Hawaii Hurricane Relief Fund:

Its History, Viability, and Role in Disaster Mitigation

Michael P. Hamnett, Ph.D. and Kristine G. Davidson Oh

Social Science Research Institute, University of Hawaii

August 1996

ABSTRACT: This paper provides a review of the Hawaii Hurricane Relief Fund’s efforts to foster disaster mitigation and its financial viability. It starts with an overview of the establishment of the HHRF as the State’s attempt to solve the property insurance crisis precipitated by Hurricane Iniki. The paper transitions into a discussion of general trends in the insurance and reinsurance industry that continue to contribute to the high cost of property insurance. It then describes the disaster mitigation program developed by the HHRF. This is followed by a discussion of the change in the loss financing plan approved by the Insurance Commissioner in June 1996. The paper assesses the ability of the HHRF to cover hurricane losses under several scenarios and the cost of loans that may be required to cover losses. The final section discusses the need for mitigation to reduce the risk of hurricane damage and secure adequate and affordable insurance for the residents of Hawaii.

Background

In December 1993, the University of Hawaii’s Social Science Research Institute (SSRI) recommended that the State government provide incentives for disaster mitigation. The following year, SSRI was awarded a contract by the Coastal Zone Management Program to facilitate the implementation of that recommendation. Since then, Institute staff and consultants have worked with the Hawaii Hurricane Relief Fund (HHRF) through its Technical Advisory Committee to develop a disaster mitigation program that includes a risk-based insurance premium structure and credits for retrofitting homes to reduce the risk of hurricane damage.

Hawaii's Insurance Crisis

and Establishment of the Hawaii Hurricane Relief Fund

Hawaii County suffered a property insurance crisis long before Hurricane Iniki struck the State in 1992. Volcanic eruption and earthquake coverage became unavailable throughout the big island because of risks associated with Kilauea Volcano. After the 1983 eruption and extensive insured losses, underwriters discontinued property insurance coverage in "lava flow zones," determined by U.S. Geological Survey Scientists at the Hawaii Volcano Observatory. In response to this insurance crisis, the State legislature encouraged the private insurance carriers to form an insurance pool to offer policies in lava flow zones. The Hawaii Property Insurance Association (HPIA) was established and began offering basic fire and extended coverage to home owners in these areas. The type of coverage offered by HPIA has been very limited and highly priced.

In September 1992, the property insurance crisis went state-wide. Hurricane Iniki resulted in $1.6 billion in insurance losses. One insurance company became insolvent, two companies left the state, and a major company stopped issuing new property insurance policies. Forty thousand insurance policies were canceled, and for several months new property insurance policies were only available from a single carrier – who was on a strict quota.

The State Legislature created the Hawaii Hurricane Relief Fund (HHRF) in 1993 to provide standard windstorm coverage for hurricane force winds. Reserves to cover potential losses were to be obtained from post-loss assessments on private insurance companies, reinsurance, and a line of credit from a banking facility. A hurricane reserve trust fund was established into which HHRF premiums, special mortgage recording fees, and annual insurance company assessments were to be deposited to cover the cost of operating HHRF and to pay reinsurance premiums. HHRF policies were to be serviced by private insurance companies participating in the Hawaii Hurricane Relief Fund in return for a modest service fee.

Most private insurance carriers eliminated hurricane coverage from their policies, and agreed to participate in the Hawaii Hurricane Relief Fund (HHRF). Premiums for many property insurance policies offered by private insurance companies remained near pre-Iniki levels even though hurricane coverage was dropped. Industry analysts say this was due to their obligation to pay a post-disaster assessment of up to $300 million, and that they remain exposed to windstorm losses from winds up to 74 miles per hour. As a result, the cost of hurricane coverage from HHRF was added to the total cost of basic property insurance for Hawaii's homeowners.

