Colorado is implementing major reforms in the home insurance market. If you feel the change is familiar, there is a good reason. The state’s new laws are surprisingly similar to the Affordable Care Act (ACA) in a way that aims to ensure fairness and be accountable to insurers. However, unlike health insurance, where metrics like health loss rates are more stable, applying similar rules to home insurance opens up a whole new set of challenges.
What is the 75% rule?
Under New LawColorado home insurers must spend at least 75% of the premiums they collect on claims over three years. If the insurance company has not reached this benchmark, the state estimates that the fees charged are excessive. And here’s the kicker. Insurance companies that missed the mark must file a fee at least 5% lower than the previous year.
This is because if the ACA rules seem to require health insurance companies to spend 80-85% of their premium revenue on healthcare costs or refund the difference, that’s because the principles are roughly the same. Both laws aim to prevent excessive pricing by ensuring that consumers get more value for the premium. However, if health insurance costs like hospital visits and medication tend to have a more predictable pattern, then home insurance is facing the Mother Nature wildcard. From hail to wildfires, Colorado homeowners and insurance companies are well aware of how possible unpredictable claims are.
Add a new twist to tackle wildfires
Comparisons do not stop at loss ratio. Colorado law also emphasizes risk reduction and equity, which is reminiscent of the ACA’s focus on healthcare access and improving outcomes. A new state program called “Enhanced Homes Enterprises” will collect a 1.5% fee from insurance companies based on the premiums they collect. This funding will be used to provide grants to homeowners and will help upgrade the roof with resilient materials that can withstand wildfire damage.
This approach reflects the ACA’s emphasis on preventive care. In this case, the investment aims to reduce costs greater than (such as regular screenings). By investing in stronger, safer homes, the state expects homeowners to get fewer claims after a wildfire, and benefit insurers and residents alike.
And there’s reinsurance. The creation of Colorado’s national wildfire catastrophe reinsurance program was like the ACA risk corridor and served as a financial safety net for health insurance companies that undertake newly insured customers. Here, reinsurance programs can cover some of the losses that insured sufferers will experience after a large wildfire, maintain solvents and, importantly, continue to provide coverage in areas where fire is prone.
Why is home insurance not so simple?
Despite the similarities of the ACA, home insurance adds a layer of complexity. Health insurance costs and risks are widely spread across a large pool of members facing relatively predictable medical needs, but home insurance is directly linked to location and property risk. In Colorado, high wildfire risk areas throw wrenches to achieve stability.
By requesting a 75% loss rate, lawmakers are urging insurance companies to prioritize policyholder claims rather than stockpiling surplus income. However, the unpredictability of natural disasters means that insurance companies may face tough balancing acts. What happens in a year when bills are surged due to particularly severe wildfire season? Insurance companies argue that the rules can produce unintended consequences, such as narrowing coverage options and making them difficult to find in high-risk areas.
What does that mean to you?
If you’re a Colorado homeowner, you might see some benefits from this shakeup. A higher loss rate requirement means that insurance companies are likely to prioritize claim payments, and a new program for roof upgrades can make your home safer and perhaps cheaper in the long run. However, the reality checks are going well. Insurers may be able to respond by strengthening standards for issuing policies for properties that are deemed to be higher risk, or by increasing premiums.
For insurance companies, interests are high, as was the case for health insurance companies under the ACA. To balance regulatory demands with financial sustainability requires innovation as well as compliance. Companies may need to go beyond traditional policies to investigate collaborations with mitigation services or smarter risk models.
Important highlights of Colorado’s Home Insurance Reform Bill
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Creating Wildfire Catastrophe Reinsurance Enterprise
- Establish a state-run reinsurance program to help insurers manage wildfire-related losses.
- Provide financial assistance through reinsurance payments, catastrophe debts and premiums.
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Funding mechanism
- Implement a 1.5% rate for insurance companies based on the premiums they collect from homeowners.
- Use catastrophe debt, income debt and federal/private grants to create funds for wildfire-related insurance claims.
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Enhance the Colorado Homes Enterprise
- Funding grant programs to help homeowners revamp their resilient roofing materials to reduce the risk of damage from bad weather.
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Homeowner Insurance Regulatory Fees
- The minimum loss rate is set at 75%, and the insurer requires that the premium be assigned to the claim over a three-year period.
- Insurers that lack a loss ratio threshold must file fees at least 5% lower than the previous year.
- Insurers will offer two rate filings that reflect the impact of the reinsurance program and one rate declaration without it.
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Insurance company responsibility
- Insurance companies must provide statewide coverage, including high-risk wildfire zones.
- It is obligated to insurers who receive reinsurance assistance for low premiums in high-risk wildfire areas.
- Insurers will properly manage wildfire-related claims to maintain eligibility for reinsurance benefits.
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Utility Protection
- It prohibits utilities from passing the costs of catastrophe bonds to consumers.
- Protects utilities from financial liability in wildfire disasters.
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Sunset clause
- It is set to expire on September 1, 2035, unless extended by Congress.
- The necessary legislative reviews are required to assess the effectiveness and necessity of the program before it expires.
This sweeping law aims to stabilize the Colorado homeowners insurance market, improve affordability in high-risk wildfire regions, and reduce financial risks for both homeowners and insurance companies.
The whole picture
What Colorado is doing under this law feels like deja vu to those familiar with the ACA. Regulations like these seek to scale in favor of consumers and ensure industry equity and accountability, which is important to public welfare. However, they highlight the difficulty of applying blanket policies to inherent, unstable sectors, such as the natural disasters of household insurance.
The full effect of these changes has not yet been seen, but one thing is clear. Colorado is taking bold steps to rethink insurance in one of the nation’s most disaster-prone regions. And, like healthcare reform, it proves that sometimes shaking the status quo is the only way to move forward.
