Homeowners Insurance Risks Create Perfect Storm

According to insurance information site The Zebra, Colorado homeowners' average annual insurance premium of $2,271 was the fifth highest in the nation in 2021, compared with the national average of $1,406.

Coloradans' average rate has risen 40 percent since 2019, when Colorado homeowners paid an average premium of $1,618 a year and the state ranked seventh in the nation, based on data from the Insurance Information Institute.

"Colorado tops all the lists no one wants to be on," said Carole Walker, executive director of the Rocky Mountain Insurance Information Association. "We're ranked second in the nation for hail insurance claims and third for wildfire risk."

Claims are skyrocketing, and so are the costs to pay those claims, Walker said.

"Materials cost more; contractors cost more and labor costs more," she said. "And then you have the large-scale disasters like the Marshall Fire and billion-dollar hailstorms, and price surges associated with that. And then just booming population with more people living in the path of hail and wildfire. So unfortunately, Colorado really is in the perfect storm of the risks that we pay insurance for."

The insurance industry defines a catastrophe as a natural disaster that causes at least $25 million in insured damage.

Single events, like the Dec. 15, 2021, windstorm that battered the Pikes Peak region, may cause significant local damage, but they don't compare with catastrophic hailstorms like the May 8, 2017, event that caused nearly $2.4 billion in insured losses in the Denver metro area.

Cost evaluation is still in progress for the Dec. 30, 2021, Marshall Fire in Boulder County, but it is shaping up to be the most expensive in the state's history, with preliminary insured damage estimates topping $2 billion.

From 2002 to 2021, the state has experienced 45 damage-causing natural events, according to RMIIA. Drought, wildfires and floods have been major culprits.

"Colorado has some of the fastest rising rates in the country because of the escalating risk factors," Walker said. "We are also one of the worst profitability states" for insurers in the nation.

"When we had the $2.4 billion hailstorm in May 2017, for every dollar they were taking in, they were paying out $1.60," she said. "Over the past 10 years, Colorado has been a loser when it comes to profitability for homeowners insurance. That is of concern as we try to keep insurance as affordable as possible in these times of economic hardship."

INDUSTRY REGULATION

Despite increased costs and increased risks, "we still have a competitive market in Colorado," Walker said. "At the same time, it is one of the most highly regulated industries out there. The main standard is that insurance rates by statute cannot be unfairly discriminatory and they can't be excessive."

It's a difficult balance for insurance companies to strike, she said — "making sure they're charging a proper rate based on marketplace trends so they are able to pay out claims when we have an event like the Marshall fire. The last thing you want is a company to go insolvent."

Insurers develop rates using their loss experience, models and trending, said Vincent Plymell, assistant commissioner for communications at the Colorado Department of Regulatory Agencies' Division of Insurance.

"In recent years, property and casualty insurers have generally not been increasing premiums by the full amounts they would have been justified to file based on trends and loss experiences," Plymell said. "This is referred to as the indicated rate change, and the insurers generally haven't been filing for the full indicated increases — likely because companies want to remain competitive on premiums."

Loss experiences and trends take into consideration the impact of previous wildfires, windstorms, hailstorms and tornadoes, he said, and insurers also use catastrophic modeling to look ahead.

"But each company has its own tolerances for these catastrophes and how much they impact premiums," Plymell said.

Insurers are allowed by law to consider past and prospective losses and expenses to establish rates, but they are prohibited from setting premiums to make up for past losses.

Insurers must submit rate filings annually to the Division of Insurance. These filings must contain detailed data and information to demonstrate that rates are not excessive, inadequate or unfairly discriminatory.

If the Division of Insurance finds that a rate is excessive or discriminatory, "they can pull back the rate and even fine the insurance company," Walker said. "But they're also looking to make sure that they're not undercharging. They even have to file [information about] discounts to make sure that they are in balance with solvency."

The state has many safeguards in place to protect consumers, Walker said, including a consumer complaints department that tracks all inquiries and complaints.

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"Colorado tops all the lists no one wants to be on." — Carole Walker

"The insurance division has the power to investigate claims and to require that the insurance company provide documentation, and there are repercussions if a complaint is found to be valid," she said. "They also regulate insurance agents, who are beholden to regulatory standards to keep their license."