 

Other Changes in the Insurance Industry that Have Affected Hawaii

The insurance crisis in Hawaii was compounded by disaster losses in other parts of the world and a growing scarcity of catastrophic reinsurance. Hurricane Hugo (1989) cost the insurance industry $4.9 billion. Hurricane Andrew, which struck Florida in 1992, was the most expensive disaster in U.S. history, with property insurance losses totaling $15.5 billion. A winter storm in the northeast in 1993 resulted in $1.8 billion in insured losses. The Northridge earthquake in 1994 resulted in $6.9 billion in losses. Sixteen of the twenty most costly disasters in U.S. history have occurred since 1989.

Other countries also experienced insured losses from natural disasters in the early 1990s. A storm named Daria resulted in $5 billion in losses in Western Europe in 1990. Typhoon Mireilla, in 1991, resulted in $5.3 billion in losses in Japan. World-wide insured losses in 1992 from natural disasters alone cost the insurance industry over $20 billion.

These losses occurred in the context of an increasing demand for insurance and reinsurance. Insured values in hurricane-prone areas of the US grew from $1.1 trillion in 1980 to an estimated $2 trillion in 1994. During the same period, industrialization and foreign investment in Asia and South America created new markets for property insurance. This, in turn, increased the demand for reinsurance. Unfortunately, the amount of money invested in reinsurance did not expand as rapidly as the demand. Moreover, heavy losses experienced by reinsurance companies in the early 1990s made those companies much more cautious about providing reinsurance to areas they perceive as "risky." This cautious attitude resulted not only in increases in the cost of reinsurance for "risky" areas, including Hawaii, but a reluctance of many reinsurance underwriters to provide any coverage at all.

The scarcity and high cost of reinsurance directly affected Hawaii property owners through the Hawaii Hurricane Relief Fund (HHRF) and insurance companies subject to catastrophe reinsurance. Up until June 1995, HHRF had been spending virtually all of its income on reinsurance and had only been able to secure $500 million in coverage. HHRF's reinsurance, along with $300 million that could be assessed from private insurance companies, a line of credit of $500 million, and authorization to purchase $200 million in general obligation bonds added up to the $1.5 billion the Hawaii Hurricane Relief Fund potentially had available to cover losses. In June 1995, a new loss financing plan was approved by the insurance commissioner that reduced the amount of reinsurance carried by HHRF and increased its line of credit. (See below.)

Disaster Mitigation Program Developed

The Hawaii Hurricane Relief Fund (HHRF) was required by statute to convene a committee to advise its Board of Directors on technical matters. Immediately after the HHRF was created, however, the Board and staff were completely occupied with securing reinsurance and setting up the operation. A Technical Advisory Committee (TAC) was established by the Board in early 1994. Shortly after its establishment, TAC began discussions about the development of public information materials and a mitigation plan. A brochure on what home owners can do to reduce the risk of hurricane damage was drafted by the Social Science Research Institute (SSRI) in collaboration with TAC.

A mitigation program options paper was prepared by SSRI staff and presented to the Technical Advisory Committee in October 1994. This paper included draft recommendations for the development of a risk-based premium structure, premium credits for retrofitting buildings, and a public education program. Based on the options paper, a draft mitigation plan was completed and presented to the Hawaii Hurricane Relief Fund (HHRF) Board on December 5^th 1994. A more detailed draft was developed at the Board’s request and presented to the Board on January 19^th, 1995. The Board accepted the plan and directed HHRF staff to begin implementation.

One of the major difficulties in establishing a risk-based premium structure was the lack of actuarial data on hurricane losses in Hawaii. Following Hurricane Iwa in 1982 and Hurricane Iniki in 1992, a number of excellent studies of structural failures in buildings damage or destroyed by the storms were conducted by professional organizations and government agencies. Unfortunately, none of these studies contained statistical information on the design and construction of buildings damaged or destroyed by the storms. Hawaii Hurricane Relief Fund’s Technical Advisory Committee members contacted the Insurance Institute for Property Loss Reduction, the Insurance Services Office, and the Dade County Building Code and Compliance Department to obtain statistics from other parts of the country that might be relevant to Hawaii. No one could identify any statistical studies of structural failures or the rate of damage to different types of buildings that would meet the Hawaii Hurricane Relief Fund’s actuarial needs.

