Hawaii fair-plan says rising reinsurance costs and thin capital strain ability to cover large lava-zone losses

The Hawaii Property Insurance Association told the Joint Committee on Commerce and Consumer Protection on Jan. 27, 2025, that rapidly rising reinsurance costs and concentrated exposure in lava zones leave the association financially thin and could exhaust surplus in a large volcanic event.

The association, which was created by the Legislature in 1991 as a last-resort property insurer for Hawaii residents who cannot obtain coverage in the admitted market, briefed legislators on its history, current product mix, financial metrics and four strategic initiatives including a policy-administration-system replacement and a study of whether to add condominium (commercial) coverage.

HPIA plan administrator Terry Fabry said the association had about 2,200 policyholders at the end of last year, split roughly half in the lava program and half in the non-lava program, but that almost 80% of the total insured limits sit in Lava Zones 1 and 2. "Reinsurance is the largest expense of the HPIA," Fabry said, explaining that reinsurance purchases protect HPIA from catastrophic volcanic losses but have risen sharply in price and in required limits.

Fabry told lawmakers HPIA’s total insured value was just over $900,000,000 and said the board’s 2025 reinsurance buying decision reduced premium expense by roughly $750,000 by increasing HPIA’s retention (the amount HPIA would pay before reinsurance attaches) and taking a participation share in tower losses above the first $10,000,000. That choice, Fabry said, means a very large catastrophe could wipe down a significant portion of HPIA’s surplus: "If that largest neighborhood was totally wiped out, there wouldn't be enough coverage to pay out all the claims," he said, noting HPIA currently has about $100,000,000 of reinsurance while its largest neighborhood concentration is $286,000,000.

Fabry reviewed HPIA’s 2018 experience, when a months-long lava flow destroyed 149 HPIA-insured homes and produced more than $30,000,000 in losses; he said reinsurance limited HPIA’s retained loss to about $5,000,000 for that event. He also said HPIA has reported net losses in six of the last seven years, prompting rate filings with the Hawaii Insurance Division; an initially large increase requested in 2020 was later reduced after negotiations and a more recent filing remains pending.

Board structure and administration: Fabry described HPIA’s governance as a 12-member board with eight seats elected by member insurers and four seats appointed by the insurance commissioner to represent the major islands. All property and casualty insurers authorized in Hawaii are members of the association and would share assessments if the association requested and the commissioner approved them; Fabry said no assessment has been authorized to date. He also noted HPIA has no employees and contracts with a plan administrator to perform underwriting, policy servicing, claims adjusting and other operations — Marsh has served as plan administrator for more than five decades in various forms.

Systems and product changes: The board approved replacing HPIA’s more-than-30-year-old policy administration system with a cloud-based platform expected to allow installment payments, electronic payments by card and ACH, and a foundation to expand products. Fabry said the go-live target for new policies is Aug. 1, 2025, with renewals following 45–60 days later.

On product expansion, Fabry said HPIA is studying a condominium/commercial property product for owners associations and AOAOs. He cautioned the work requires an actuarial capital and cash-flow study to determine appropriate capitalization and reinsurance structure. Fabry gave sample capitalization discussion ranges heard internally from as low as $30,000,000 to figures exceeding $2,000,000,000 depending on modeling assumptions. He recommended issuing an RFP for a cash-flow and capital analysis before the board pursues that line.

Cost-control steps: Fabry said the board has taken steps including (1) reducing reinsurance expense by increasing retention, (2) negotiating a reduction in plan-administrator fees tied to an extension of the contract to take effect midyear, (3) reducing commissions to agents, and (4) Marsh offering to absorb the salary and benefits for a project manager for the new system (estimated $200,000–$250,000).

Lawmakers pressed HPIA on the feasibility of writing condominium coverage and on timelines and costs. HPIA representatives said facultative reinsurance (coverage negotiated per building) would likely be the only available path for many condominium risks and that it is generally more costly and less efficient than treaty reinsurance; they said large-scale, multi-building treaty placements are unlikely for many of the condominium risks now struggling to obtain coverage. Fabry and Marsh representatives estimated it could take roughly a year and several hundred thousand dollars to a million dollars or more to add a new commercial condo product to systems and to stand up the necessary actuarial and reinsurance arrangements.

Why this matters: HPIA serves as an insurer of last resort in Hawaii and holds significant exposure to volcanic risk concentrated in Lava Zones 1 and 2. Lawmakers and HPIA officials emphasized that reinsurance market dynamics — which are influenced by global insured losses — and limited surplus create a vulnerability in the event of a very large, concentrated volcanic loss.

The briefing concluded with lawmakers asking for additional detail and updates; HPIA officials said work on the system replacement and ongoing rate filings would continue and that the board plans further study before expanding into commercial condo coverage.