Under the new law, home insurance companies in Colorado must spend at least 75% of the premiums they collect on actual claims over a three-year period. If an insurer falls short of this 75% loss ratio, the state will assume their rates were excessive. Insurers who miss the target will be required to file new rates that are at least 5% lower than the previous year.
This rule works similarly to the Affordable Care Act’s medical loss ratio for health insurers, which requires them to spend 80–85% of premium revenue on healthcare. The goal is to ensure that consumers get real value for their money and that insurers aren’t charging excessive premiums without paying out claims.
Why Home Insurance Is More Complex Than Health Insurance
While the principle is similar, home insurance faces far more unpredictable risks. Health costs are relatively stable and based on large pools of patients with predictable needs. In contrast, home insurance is heavily influenced by natural disasters. In Colorado, wildfires, hailstorms, and other extreme weather events can cause sudden spikes in claims, making it harder for insurers to maintain a consistent loss ratio.Critics warn that the 75% rule could backfire in years with major disasters, potentially leading insurers to pull back from high-risk areas or tighten coverage terms to protect their bottom line.
Strengthening Homes Against Wildfires
The law includes a new program called the Strengthen Colorado Homes Enterprise. A 1.5% fee will be collected from insurers based on the premiums they collect. These funds will support grants for homeowners to upgrade their roofs with fire-resistant materials.This is similar to preventive care in healthcare—spending a little now to avoid much higher costs later. By making homes more resilient, the state hopes to reduce damage from wildfires and lower the number of costly insurance claims.
State-Run Reinsurance to Protect Insurers
To help insurers manage the financial risk of massive wildfires, Colorado has created a state-run wildfire catastrophe reinsurance program. This acts as a safety net, covering part of the losses insurers face after a major fire.This mirrors the ACA’s risk corridor program, which protected health insurers during the early years of healthcare reform. By reducing financial risk, the reinsurance program aims to keep insurers in the market, especially in high-risk areas where coverage might otherwise be hard to find.
Key Features of the Reform Bill
- Creation of the Wildfire Catastrophe Reinsurance Enterprise to support insurers after major fires
- A 1.5% insurer fee to fund the Strengthen Colorado Homes grant program
- Mandatory 75% loss ratio over three years, with 5% rate reduction required if not met
- Insurers must file two separate rate proposals—one with and one without reinsurance benefits
- Insurers must offer coverage statewide, including in high-risk wildfire zones
- Utilities are protected from liability and cannot pass catastrophe bond costs to customers
- Program includes a sunset clause, set to expire on September 1, 2035, unless extended
What This Means for Colorado Homeowners
Homeowners may benefit from lower premiums, especially in wildfire-prone areas where insurers are required to reduce rates. Safer homes could lead to fewer claims and better long-term affordability. However, there’s also a risk that insurers might become more selective about which properties they cover, particularly those deemed high-risk.For insurers, the law creates both pressure and opportunity. They must adapt to stricter rules while also participating in new programs designed to stabilize the market.
The Bigger Picture
Colorado’s approach reflects a bold attempt to reform a struggling insurance market. By combining consumer protections, risk-sharing mechanisms, and prevention incentives, the state is trying to create a more balanced system. Like the ACA, it shows how regulation can push industries to be more accountable—even in areas as unpredictable as natural disasters.
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