Hawaii Hurricane Relief Fund staff and its Technical Advisory Committee discussed the possibility of using data compiled by Kauai’s Office of Emergency Permitting (OEP), a federal agency established to assist the county building department after Iniki. They learned that an OEP database had been developed on Kauai that contained over 8,000 files on building permits issued after Iniki. An assessment of the files from which the database was developed made it clear that there was not sufficient information on the types of structures that were damaged or destroyed to conduct the required statistical analysis. They found, however, that the Multiple Listing Service had a tax map key (TMK) database that contained information about the design and type of construction for every residential property in the State. They concluded that it would be possible to conduct a risk analysis using the OEP database and a 1991 archive copy of the TMK database.

An actuary with the firm Wakely and Associates was contracted by the Hawaii Hurricane Relief Fund in October 1995 to analyze the Kauai data. His analysis clearly demonstrated that there were statistically significant differences in the relative risk of loss in terms of demolition and repair costs depending on the age, foundation type, wall type, and roof design of single family homes on Kauai at the time of Iniki (Table 1).

Table 1

Variables Used in the Analysis of Damage from Iniki on Kauai

 

Age	Foundation Type	Wall Type	Roof Design
1900 to 1969	Masonry (slab)	Masonry	Gable
1970 to 1979	Wood Post on Pier	(Wood) Double Wall	Hip
1980 to 1991		(Wood Single) Wall

The analysis divided the structures for which building permits were issued into two categories: (1) those that had to be totally demolished for reconstruction; and (2) those that were repaired. For the former, a frequency analysis was conducted to determine the percentage demolished for each combination of variables listed in Table 1 (Figure 1). For the latter, the value of the building permit issued was used to determine the average cost of repairs. Analysis of both categories showed that, in general, older homes had a higher risk of demolition and more expensive repairs than newer homes. Homes built on masonry slabs were at less risk than those built on wooden piers. And, homes with masonry walls were at less risk than those with wooden walls, and single wall homes were at greater risk than those with double wall construction.

This analysis was used to develop a risk-based premium rate structure which was presented to the Hawaii Hurricane Relief Fund (HHRF) Board in January 1996. The risk-based premium structure (RBPS)established seven categories of structures, each with its own commercial and residential insurance rate (Table 2). Most buildings insured by HHRF fell into the Standard Frame (Class 1) category; these are wood and metal buildings not specifically designed to withstand 80 mph winds. The Standard Masonry (Class 2) are structures built with masonry or concrete walls that are connected to similarly constructed foundations. This results in buildings that are securely anchored to the ground. Semi-Wind Resistive (Class 3) and Wind Resistive (Class 4) are structures constructed of the same masonry materials as Class 2, but with roofs of heavy steel and concrete. Wind speed criteria, a new concept in the classification of buildings, are introduced in the risk-based premium structure (RBPS). Wind speed resistance became an additional classification criteria and more accurately groups the risk for the peril or hazard insured against. Buildings classified under the RBPS will be grouped by construction material and/or wind speed. For example, any building engineered to withstand wind speeds from 101 to 120 mph and from 121 to 161 mph will be classified as Semi-Wind and Wind Resistive, respectively. Superior Frame (Class 6), a new classification, will recognize wood and metal framed buildings built in accordance to the 1991 Uniform Building Code. That same frame building would qualify for another new class (Class 7), Superior Wind Resistive, if constructed to withstand wind speeds in excess of 106 mph. Light Frame buildings (Class 5) are mobile homes and sheds not designed to withstand winds speeds over 80 mph. The premium rates presented to the Hawaii Hurricane Relief Fund Board for each class of construction are shown in Table 2.

Table 2

Residential and Commercial Rates Per $1,000 of Coverage

 

The risk-based premium structure also included premium credits for wind resistive devices and protection of windows, doors and other openings. Credits for wind resistive connecting devices, including hurricane straps and clips, were to be available for the construction classes that do not already have them (Table 3). Credits for storm shutters were to be available for all classes of buildings except light frame construction (Class 5).

