Colorado legislators are hoping that imposing a new 1% fee on homeowners insurance will help stabilize the state’s increasingly volatile marketplace. 

A bill proposal is making its way through the state legislature that would create two new enterprises within the Colorado Division of Insurance to tackle the two biggest cost drivers in the state’s property insurance market: hail and wildfire. 

“As we’ve continued to wrestle with the skyrocketing costs of premiums in this state — insurance rates in Colorado are 87% higher than the national average, putting us in the top 10 for least affordable space when it comes to homeowner’s insurance — the step that we are taking in (House Bill) 1302 is to help promote a more affordable approach to property insurance and over time, we hope to bring down the cost of insurance rates across the state,” said House Speaker Julie McCluskie, a Dillon Democrat. 

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McCluskie is sponsoring the bill alongside Rep. Kyle Brown and Sen. Judy Amabile, both Front Range Democrats.  

According to a 2023 report commissioned by the Colorado Division of Insurance, the average homeowner premium in Colorado increased by nearly 52% between January 2019 and October 2022, with the annual increase accelerating. The average premium increase went from nearly 7% in 2020 to an average increase of nearly 15% in 2022, making the rate increase “measurably higher” in Colorado than the countrywide average,” the report notes. 

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What the bill proposes

The first enterprise created by the bill would be the “Strengthen Homes Enterprise,” which would create a grant program to help homeowners pay for improvements that harden homes against extreme weather like wind and hail. 

“Fewer losses means fewer claims, which benefit insurers and homeowners alike,” Brown said Monday. “Hardened homes are easier to insure and help stabilize rates in hail-prone areas of the state.”

Hail and wind are the leading causes of property damage in Colorado, reported Michael Conway, the state’s insurance commissioner, at Monday’s bill hearing. 

In turn, hail is the “biggest insurance cost driver,” according to Carole Walker, executive director of the Rocky Mountain Insurance Association. The association represents 85% of the Colorado homeowners insurance companies. 

While hail damage mostly impacts eastern Colorado, it is driving up insurance rates across the state, McCluskie and bill supporters claim.

“While hail occurs in a very small, non-impactful way up in the High Country, we bear the costs that occur when there’s a significant hailstorm on the Eastern Plains because our risk pool is really the entire state,” McCluskie said. “What happens in one part of the state impacts property insurance rates in other parts of the state. That’s why we need to take a statewide approach in how we address the problem.” 

The second enterprise created by the bill would be the “Wildfire Catastrophe Reinsurance Enterprise,” creating a state reinsurance program to help provide funding for insurers when catastrophic incidents occur. 

The goal of this would be to reduce the volatility of homeowners insurance rates following large wildfire events like the 2021-2022 Marshall Fire in Boulder or the 2020 East Troublesome Fire in Grand County.

“This is really designed to provide additional funding for property insurers if we do have a significant fire event to help support them,” McCluskie said. “It would help offset those cost impacts that the insurance companies feel, hoping then that that translates to savings or at least not an increase in property insurance rates.”

Conway said a reinsurance fund with “approximately $300 million worth of capacity would have offset approximately 10% to nearly 30% of total losses in the high to extreme wildfire danger areas of the state,” citing the 2023 Division of Insurance report.  

“In many of those years, that would have meant that the insurers in our state would have been profitable, whereas otherwise, they were not,” Conway said. “By transferring a portion of risk to the enterprise, we incentivize insurers to return to high-risk areas, and with competition, premiums will go down … That will ensure continued availability of coverage in wildfire-prone areas of Colorado and reduce volatility in our homeowners’ insurance market.”

How the enterprises would be funded

Bill sponsors passed amendments to the bill on Monday that changed the funding mechanisms for both enterprises to appease insurers’ concerns about the original proposal. 

In the initial proposal, the hail enterprise and grant program was to be funded by a 1.5% fee on policyholders. Amendments, however, reduced this to a 0.5% fee for policyholders who don’t have a hail-resistant roof. 

The bill defines a “resilient roof system” as one that meets the standards of the Insurance Institute for Business and Home Safety, but also allows that the enterprise will be able to set these standards.  

Amendments changed the funding mechanism for the wildfire enterprise from catastrophe bonds, which the insurers would have paid, to a 0.5% fee on every homeowners insurance policy in Colorado. 

Walker, whose association represents the majority of Colorado homeowners insurance companies, reported that these amendments “will help (the bill) achieve its purpose of increasing insurance availability while balancing that with market competition and stability.”

Both enterprises could collect up to $100 million every five years. 

Who would benefit from the enterprises? 

Those opposing the bill questioned how making homeowners pay additional fees would ultimately drive down their costs. 

“Placing new fees on all policyholders, many of whom won’t directly benefit, drives up costs and doesn’t really get at the root cause of the issue,” said Carly West with the Denver Metro Chamber of Commerce, adding that it mirrors other policy proposals that will impact affordability with fees. 

Another bill proposed this session would impose a fee on car insurance in Colorado to fund an enterprise and grant program for road safety projects. 

McCluskie and supporters claim that the bill has the ultimate goal of bringing down insurance rates across the state in the years to come by investing in prevention and reducing insurer risk. 

Conway claimed that the enterprises will increase insurance affordability in two fundamental ways. 

First, by incentivizing homeowners to replace roofs, it would drive down premiums on homes. In Denver, Coway reported that replacing roofs would reduce premiums by $400, Conway claimed. 

Homeowners who get a hail-resistant roof would no longer have to pay the proposed 0.5% fee.

The enterprise and grant funding help create “incentives that the private market cannot handle on its own,” Brown said.

“I think that some insurance companies are offering some discounts here and there for mitigation related to wildfire or mitigation related to hail,” he added. “But what this program provides is specific grant dollars that will help to defray the cost of a new roof and encourage that kind of risk mitigation efforts because once you mitigate your roof for hail, then you are no longer subject to the increased fee.”

While the Strengthen Colorado Homes Enterprise focuses heavily on hail, the board created to distribute grant dollars would have the authority to fortify roofs against wildfire as well, McCluskie said. 

“The standard for fortifying your roof against wildfire and fortifying your roof against hail is effectively the same,” she said. 

The second way Conway claimed the bill would increase affordability was by bringing stability to the homeowners insurance marketplace with the wildfire enterprise. 

“If we don’t find stability for that market, homeowner’s insurance rates are going to continue to go up year after year after year because we have insurance companies that are continuing to lose money in Colorado, both because of hail and wildfire,” Conway said.   

While the risk of wildfire risk in Summit County and other rural, high-altitude communities has historically been a part of daily life, the cost and availability of homeowners insurance has changed in recent years, said Summit County Commissioner Tamara Pogue on Monday.

“Many in my community find themselves with dramatically escalating homeowners’ insurance if they can even find it at all. Families are seeing their premiums double or triple or worse, getting dropped altogether,” Pogue said. “It’s making it harder to sell homes, harder to buy homes, and harder to keep homes. This is not just an insurance issue. It’s a housing issue.”

This bill “thoughtfully addresses both the cause and the consequence of this crisis,” Pogue said.