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Request for Comments and Information
Colorado DOI seeks comments and information regarding potential
parametric insurance policy concept to help stabilize the homeowners
insurance market.
Issue
Colorado, like most states in the western half of the country, has experienced more wildfire events in the last two decades than before the impacts of climate change began to be felt in the state. That has, in part, led to affordability concerns in Colorado's homeowners insurance market.
Because the affordability of homeowners insurance coverage is connected to the
number of insurers offering coverage in the state, it is important to increase stability in
our market in order to encourage more insurers to offer more policies throughout
Colorado.
Concept
To that end, the Colorado DOI is seeking information on a potential concept to utilize
parametric insurance to increase stability in our homeowners insurance market.
Specifically, we are exploring the concept of a parametric policy with a geographically
defined parameter coupled with a scalable number of total loss homes from a single
wildfire event parameter.
Parametric insurance is “...a type of insurance contract that insures a policyholder
against the occurrence of a specific event by paying a set amount based on the
magnitude of the event, as opposed to the magnitude of the losses in a traditional
indemnity policy.”
Governmental entities, mostly in other countries around the world, have purchased
parametric policies in order to protect against certain events. We are interested in
exploring whether such policies could be used by the state or a county or municipality to
offset a portion of the risk from the admitted homeowners insurers in the market to
encourage more competition among homeowners insurers and to drive affordability.
The policyholder would be a state/county/municipality. The state/county/municipality
would utilize the claim payment from the policy to offset a portion of the losses of the
homeowners insurance companies paying out for the wildfire event.
In turn, the state/county/municipality would expect to see more insurers operating in the
defined geographic region. Those competitive forces, along with the fact that the
state/municipality/county would be offsetting risk from the insurer, should likely lead to
more affordable premiums for homeowners.
In addition, the state/county/municipality could put requirements around participation in
the program by homeowners insurance companies to encourage coverage throughout
the state, streamlining of the claims process for consumers, or any other number of
public policy goals to aid in recovery after a wildfire event.
Request for comment and information
As discussed above, we are exploring the concept of a parametric policy with a
geographically defined parameter coupled with a scalable number of total loss homes
from a single wildfire event. For purposes of this request, the geographically defined
parameter would be the state. The policy limit would increase with the number of total
losses. Regarding the scalable homes concept, please see the chart below.
| Number of homes classified as total losses |
Policy payout |
| 100 homes |
$75 million |
| 500 homes |
$150 million |
| 1,000 homes |
$250 million |
Based on our conversations with the industry and the research that we’ve conducted,
we do not believe that such a product currently exists.
As a result, we are interested in comments from insurers that write parametric policies
regarding: (1) whether there is interest in creating this type of product, and (2) the
expected premium for such a product.
As important, we also seek comments from insurers writing homeowners insurance
policies in the admitted market regarding whether this would: (1) incentivize you to write
more homeowners insurance policies in the state, and (2) whether it would lead to
decreased insurance rates for the homeowners policies that you write.
We also welcome comments from any other interested parties on the concept. We are
hopeful that we will hear from trade organizations, insurance agents, brokers,
homeowners, and advocates.
Caveats and Assumptions
This concept would require legislation. The Division does not mean to imply that we
would pursue any such legislation because we are seeking comments on the concept.
As we’ve said before, we want to explore any and all ideas that can bring stability to our
homeowners insurance market. It is in that spirit of exploration that we are seeking your
feedback.
With that said, any such legislation would necessarily answer many of the questions
that are left unasked and unanswered in this request. For example, to the extent that we
would need to redefine insurable interest in the state, we would do so in legislation. The
funding to purchase the parametric product would necessarily need to be addressed in
the legislation as well.
Please understand this is simply the beginning of exploring this concept, and we urge
you not to let unanswered questions stop you from answering our core questions that
are detailed above to the greatest extent possible.
Finally, while we would prefer for the industry to provide us as much information as
possible in a transparent fashion to encourage open dialogue, we also understand that
the industry may provide us with information that could be considered a trade secret,
proprietary, or otherwise confidential in response to our core questions. We are happy to
engage in conversations about the best way to protect any proprietary information that
may be provided.
Conclusion
Please email responses to Keilani Fleming at Keilani.Fleming@state.co.us by October 2, 2023. A copy of the proposed concept paper, as outlined above, can also be found in .pdf form on the Division's Homeowners Insurance - Affordability & Accessibility website. We look forward to working together to find solutions.
Please do not reply to this email as your response will not be read or forwarded.
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