 

 

 

Table 3

Wind Resistive Device Credit

 

	Construction Class
Protection	1	2	3	4	5	6	7
Roof to wall connection	5%	5%			5%
Wall to foundation connection	10%				10%
Opening protection	15%	15%	15%	15%		15%	15%

 

 

In order to qualify for credits, all buildings on the premises had to be properly maintained. Carports, sheds, and extensions had to be firmly anchored, and less than 25% of the land at the premises may be used for storage of loose material and other items that may become flying debris.

The report presented to the Hawaii Hurricane Relief Fund (HHRF) Board included an extensive analysis of the overall financial impact of the risk-based premium structure. This analysis included estimates of the number of structures in each construction class based on the 1995 tax map key (TMK) database and HHRF’s detailed policy holder database as of September 1995. The actuary’s report to the Board concluded that with no change in the base rate for hurricane coverage, the implementation of the risk-based premium structure would result in a reduction in average premiums of from 3% to 6%.

 

A Reduction in the Base Premium Rate

for the Hawaii Hurricane Relief Fund

In late 1995, the Executive Director of the Hawaii Hurricane Relief Fund (HHRF) initiated discussions with a loss financing consultant to see if it would be possible to lower the amount of reinsurance purchased by the Hawaii Hurricane Relief Fund and maintain HHRF’s ability to cover losses. Several options were explored including a change in the amount of reinsurance purchased by the Hawaii Hurricane Relief Fund and the ceiling on the line of credit from the banking facility. By December 1995, the Executive Director had reached a tentative agreement with reinsurers and the banking facility to lower the amount of reinsurance coverage from $500 million to $300 million and to increase the line of credit from $500 million to $750 million. This change would allow the Hawaii Hurricane Relief Fund to provide an across the board decrease in the base premium for HHRF policies.

Several members of the Technical Advisory Committee questioned the wisdom of this change for two reasons. First, a decrease in the base premium rate would reduce the incentives that could be provided under the risk-based premium structure. Second, a decrease in the amount of reinsurance and an increase in the line of credit would require the Hawaii Hurricane Relief Fund to borrow more money if losses exceeded $600 million.

A November 1995 analysis of the Hawaii Hurricane Relief Fund’s (HHRF) ability to cover losses under several hurricane scenarios had been conducted by SSRI. It showed that as of August 1995, the HHRF had 129,980 policies in force with a face value of $28 billion. Estimated losses from a Hurricane Iwa-strength storm striking all the inhabited islands in the State, which is extremely unlikely, would result in approximately $1.2 billion in losses to HHRF policy holders. This loss could have been covered by the existing loss financing arrangements if the Hawaii Hurricane Relief Fund borrowed $400 million. Projected losses for an Iniki-strength storm striking Oahu were estimated at $2.3 billion, or $1 billion more than the Hawaii Hurricane Relief Fund could cover through its loss financing program. This would mean that Oahu policy holders would only receive $0.56 on an insured dollar. It would also mean that the Hawaii Hurricane Relief Fund would be $500 million in debt which would have to be repaid through a surcharge on all insurance policies sold in the State except health and flood insurance policies.

The change in the loss financing plan proposed by the Executive Director in December 1995 would have resulted in a 15% across-the-board decrease in Hawaii Hurricane Relief Fund (HHRF) premiums. The change would have increased the potential debt of HHRF by $250 million for a loss in excess of $600 million.

Members of the Technical Advisory Committee wrote to the Hawaii Hurricane Relief Fund Board Chair urging that any change in the premium rates be deferred until the risk-based premium structure was approved and implemented by the Board. They provided results of the Social Science Research Institute (SSRI) analysis to the Executive Director and told him that their greatest concern was that any decrease in the base premium rate would undermine incentives provided in the risk-based premium structure. On December 30, 1995, the Honolulu Advertiser ran a story stating that Governor Cayetano had announced that there would be a decrease in Hawaii Hurricane Relief Fund premiums of 15% with an average savings of as much as $60 per policy holder.

At the February 22^nd, 1996 meeting of the Hawaii Hurricane Relief Fund Board, the Wakely and Associates actuary presented his report. The actuary and members of the Technical Advisory Committee urged the Board not to approve the 15% reduction in the base premium rate. The Board approved a compromise reduction of 10.6% and an adjusted version of the risk-based premium structure. The Board discussed the feasibility of instituting both changes in June 1996, but, after discussion with staff, decided to aim for June for the 10.6% reduction and August for the implementation of the risk-based premium structure.

