Demand for Colorado's new last-resort property insurance 'significantly less' than expected

Only 51 homeowners have signed up so far for the Fair Access to Insurance Requirements (FAIR) Plan, Colorado's newly created insurance of last resort for property owners with repeated denials from traditional insurers.

The low numbers are in some ways by design. The website, which launched along with the program in April, is full of "turn back now" warnings. Plans have "substantially higher premiums" and are "the most expensive way to insure a property," warns the website.

The insurance plan is state-backed, the product of the FAIR Act signed into law by Gov. Jared Polis in 2023. It is the first insurance of last resort created by a state in decades. It is also one of the first specifically set up to address insurability problems caused by natural disasters, said Executive Director Kelly Campbell.

"We are one of the first catastrophe-related plans to be created," she said.

The program's lack of self-advertising is not stopping some from looking into coverage as wildfire risk continues to increase in Colorado's wildland-urban interface. Gage Struble, a Farmers Insurance agent based in Woodland Park, said he was writing his first FAIR Plan policy this past week.

"It's probably a good stopgap for higher-risk homes up here," he said.

Not for everybody

Modeled after insurers of last resort in California and Florida, the FAIR Plan is meant for homes and commercial properties that are too high risk for traditional insurance. To get covered, a property owner must prove they have been rejected by three insurance companies on the admitted market.

Campbell said that the majority of plans written have been for property in areas of high risk for wildfires.

Another large group are properties with preexisting claims history.

"They aren't just in mountain areas," she said.

FAIR Plan coverage is likely to net a property owner less than market value in the event of a total loss. It covers the actual cash value of a property, something that depreciates over time with things like aging appliances and wear and tear. Most traditional insurance policies cover the replacement cost of a home, which is usually much higher.

Struble said that the gap, while different for every structure, can be major. He said he was telling clients that a total-loss claim on a $300,000 home covered under the FAIR Plan would likely net about $150,000 to $180,000.

The coverage cap for the FAIR Plan also is just $750,000, a nonstarter for more expensive mountain properties in Colorado.

"It's not a plan for everybody," Struble said.

Still, Campbell said the plan was seeing fewer policies than the state anticipated based on market research.

"We are seeing demand significantly less than we were expecting," she said.

She attributes some of the lack of interest to a strong non-admitted market in Colorado. Non-admitted carriers are insurance companies that do not have to meet Colorado's regulations and are not covered by the state in the case of insolvency.

A plan with a non-admitted carrier is riskier but still often a better option than the FAIR Plan, according to Campbell.

Actuarially sound

Colorado's insurance of last resort launches into a fraught landscape for similar providers.

California's FAIR Plan is facing scrutiny this year as it navigates thousands of claims related to the Los Angeles wildfires in January. The state's insurance of last resort is facing over $4 billion in estimated total payouts.

In February, facing a "substantial risk of insolvency," the California FAIR Plan asked for and received authorization to collect $1 billion to pay claims outstripping its earnings for the year in February.

The money comes from member insurers, California's admitted carriers that have state backing and agree to follow state regulations. Part of the cost of such assessments can be passed along to consumers.

Financial backing for Colorado's FAIR Plan works similarly, with admitted carriers operating in the state bearing the cost of claims. Campbell said that the FAIR Plan put two assessments on the admitted market totaling $1 billion for operating expenses, anticipated claims and surplus for emergencies.

"Those carriers are essentially our financial backbone," she said.

She said that one of the things that distinguishes Colorado's insurance of last resort is that premiums incorporate the cost of reinsurance — basically insurance for insurance companies.

She said that California's rates are "not actuarially sound," meaning it does not have the funds to meet its potential financial obligations.

Colorado has had dozens of billion-dollar disasters since 1980, however, and the yearly costs have risen sharply in the past decade. An average year sees over $3 billion in damages from wildfires, hailstorms, drought, flooding and other natural disasters, according to the National Oceanic and Atmospheric Administration.

"A billion-dollar disaster is definitely within the realm of possibility in Colorado," said Campbell.

Florissant

The Pikes Peak Historical Society operates out of a wood-sided building in the small community of Florissant, about 45 minutes away from Colorado Springs. President John Rakowski said it was dropped from its insurance earlier this year, at the same time multiple Florissant homeowners also got nonrenewal letters.

"All these cancellations have really started hammering us in the area around six or eight months ago," he said.

After a "tough battle," he said he found another carrier willing to insure the museum at a substantial increase. At the same time, his homeowners insurance went up 40%, accompanied by a letter saying profits were up for the company.

"It's just putting a little salt in the wound," he said.

According to Campbell, Florissant has just one FAIR Plan policy so far. With carriers intermittently dropping policies and raising rates because of wildfire risk, the area might soon become a prime location for the insurer. Struble said his agency sees a high percentage of rejections there.

"They get 'no's' from everybody," he said.

Rakowski said he felt rising insurance costs were pushing out long-term residents. Which companies are still writing policies and whether to consider the FAIR Plan are things the community is discussing.

"It's a common topic of conversation out here when you meet people," he said.