Colorado’s wildfire risk is so high some homeowners can’t get insured. The state may create last-resort coverage.
State lawmakers are preparing to introduce a bill in the legislature that would create a state sponsored governmental program offering basic home insurance to the growing number of Colorado homeowners who say they can’t get coverage from private companies because the risk of wildfire is growing. The bill sounds innocuous enough, but don’t forget someone has to pay and that someone will be you! What is in the new proposal? How will this alter property insurance in Colorado? Who pays and how much?
What is in the new proposal for a government run insurance program
State-run or state-created insurers of last resort started cropping up in the 1960s in coastal and urban areas where property owners faced high risks — from riots, fires and hurricanes — and couldn’t get traditional coverage from private insurance companies, said Mark Friedlander, a spokesman for the Insurance Information Institute, another insurance industry trade group.
Theoretically, the new state run policy would insure property owners in extremely high risk areas that are not able to obtain fire insurance. As a lender in Colorado for over 20 years I have not seen a single instance where insurance was not attainable at a price. The reason that the issue of not being able to get insurance is even coming up is that insurance providers are drastically raising rates in high risk areas due to huge losses in the last several years from wildfires.
I’ve been dropped on my properties due to “high fire risk” and live and have lived in the mountains and foothills throughout Colorado. Every time I was dropped I was able to obtain insurance albeit at a price and with certain stipulations (tree removal, defensible space, etc…)
The new proposal subsidizes property owners and does not address the root cause
Unfortunately any new state sponsored insurance agency will further subsidize property owners in high risk areas. A good example is the recent Marshall fire. A large cause of how quickly the flames spread were wood fences that created a “ladder” to the structure and ultimately destroyed many houses. One would think that with this knowledge when properties were rebuilt they should not have wooden fences. Unfortunately the opposite is occurring whereby many of the houses that are being rebuilt have installed wood fences. In other words, nothing has changed and a state run insurance program would continue to subsidize bad decisions.
Furthermore a state run insurance program will enable continued building in high risk areas whose costs will be born by taxpayers. A state run insurance program is a redistribution from lower risk properties to higher risk properties with no change in behaviors.
How will this impact Colorado’s insurance market? A Cautionary tale from Florida
We can look no further than Florida for what happens with a state run program. Florida’s insurer of last resort, Citizens Property Insurance Corps., predicts to hit a record with nearly 2 million policyholders by the end of 2023, citing “continued instability” in the state’s insurance market.
According to the Citizens’ 2023 Operating Budget Report, the insurer ended 2022 at just above 1,153,000 policies and they predict to reach the highest number of premiums in their 20-year history by the end of 2023 with nearly 1.7 million.
The insurer averaged about 400,000 policyholders prior to 2020, when the state’s property insurance market started to crumble with several private insurers either going insolvent or pulling out of the state.
In essence the state insurance program has taken a substantial number of people out of the private Florida insurance marketplace and made it unprofitable for many insurance companies. Remember insurance is a volume game with the objective to take in more from premiums than you pay out in claims. As the number of insured declines due to the state subsidizing property owners, private insurance companies are no longer viable.
Who pays and how much?
Anyone not in the state subsidized program will pay via higher rates and taxes/fees that will be needed in order to subsidize a high risk insurance pool. We have seen in Florida that costs have skyrocketed for insurance. The same will occur in Colorado.
Colorado’s proposed plan to get into the insurance business is a bad solution to a problem that is not real. The overwhelming majority of property owners can obtain insurance at a price. The real reason that the state is getting involved in the insurance business is because property owners do not like the price of the new coverage. Remember, the price reflects the risk that insurance companies have and also creates incentives and disincentives in the market. For example, when I renewed my insurance after getting dropped, the new carrier required certain items (removal of trees, protected space, etc…) in order to get insurance. Without making these changes, I would have paid a substantially higher price.
This is a terrible idea to create a state run property insurance fund to subsidize properties in high risk areas. A better solution would be to address the root causes of the issues including building in extremely high risk areas and building requirements like no wood fencing after what happened in the Marshall fire. Unfortunately the legislature is misguided in their proposal for a state run insurance program and at the end of the day everyone in the state will pay substantially more to subsidize others as opposed to making structural reforms.
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Written by Glen Weinberg, Owner Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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