Hawaii lawmakers are seeking to stabilize Hawaii’s condominium insurance market against skyrocketing premiums and dwindling availability of hurricane insurance, which has sent ripples through Hawaii’s housing market.
A Hawaii Senate committee is scheduled to hear a measure Tuesday that would increase the tax on short-term vacation rentals and reinstate the mortgage underwriting fee. The money will go to so-called insurers of last resort to fill a growing gap in Hawaii’s insurance market.
The bill aims to address a critical issue facing condominium owners, who make up about a quarter of Hawaii’s housing stock, according to the Department of Business, Economic Development and Tourism. Rising insurance premiums are driving up the cost of housing in a state where residents already face the highest cost of living in the nation.
The measure met little opposition as it progressed through the House, and has broad support from the insurance, financial services and condo management industries, as well as some condo associations.
Not only have premiums routinely doubled or tripled, according to anecdotal accounts. Deductibles are also rising amid a dramatically tightening insurance market, says Janet Hirai, an agent at Pyramid Insurance in Honolulu.
“That’s my word for this year: tighten up,” Hirai said. “Everything tightens up.”
Rising costs affect not only property owners but also renters, said Rep. Adrian Tam, who sponsored the House measure along with Reps. Mark Nakashima and Jackson Sayama and House Speaker Scott Saiki.
“Even if you don’t own an apartment and let’s say you’re renting, it’s going to trickle down to you,” Tam said.
Lawmakers are holding public events to allay concerns. Saiki, Tam, Sen. Sharon Moriwaki and Congressman Scott Nishimoto joined insurance, real estate and banking professionals for a March 12 town hall meeting at McKinley High School to explain what’s going on to worried residents. Two days later, Tam joined a panel discussion on PBS Hawaii’s Insights program.
In the meantime, the MPs have included in the bill a detailed preamble outlining the situation.
According to the bill, the insurance crisis is a statewide problem and is not directly related to the wildfires that destroyed much of Lahaina in August.
One reason for rising rates and deductibles, according to the bill, is more mundane: Hawaii has many older buildings where aging plumbing has caused leaks and significant water damage insurance claims. As a result, the bill says, insurers have increased deductibles from just $10,000 per unit, per occurrence, to $250,000.
Hurricane insurance presents another problem. Although Hawaii has not been hit directly by a hurricane since Iniki in 1992, “mortgage lenders continue to require Hawaii homeowners to carry hurricane insurance, which can cost two to three times the annual premiums of a conventional policy for homeowners,” the bill notes.
Generally, an apartment complex in the past has had a basic hurricane policy covering 100% of the cost of replacing the property in the event of a catastrophic storm. But due to rising premiums, many buildings have opted for less than 100% coverage.
And it’s not just outliers who are opting for less coverage because of high premiums. About 390 buildings, including new high-rises in Kakaako, are opting for less than 100 percent coverage, the bill quoted Sue Savio, president of Insurance Associates, as saying. Savio did not respond to an interview request.
Some buildings require cash buyers
This lack of coverage has huge implications. It is not just apartment owners in buildings without 100% coverage who face the risk of losses that would not be fully covered in the event of a catastrophic hurricane. In addition, many mortgage companies do not provide home loans for apartments in such buildings, creating problems for first-time buyers as well as owners trying to refinance mortgages.
This creates a ripple effect in the economy, Tam said, as people who want to buy apartments simply cannot buy them. For many Hawaii residents, condos are starter homes, he said, a way for people to start building equity in a market where the average price of a single-family home exceeds $1 million. Many apartment buildings are now on “forbidden” lists, Tam said, making apartments available only to people who can pay cash.
The same problem applies to people who want to sell properties: they have fewer potential buyers if their building is not 100% covered. The bill would essentially expand two public entities — the Hawaii Property Insurance Association and the Hawaii Hurricane Relief Fund — that serve as “insurance markets of last resort.”
Seniors on fixed incomes and families struggling to make ends meet are also vulnerable to increases that could be passed on through higher association fees or rents.
The idea, Tam said, is to ensure that insurance is at least available. He acknowledged that premiums and deductibles may not drop significantly. But he said the cost of insurance from HPIA and the hurricane relief fund will be lower than insurance offered by non-Hawaii-licensed firms that are now filling a gap.
HPIA is a nonprofit association of licensed insurers in Hawaii, originally created by the Legislature in 1991 to provide basic property insurance for homeowners on the Big Island who are unable to purchase insurance due to the ongoing volcanic eruptions there. Now providing insurance nationwide.
The Hawaii Hurricane Relief Fund was established in 1993 to provide hurricane insurance for properties unable to obtain coverage after Iniki. The fund stopped issuing policies in 2000 after the private market rebounded, and now interest from the fund is transferred to the general fund, Tam said.
The hope, Tam said, is that private insurers will eventually pull back, as they did after the dust settled after Iniki. Meanwhile, the Hawaii Property Insurance Association’s operations will be funded by an increase in the transitional lodging tax rate for vacation rentals. The hurricane relief fund will be capitalized with a mortgage recording fee.
“It’s a societal problem,” Tam said. “I don’t see anyone who isn’t affected by it.”
