Hawaii Residential Insurance; costs rise, options shrink

Last year’s Maui fire driven by a changing climate, was a wake up call for many, especially for the state’s Property & Casualty (P&C) insurance providers.

While Hawaii’s insurance market has been relatively stable compared to states like Florida and California, the increasing frequency and severity of climate-related events are already placing upward pressure on insurance rates throughout the industry, leading to higher costs and changes in coverage and availability.

Hawaii’s residents not otherwise sleeping under a coconut tree generally find themselves within one of three residential P&C insurance market categories as; Home Owners, Condominium Owners, or Renters, and as a result, most residents have some form of Property & Casualty insurance coverage, and in many local markets have experienced annual cost increases exceeding inflation over the past several years.

For Hawaii and beyond, long-term premium increases are projected to increase throughout the insurance sector by 5.3% per year through 2040, largely due to increasing climate change impacts.

Locally, P&C insurance companies are a band on the run. Hawaii’s Insurers have so far paid out more than $2.34 billion and more than 10,000 claims as the result from the climate -driven Maui fires, as of June 30, according to the Hawaii Insurance Division.  About $1 billion more in claims is expected, the agency said in a late July update. The August 2023 wildfires that spread across much of Maui killed 102 people and displaced more than 12,000, further validated P&C insurers worst fears of greater financial exposure in an increasingly climate-unstable world.

Even before the Maui fire Hawaii property insurance premiums had been rising year-over-year, a trend likely to continue due to increasing climate related change property claims. While it’s too early to determine the exact impact of the recent Maui wildfires on rates, they are expected to contribute to further rate increases.

Insurance companies are likely to reassess the risks associated with offering coverage in Hawaii, particularly in areas prone to wildfires and other climate-related disasters. This reevaluation is already leading to higher premiums and more selective or limited coverage and coverage value ceilings.  Some insurers are already limiting coverage and/or increasing scrutiny in high-risk areas throughout Hawaii.

No major insurance carriers have announced plans to pull out of the state due to the Maui fires, but the industry as whole with customers in the state are or could reassess their risk exposure in Hawaii at anytime, especially as the industry is transformed by non-historic risk events that previously did not exist.

Cause & Effects

The 2023 Maui wildfires has had a significant impact on Hawaii’s property and casualty (P&C) insurance landscape, affecting rates and underwriting policies.  The Maui wildfires resulted in substantial insurance payouts, with Insurers having already paid $2.34 billion on more than 10,000 claims as of June 30, 2023.  An additional $1 billion in claim payouts is expected bringing the total insured Maui fire loss to an estimated $3.4 billion, and making it Hawaii’s second costliest natural disaster on record.

Significant losses have prompted insurers to reevaluate insured risks with Hawaii based customers, and like California, the threat of some P&C insurers leaving the state remains high a some future time.  In the meantime, insurers are likely to reassess their underwriting policies in Hawaii:

• Some companies may limit coverage or increase scrutiny in high-risk areas.
• At least one company has issued a moratorium on new fire policies in parts of Maui where wildfires are still actively burning.
• Insurers are further reevaluating the risks associated with offering coverage to homeowners in Hawaii.

Despite the aforementioned concerns, Hawaii’s insurance market appears relatively stable:

• No major insurers have announced plans to pull out of the state due to the fires.
• Hawaii’s market has been stable for many years, with availability across various insurance types.
• The state is in a better position compared to states like Florida and California, where more insurance companies are withdrawing.

However, the Hawaii Property Insurance Association (HPIA), which serves as an industry safety net, may struggle to handle an increasing number of homeowners unable to secure private insurance.  HPIA typically charges higher premiums for less coverage, with a maximum coverage limit of $450,000.  State government and insurance regulators are also taking steps to address the situation:

• The state issued a declaration allowing out-of-state adjusters to help process claims.
• The insurance commissioner encouraged insurers to ensure continued coverage for those impacted by the wildfires.
• The Hawaii Insurance Division is monitoring the situation and providing some support to affected policyholders.

While the full impact of the Maui wildfires on Hawaii’s P&C insurance market is still unfolding, it’s likely to result in some rate increases and changes in underwriting policies beyond Maui. However, regulators are presently actively working to maintain insurance availability in support affected Maui residents, but may this effort should be expanded with a statewide view into the near future.

Self-Insure?

Some people are rolling-the-dice and self-insuring or skipping traditional P&C insurance altogether.

A recent study by the Insurance Information Institute, a nonprofit that seeks to educate consumers, found that the number of people foregoing insurance coverage is rising sharply.  “Twelve percent of homeowners are now voluntarily not purchasing home insurance versus 5% before the pandemic, so the rate has more than doubled,” Mark Friedlander, the institute’s director of corporate communications. That comes despite the finding in a survey by the financial adviser firm Bankrate that most Americans don’t have $1,000 set aside for a family emergency.

“How realistic is it for an American family to say, ‘we’re just going to forego insurance and we’ll pay for a loss out of pocket’? Not very.” Friedlander said. “But that’s the kind of trend we’re seeing.”