.

Insurance companies dislike House Bill 1302 for a number of reasons. They don't think $100 million will be enough to pay for the reinsurance premiums and they feel the bill will force them to sell policies in places that are too risky.

But their biggest complaint is about a clause in the measure that would require insurers to lower rates when no more than 75% of their revenue goes toward insured payouts over a three-year period. That's called a loss ratio.

"A three-year window isn't long enough to observe that long-term average of wildfire or weather events," Walker said. "They would just be in a death spiral of facing losses. Companies maintain capital reserves to stay solvent."

The RMIIA said the loss-ratio rule would create an all-risk-no-reward scenario for them.

House Speaker Julie McCluskie, a Dillon Democrat and another lead sponsor of House Bill 1302, said loss-ratio regulations have been used in the health insurance market but that she is willing to work with home insurers to find a solution that works for them.

"I am just beginning conversations with them to better understand the concerns and see if there's a way we can address that," she said.

A plan to drive down hail-related insurance costs, too

Hail is one of the largest drivers of home insurance costs in Colorado, and House Bill 1302 seeks to address that, too.

The measure would impose a fee of up to 1.5% on insurers for every home insurance policy they write in Colorado on a property that doesn't have a so-called resilient roof system, also known as an impact- or hail-resistant roof.

The revenue from the fee, which could be passed along to homeowners, would be capped at $100 million over five years.

The money would be used for grants to help homeowners install resilient roofs. The grants would be administered by a third-party service contracted by the state.

Brown and McCluskie said if there were more hail-resistant roofs in Colorado, homeowners' insurance premiums would go down.

"When big hail events happen, everybody gets a new roof," Brown said. "We're saying, 'let's invest a little bit upfront so that we can protect our homeowners market.' We cannot make sure that we have a functioning homeowners insurance market in Colorado if we are not taking steps to make sure that our roofs are hail-resistant."

Insurers like the idea of a grant program to help Coloradans shore up their homes against hail. It has been tried successfully in other parts of the country.

"The idea of mitigation grant programs is a worthy goal that we all share," Walker said.

But they don't like that House Bill 1302 would force them to pay for the grant program. They also worry about how they would determine which homes have resilient roof systems. Finally, insurers feel the definition of resilient roof systems isn't clear enough in the bill.

Walker also said that while the 1.5% fee could be passed onto customers, that would be easier said than done. The money would initially have to come out of insurers' pockets, and the bill doesn't prescribe how the pass-through could happen.

Insurers are also concerned about forcing homeowners in parts of the state without frequent hail to subsidize the premiums of people who live in hail-prone areas.

But McCluskie and Brown argue that since hail causes home insurance rates across the state to be high, and since insurance programs are most effective when they draw from a large pool, their approach makes sense.

"It is a statewide or regional perspective when you set rates, and if we make those small investments now, that's an overall rate decrease we hope for in the future," McCluskie said.

She said the roof-fee provision in the bill is the area where she thinks compromise can be achieved most easily.

"Of all the components of the bill," she said, "that's getting the most positive feedback."

The lead Senate sponsor of the measure is Sen. Judy Amabile, a Boulder Democrat.