HOMEOWNERS INSURANCE
Colorado Bill Sets Home Loss Ratio Requirements, Creates Wildfire Reinsurance Program
DENVER //BestWire// - Colorado lawmakers are considering setting a loss ratio threshold for home insurance to help determine when rates become excessive, according to House Bill 1302, which also creates a wildfire reinsurance program and lays out funding a home hardening program.
(Photo credit: Helen H. Richardson/MediaNews Group/The Denver Post via Getty Images)The loss ratio would determine rates are excessive if the carrier’s loss ratio is less than 75 during a three-year period, according to HB 1302. If the loss ratio comes in below the threshold, the insurer would need to submit rates that are at least 5% below the previous year’s rates.
The ratio provision was crafted to make sure home insurance premiums go toward paying claims while working to keep premiums as low as possible, according to Democrat Rep. Kyle Brown, who represents District 12 and is one of the bill’s sponsors.
“This allows companies to still make profit while also protecting homeowners from excessive price increases,” Brown said in an emailed statement. “We very much want to grow a healthy insurance market here in Colorado, working to address both the underlying risk factors as well as the practices companies use to set rates.”
The loss ratio portion is a carryover from the health insurance section and is something the industry is warning lawmakers about pursuing, said Carole Walker, executive director of Rocky Mountain Insurance Information Association.
“We’ve tried to caution them that property insurance doesn’t work like health insurance,” Walker said, continuing: “It is very volatile year to year, especially in a state like Colorado, where we are ranked second in the nation for hail insurance.”
Highlighting this volatility, Walker explained that a year with few hailstorms or wildfires could be followed by a year with heavy hail and fire activity. This makes carrying surplus over from one year into the next vital for carriers to survive in the state.
“Insurance companies cannot run at a 75 ratio, and that’s not even a combined ratio,” Walker said. “Most companies, when you add expenses, they cannot stay in business if they are giving back premium and are taking premium reductions over a three-year window at a 75 expense ratio."
HB 1302 would also create in the division of insurance a “strengthen homes enterprise,” a state-owned business that would impose and collect a fee from all home insurance companies, including the state’s new Fair Plan, to support a risk mitigation grant program. The enterprise would collect 1.5% of dollar amount of home insurance premiums an insurer collects.
The enterprise would also administer the grant program, which would support programs to mitigate against wildfires, high winds, hail and other extreme events. The bill says the program will benefit carriers by lowering the overall risk in the market.
The legislation also creates a wildfire reinsurance enterprise that aims to further stabilize the home insurance sector, the bill says. The enterprise would be part of the insurance department and would pay reinsurance to carriers offering home insurance in the state.
The reinsurance enterprise would raise funds for the program by issuing revenue bonds and catastrophe bonds as well as investment revenue. The enterprise would also be empowered to collect fees from insurers to cover any shortfalls should no disasters occur during the bonds’ terms and insufficient funds exist to cover bond redemptions.
Walker said these state-run enterprises amount to another tax insurance carriers would have to shoulder. Additionally, many of these provisions would be experimental and would insert uncertainty into the market.
“The premise of the bill is really challenging for us to understand,” Walker said. “It says it's going to reduce premiums and stabilize the market, when you look at this as an insurance person, it does the opposite.”
The state legislature is also considering new disclosure and notification requirements for carriers that use risk models in underwriting (BestWire, Feb. 14, 2025). If enacted, rate filings would need to include a description of models being used, how they impact rates and how they are used in underwriting.
The five largest writers of homeowners multiperil insurance in Colorado during 2023, based on direct premiums written, were: State Farm Group, 20.82%; Liberty Mutual Insurance Cos., 15.42%; USAA Group, 12.62%; American Family Insurance Group, 9.5%; and Allstate Insurance Group, 8.33%, according to BestLink.
(By Steve Hallo, senior associate editor, BestWire: Steve.Hallo@ambest.com)