As a result of the Maui fires, home insurance in Hawaii is likely to become more expensive for most and unaffordable for many.
We may see “fire hazard zones” created for insurance purposes, similar to the lava hazard zones on the Big Island. Although not officially defined, we will see areas designated by insurance companies as very high risk, which will result in very high insurance costs for those areas.
On the Big Island, lava hazard zones have been drawn to assess risk. In response, insurance companies have charged high rates in these areas and are now not writing new policies in Lava Hazard Zones 1 and 2.
The Hawaii Property Insurance Association was formed in 1991 to address these areas where coverage was not available. It has since grown to include areas beyond the lava zones where insurance is not available. The HPIA is an unincorporated association of property insurance companies and all such companies operating in Hawaii must participate.
Recently, the situation worsened when in October the last company writing new homeowners policies in Lava Zones 1 and 2, Universal Property and Casualty, stopped writing them and even stopped renewing its policies. With nowhere to turn for adequate coverage, many now face the prospect of being uninsured or paying five to ten times more with HPIA, which many cannot afford. A typical scenario is a family I spoke to whose home insurance premium has risen from $1,300 to $7,000 a year for a modest home.
Faced with this, many choose to go without insurance, but for those with a mortgage, this is not an option. It’s become a barrier to home ownership, putting local families at risk of bankruptcy and losing their homes.
We need to make HPIA-style insurance available to everyone who needs it across the country, and we need to keep HPIA rates affordable. Extending its reach will increase the pool of insured and reduce the risk and cost to HPIA. With proper oversight, we can then reduce costs for consumers.
Other measures to reduce costs include creating a state-funded reinsurance programme, making HPIA more transparent about its finances, publicly assessing its finances and premiums, and setting limits on premiums. HPIA, with government reinsurance support, cannot have rates that are more than double what private insurance would cost.
HPIA can change its policies to make them available to anyone who needs them throughout the country, not just those who have no insurance. This expands the pool of customers, reduces risk and lowers costs.
It must allow those whose insurance has lapsed to be covered, an unreasonable current exclusion that further harms those who need its help the most. And it needs to increase its limit, which is currently $350,000.
Clearly, a $350,000 limit is unrealistic in a market where the average home costs much, much more. The low limit prevents many home sales and purchases because you can’t get a mortgage without insurance.
Insurance companies need to be profitable to stay in our market. We need to strike a balance so that we don’t compete too much with the companies’ direct customers to keep the companies healthy. But this is easy to do, and this concern should not stop us from helping people who need help.
HPIA was created to serve the real needs of Hawaii residents, and it should do so for real. HPIA could make all these changes itself if it wanted to. But it will probably need a state mandate to do so. The legislature needs to act.
We had another state-funded insurance programme, the Hawaii Hurricane Relief Fund, which was set up in 1993 after Iniki. The hurricane insurance market stabilised and the programme was suspended in 2000.
This is another example of the government stepping in to stabilise our insurance markets in the face of an emergency. The fund has accumulated nearly $200 million. So it’s been done, and it’s been successful.
We can make the HPIA a success too, but it needs to be expanded, with more oversight and sensible but tougher regulation. The state is already involved in insurance and reinsurance to stabilise the markets. It now needs to do so on a larger scale.
There are efforts to create a multi-state reinsurance fund, which will probably move too slowly to help us. But Hawaii, like many states, insures itself at many levels. So do the counties. It’s not such a strange idea to pool our insurance costs and help our neighbours.
It’s not just Puna’s problem anymore, it’s a statewide problem. The financial losses from volcanic eruptions are dwarfed by the losses we are seeing on Maui this year. This will affect all fire-prone areas throughout the state with similar hazards.
No area is immune to some form of catastrophic risk. Throughout our state there is risk from windstorms, floods, earthquakes, drought and, of course, fire. We need to address and manage them.
With the Maui fires, we are seeing that localised catastrophe risk is a much bigger issue than we realised. We can expect insurance costs to rise statewide in response to the fires, in addition to very large increases in high-risk areas.
Our insurance crisis is no longer just about Puna, it is more widespread, affecting more people and more property. It’s going to get much, much worse. Let’s be proactive in getting our disaster-related insurance costs under control.