The Hawaii Hurricane Relief Fund filed a request for a base premium rate reduction of 10.6% with the Insurance Commissioner in March 1996. This request was denied on April 12^th, 1996. According to the Property Insurance Report the Insurance Commissioner rejected the 10.6% reduction and "required the Fund to go through with the plan to cut rates by 15%," as pledged by Hawaii Governor Ben Cayetano. The 15% reduction was approved by the Insurance Commissioner in late May 1996.

The anticipated change in the base premium rate required a revision of the risk-based premium structure. The rate for the Standard Frame Class construction for residential properties was reduced from $1.75 per $1,000 of insured value to $1.49 per thousand. The rate for commercial properties in the same class was reduced from $1.40 to $1.19 per $1,000 of insured value (Table 4). The premium rate for other construction classes were decreased proportionately. A rate filing for the risk-based premium rates was submitted to the Insurance Commissioner on July 3, 1996 and is now pending approval.

 

 

 

Table 4

Residential and Commercial Rates Per $1,000 of Coverage

 

 

 

* = pending approval from the Hawaii Insurance Commissioner

 

 

Ability of the Hawaii Hurricane Relief Fund to Cover Future Losses

The hurricane history of Hawaii is too short to determine, with any degree of statistical certainty, including the probability of hurricanes of different strengths hitting one or more of the Hawaiian Islands. Although historical facts of hurricane damage seems to indicate Kauai is the most vulnerable island in the State, there are not enough data to say that Oahu, Maui or Hawaii are less vulnerable. Indeed, historical evidence seems to show that islands other than Kauai have been struck by severe hurricanes in the last century.

Five hurricanes have affected parts of the State between 1950 and 1993. Iwa (1982) had the lowest peak wind speed of the five storms, and Dot (1959) had peak wind speeds higher than Iniki. Thus, losses from the next hurricane to strike Hawaii may be higher than those estimated for an Iwa-strength storm and may even exceed those estimated for an Iniki-strength storm.

 

Given this, it is not possible to provide a probabilistic assessment of hurricane insurance losses from hurricanes of different strengths. Nevertheless, the methodology developed by the Social Science Research Institute (SSRI) provides an estimate of the range of insurance losses with which the Hawaii Hurricane Relief Fund may have to cover. It estimates losses from an Iwa-strength storm and an Iniki-strength storm hitting each one of the main Hawaiian Islands based on adjusted loss data from Kauai from Iwa in 1982 and from Iniki in 1992.

As of April 1996, the Hawaii Hurricane Relief Fund (HHRF) had 144,457 policies worth approximately $31.7 billion. Applying adjusted loss coefficients developed by the Social Science Research Institute (SSRI) to the Hawaii Hurricane Relief Fund (HHRF) policies, estimated HHRF losses from an Iwa-strength storm and an Iniki-strength storm have been calculated and are shown in Table 5. It appears HHRF would be able to cover losses from an Iwa-strength storm with 74 mph winds striking any single island except Oahu by using a combination of deductibles and reinsurance. HHRF may even be able to cover losses from an Iwa-strength storm striking more than one of the neighbor islands. Losses from an Iwa-strength storm on Oahu would require the Hawaii Hurricane Relief Fund to assess the private insurance companies $300 million and to borrow over $367 million to settle claims.

It also appears that Hawaii Hurricane Relief Fund (HHRF) could cover losses from an Iniki-strength storm striking any one of the neighbor islands from reinsurance and an insurance industry assessment. HHRF could not, however, cover losses from an Iniki-strength storm striking the island of Oahu. With about 94,000 policies in force, even after an insurance industry assessment of $300 million and a loan of $750 million, such a loss would only allow the Hawaii Hurricane Relief Fund to settle about 51% of the claims. This would make it impossible for many Oahu homeowners to rebuild without federal aid. It would also mean the Hawaii Hurricane Relief Fund’s line of credit drops to $200 million for the rest of the hurricane season – a decrease of $550 million. In addition, a surcharge would have to be imposed on insurance premiums to repay the HHRF debt, eventually becoming rate increases for policy holders.