Rates within localities can vary significantly from ZIP code to ZIP code, depending on factors such as high hail or wildfire risk or high crime, Walker said.

Insurers look at individual risk factors as well.

"Those can be things like the type of construction material you have on your home, such as the type of roof you have, since that is the most vulnerable part of your home," she said. "They're basically trying to get, as accurately as possible, what it would cost to reconstruct your home in today's dollars and what kind of risk you pose."

KEEPING COSTS DOWN

Robert Edgin, CEO of EJC Insurance and Financial, said raising rates are not the only way insurers are trying to control costs and stay in business.

"They also tighten up their underwriting to try to lessen losses," Edgin said. "They may not write so many policies in areas where we're seeing more likelihood of wildfires. We're seeing a lot of that going on in Colorado right now."

Many insurance companies use a wildfire scoring system — a risk scale of 0-100.

"A few years ago, certain insurance companies would write insurance all the way up to a wildfire score of 80. Now, it's down to 50," he said.

Colorado Springs has a significant number of areas that are above an acceptable wildfire risk score, he said, and some insurers will not offer policies there.

"Consumers will have to look a lot harder to find insurance in those areas," he said.

For homeowners in some states, a Fair Access Insurance Requirements insurance plan may be available for high-risk clients who can't find a commercial insurer. These plans are policies of last resort and carry higher costs and deductibles.

Colorado does not have a FAIR insurance plan, but because the state has become such a challenging marketplace, "legislators and the insurance division are considering whether Colorado has a need for some type of state fund or FAIR plan, and what that would look like and how would we fund it," Walker said.

"The main goal is trying to preserve the private marketplace," she said. "But a state fund of last resort has become an increasing part of the conversation."

Homeowners who are denied coverage or dropped by their insurer still have options, Walker said.

"We have a large, competitive marketplace with many different types of insurers, from preferred, high-net-worth insurers to nonstandard, higher risk insurers," she said. "If you live in a high-risk area, especially a high-risk wildfire area, you may have to shop around for it, and it will cost you more. But for the most part, we haven't found people that just aren't able to get insurance."

Consumers can increase their insurability and even lower costs by taking steps to reduce risks.

"There's not much you can do to prevent a hailstorm or a windstorm, but you can get a wind- and hail-resistant shingle, called a Class 4 shingle," Edgin said. These are impact-resistant shingles that can stand up to hail and winds of up to 110 mph.

Although it is costly to replace a roof, Edgin said some insurance companies are giving 40-50 percent discounts to homeowners who reroof with wind- and hail-resistant shingles.

"I've been counseling homeowners for years to clear brush away from their house and do fire mitigation," he said. Local fire departments can offer tips about fire mitigation.

"You can also raise your deductible, which means you're assuming more of the risk yourself versus the insurance company," he said. "You can make sure that you bundle your insurance policies, because grouping them together is getting larger discounts with most insurance companies. The more lines of business that an insurance company holds for a consumer, the more willing they are to overlook the number of claims.

"We've all been conditioned that if something goes wrong with your house, you file a claim with your insurance," he said. "That has happened so much that maybe now we file claims that we should take care of ourselves. Even a small claim without a big payout could jeopardize your insurability."

Regardless of what homeowners do to mitigate risk, insurance costs are going to continue to rise, Edgin said.

"We are seeing insurance rates go up every single year, typically 10 percent or more," he said, and in many cases, homeowners are having to increase their coverage because of increasing valuations and rising costs of rebuilding.

"We're doing a lot of outreach programs right now with our clients to prepare them for an extra $50, $75 or $100 a month," he said, "and in some areas, $200-$300 a month."

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Factors that affect home insurance cost

* Square footage of the house and any additional structures, such as a detached garage

* Building costs in your area

* The type of construction, materials, and features on your home, including the roofing

* Crime rates in your neighborhood

* The likelihood of damage due to a disaster, such as a wildfire, hail or wind

* Distance to a fire hydrant and fire station, whether your neighborhood is protected by professional or volunteer firefighters and any factors that affect the time it would take to extinguish a fire in your area

* The condition of the plumbing, heating and electrical systems in your home

* Your credit history

* The number of claims you file over a certain period of time

Source: Rocky Mountain Insurance Information Association, rmiia.org