Data and technology are providing new ways for homeowners to assess their property’s risk from extreme weather events like wildfires and floods. Homeowners can now get detailed reports, complete with recommendations, by simply entering their address. However, Colorado Insurance Commissioner Michael Conway questions the value of these tools if insurance companies don’t incorporate them into their models or consider homeowner mitigation efforts.
Rising Premiums and Coverage Challenges
Colorado homeowners’ premiums have surged almost 60% in the last five years, and many insurers are dropping coverage or leaving the state entirely. The state is facing a homeowners insurance crisis, driven by multi-billion dollar disasters in recent years.
Conway voiced concerns about the disconnect between recommendations for homeowners and the practices of insurance companies during an October 15 town hall in Pueblo:
“It makes me feel like we’re lying to people,” Conway said at an Oct. 15 town hall for homeowners in Pueblo. “So if we’re telling people that they should do things, then that has to be reflected in these models. So they have to get better.”
Potential Solutions on the Horizon
Colorado is implementing the Fair Access to Insurance Requirements (FAIR) Plan, a state-run insurance program, to assist homeowners who have been denied coverage elsewhere. The FAIR Plan is expected to begin accepting applications soon, though the exact start date is still being finalized.
Proposed legislation also aims to require insurance carriers to consider mitigation efforts at the state, community, and property levels when determining premiums. This could benefit proactive communities, such as Colorado Springs, where projects are underway to reduce fire hazards. At the state level, significant investments have been made in the firefighting fleet, including the purchase of specialized helicopters.
Conway emphasized the need for transparency, advocating for insurers to share available discounts for mitigation efforts, and for homeowners to be able to view and appeal their wildfire scores. While mitigation discounts wouldn’t be mandated immediately, one bill seeks to provide grants for hail-resistant roofs, which could reduce claims and benefit the market. Another would establish a reinsurance cap program specifically for wildfires.
Addressing the Limitations of Insurance Models
Inaccurate catastrophe models are another concern. If these models overestimate risk, consumers bear the cost. “There is a risk that the models will be wrong and people will be paying too much because the model inaccurately forecasted the risk of a wildfire,” Conway stated. He believes insurance companies should share some of that risk.
Conway suggests that a balanced loss ratio, between 70% and 80% per year for home insurance, is reasonable, meaning that for every dollar in premiums, 70 to 80 cents are used to pay claims.
New Forecasting Methods
Companies like Zesty AI are using satellite imagery to assess property-level risk from extreme weather. They utilize detailed data like property tax records and aerial imagery to evaluate improvements and materials, providing more granular risk assessments than traditional methods. This allows for dynamic risk scoring as homeowners make improvements.
Zesty AI provides a neighborhood score and a property-level score, helping homeowners understand their risk and the impact of mitigation efforts. Studies have shown that reducing fuels around a property can significantly improve its chances of surviving a wildfire.
The FAIR Plan: A Safety Net for Homeowners
For those who can’t find coverage, the state’s FAIR Plan is designed to be an insurance option, and it is expected to begin accepting applications soon. Created by House Bill 1288 in 2023, the FAIR Plan offers limited coverage, with exclusions for water damage, theft, and liability, focusing on high-risk areas. The plan intends to provide a safety net for residents facing difficulty obtaining insurance.
The FAIR Plan offers coverage up to $750,000 for homeowners and $5 million for commercial properties. It is designed as the only option for those needing this particular coverage.
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