 

Table 5

Estimated HHRF Losses Under Two Hurricane Scenarios

With total policies in force as of April 1996

 

 

Under the statute that established the Hawaii Hurricane Relief Fund (HRS, ¤431P), the legislature made provisions for the repayment of any loans incurred by the Hawaii Hurricane Relief Fund (HHRF) to cover losses. Its Board is authorized to increase assessments on premiums collected by insurance companies from the present 3.75% to 5%, including those collected for automobile insurance. In addition, a surcharge of 7.5% could be added to the 5% assessment for a total of 12.5%. This would cause an increase in premiums for all lines of insurance, excluding flood and health, by an equivalent amount. According to HHRF data, insurers received a total of $1,536 million in premiums for 1995. After subtracting health and flood premiums ($27.7 million), $1,508 million remains per year remains. Upon this amount the state could impose the 12.5% surcharge, providing the Hawaii Hurricane Relief Fund with $188.5 million annually to repay its loans.

The debt financing costs of loans to cover losses under Hawaii Hurricane Relief Fund (HHRF) loss scenarios for Oahu are contained in Table 6. These are based upon the projected HHRF losses for 1996 presented in Table 5. Table 6 assumes a debt ceiling of $750 million the line of credit and reinsurance to $300 million, which is consistent with the new debt financing plan approved by the Insurance Commissioner in May 1996.

 

Table 6

HHRF Debt Financing for Two Hurricane Loss Scenarios for Oahu

 

	Iwa-Strength Storm			Iniki-Strength Storm
Total Losses	$976,996,884			$2,795,923,754
Less Deductible, Industry Assessment, and Reinsurance	(-)$609,769,969			(-)$627,959,238
Total Amount Borrowed	$367,226,915			$750,000,000
Total Unpaid Claims	0			$1,417,964,516
Term of Loan To Cover Losses	5 Years	10 Years	15 Years	5 Years	10 Years	15 years
Approximate Annual Loan Payment (7.5% interest rate)	$88+ million	$52+ million	$40+ million	$180+ million	$106+ million	$83+ million
Total Interest to be Paid Over the Life of the Loan	$74+ million	$155+ million	$245+ million	$151+ million	$318+ million	$501+ million

 

From the data available, it appears that Hawaii Hurricane Relief Fund (HHRF) would be able to cover Oahu losses from an Iniki-strength storm within five years. This could be done by using the approximately $188.5 million that could be generated from the insurance surcharge to repay funds borrowed to cover losses. This would mean that premiums on all insurance policies except those for health and flood would be increased by about 12.5% for a five year period in order to retire the HHRF debt incurred to cover

The Prospects for Federal Catastrophic Insurance Relief

The elected officials that established the Hawaii Hurricane Relief Fund saw it as a short-term solution to the insurance crisis that emerged in 1992 and 1993. They believed insurance industry claims that the companies serving Hawaii could not bear the burden of the kind of catastrophic loss that resulted from Hurricane Iniki. Indeed, the magnitude of the Iniki losses and the effects on the companies as a result of the storm was seen as evidence that the industry was not able to cope with catastrophic events.

In 1993, Senator Daniel Inouye and Congresswoman Patsy Mink co-sponsored bills that would have created insurance programs at the national level to address the problem of catastrophic loss from natural disasters. Despite support from members of Congress from States that had experienced catastrophic disaster losses, both bills died. In July 1995 Senator Inouye co-sponsored the Natural Disaster Protection and Insurance Act (S.1043). In its original form, this bill would have established a private insurance corporation to provide reinsurance to private companies and "state insurance pools" like the Hawaii Hurricane Relief Fund. This bill and its companion bill in the House of Representatives (H.R. 1856) had fairly wide-spread support. The bills also drew considerable criticism from members of Congress and public interest groups that felt they were "no more than an insurance industry bailout."

