Challenges facing homeowners on Maui after the wildfires have prompted concerns that insurers may find the island state too risky.

The aftermath of the Aug. 8 wildfires on Maui could spur the state to create a new insurance program.

Natural disasters like volcanic eruptions and increasingly wildfires are contributing to an economic landscape where insurers may feel the risk is too great to do business here, Gov. Josh Green said Tuesday. 

“I’m told that it’s going to explode as a problem in the coming months,” Green said on Hawaii News Now’s “Spotlight” program.

Green is floating the idea of a captive insurance model program to help resolve that problem. 

Health officials are advising people reentering the burn zone to wear personal protective gear. (Nathan Eagle/Civil Beat/2023)
About 2,000 buildings — many of which were homes — were destroyed in the Aug. 8 wildfire that swept through Lahaina. (Nathan Eagle/Civil Beat/2023)

It’s not a new proposal. Green mentioned it last year in an interview with HNN after his election, saying it could be a use for funds coming in from the proposed environmental “green fee” that would charge visitors for coming to Hawaii.

He brought up the idea again Tuesday in the context of insurers raising their costs now that Hawaii might seem like a riskier place to insure.

His appearance on HNN occurred Tuesday afternoon after he gave a recap of his first year in office in a 15-minute speech that was streamed online. Green declined a request for an interview following the speech.

Captive Insurance Model

Banks often mandate homeowners insurance before they approve a customer’s mortgage. That means if the cost of insurance skyrockets, people looking to get a mortgage will be forced to pay more – and if they can’t afford the insurance, they won’t be able to get a mortgage at all.

This would have a cascading effect on the real estate market.

Fewer qualified buyers mean it would be harder to sell, lowering demand. If demand for homes is lowered but the supply of homes remains the same, home values would drop.

And the only buyers able to take advantage of these lower home values would be people who can afford high insurance payments.

Green is worried about this exact scenario happening in Hawaii, given the slew of natural disasters and rising seas that threaten homes here and make the state a riskier place to insure.

“We may have to create our own insurance product, which is often called a ‘captive insurance model,’” said Green.

This type of insurance essentially is when a large private company creates its own in-house insurance subsidiary. Often this is because the company has a hard time getting insurance that is both specific and affordable enough for its needs.

Green’s proposal would have the state do something similar.

Economist Paul Brewbaker is skeptical. It’s unclear exactly how Green’s proposal would work, but captive insurance is a model that is typically for the private sector, where the government’s role is to just write a legal carve-out allowing these kinds of insurance subsidiaries to exist, he said.

Gov. Josh Green touted his accomplishments from his first year in office. (Screenshot/Governor Facebook)

Brewbaker agrees that Hawaii will likely experience a gap in insurance coverage where insurers will pull out of the state. But he said they will eventually come back at some point once the environment is right for them to do so, and when they have sufficiently updated their risk calculations. 

“The sooner you enable that chasm – right, that gap – between the date the last underwriter exits and the date that the first underwriter sees an opportunity to come in and get the first mover advantage,” the better, he said.

It’s the job of the government, said Brewbaker, to shorten that gap as much as possible by lowering risk and making it appealing for insurance companies “to enter and thrive” again in Hawaii.

“Either way, I’m going to have to come up with some supportive resources,” Green said on HNN. He added that the captive insurance model would likely require legislative backing since it would mean appropriating funds to support it.

Anniversary Speech

The governor’s address covered several events from the past year. 

He referenced a new contract with the state teachers union, which will raise entry-level salaries from about $38,000 to about $50,000 and top-level salaries from about $93,000 to about $101,000 over the course of four years

Green also touted his new loan forgiveness program for health professionals and a program to shelter homeless people in tiny home villages called kauhale

He was light on detail about one of Hawaii’s most talked-about issues though.

Since Aug. 8, much of the state’s resources have been focused on Maui’s recovery after a wildfire killed at least 100 people and destroyed Lahaina.

Last month, Green announced a $150 million recovery fund for the families of fire victims – but it’s still unclear where that money will come from.

The fund will be a joint venture by the state, Kamehameha Schools, Hawaiian Electric Co., and Maui County, but so far Green has not announced how much money the state will be contributing. 

His next update on Maui’s recovery will likely happen in the next week or so, said his press office, but the exact date was yet to be determined.

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