As the Natural Disaster Protection and Insurance Act was being amended in the Spring of 1996, it became clear that any insurance scheme created by the Federal government was not going to meet Hawaii’s need to cover losses in excess of what the Hawaii Hurricane Relief Fund (HHRF) could cover. The May 23, 1996 Senate version of the bill had the minimum threshold for a catastrophic loss set at $25 billion, well in excess of the $1.5 billion HHRF could cover. If passed, the primary impact of the Natural Disaster Protection and Insurance Act would be to impose new Federal mitigation requirements on Hawaii as a condition for receiving Federal disaster assistance above the minimum threshold. It would provide, however, little or no funding for mitigation activities in Hawaii, nor would provide the increased reinsurance HHRF needs.

The Future of the Hawaii Hurricane Relief Fund

The Hawaii Hurricane Relief Fund (HHRF) has made it possible for building owners in Hawaii to purchase hurricane insurance and to meet mortgage lender requirements for "adequate" insurance coverage. Unfortunately, HHRF has not been able to secure enough reinsurance to cover a catastrophic loss on Oahu. Some individuals involved in the establishment of the Hawaii Hurricane Relief Fund maintain that they have known since the HHRF was first proposed that it would not be possible to secure adequate reinsurance to cover such a loss at a "reasonable" cost. They pinned their hopes on Federal government action to address the broader issue of catastrophic loss coverage.

The prospects for the federal government, or the private insurance industry, making hurricane insurance available to Hawaii homeowners seem slim. Private insurance companies have continued to make hurricane coverage available to commercial policy holders, including condominium associations. However, no private companies have offered hurricane coverage for single family dwellings at a price comparable to the cost of Hawaii Hurricane Relief Fund coverage. They are not willing to bear the risk and cannot secure adequate reinsurance to cover potential losses at a reasonable price.

When confronted by the inadequacy of Hawaii Hurricane Relief Fund’s reinsurance for an Oahu hurricane, several public officials have said that if we suffer a major hurricane, "the feds will have to step in." The debate over the Natural Disaster Protection and Insurance Act has made it clear that most members of Congress do not see Hawaii’s property insurance situation as a national problem. Moreover, the Federal Emergency Management Agency, the Small Business Administration, and other federal agencies have limited statutory authority to provide disaster relief. If Oahu were struck by a major hurricane, many homeowners would be able to secure a Small Business Administration Loan to cover repairs, and, potentially, reconstruction of their homes. But, federal agencies will not be able to bail out the Hawaii Hurricane Relief Fund (HHRF) and cover losses for which HHRF has inadequate reinsurance. Moreover, if Oahu suffered a major loss, it appears very unlikely that the Hawaii Hurricane Relief Fund would be able to secure reinsurance at any price. It also appears unlikely that the HHRF, as it is currently constituted, would survive.

In the long-term, the only solution to Hawaii’s continuing insurance crisis is to reduce the risk of future losses. The adoption of the 1991 Uniform Building Code (UBC) by all counties will result in a very gradual reduction in the risk of catastrophic hurricane losses. A new housing development is being planned for Oahu that will include homes built to withstand wind loads of 160 mph winds, twice the wind loads required under the 1991 UBC. The Kauai County Housing Agency has built two houses designed to withstand wind loads from 100 mph winds. The Agency is also planning to require similar design requirements as part of its affordable housing policy for new sub-divisions. Unfortunately, these efforts will have very little impact on the existing stock of homes for many years.

Skeptics have said that the incentives that will be offered under Hawaii Hurricane Relief Fund’s (HHRF) risk-based premium structure (RBPS) are insufficient to motivate homeowners to retrofit their homes with hurricane clips and straps or storm shutters. On December 1, 1995, the Honolulu Advertiser ran a story on the risk-based premium structure being developed by HHRF. According to the owner of Hurricane Protection Products, a private firm that retrofits homes, sales increased dramatically during the weeks following the story. At the end of December 1995, the Honolulu Advertiser ran a story on the proposed reduction in the base premium for HHRF insurance. The owner of Hurricane Protection Products reported that this resulted in a sharp decrease in sales. Sales also reportedly declined following two Advertiser articles on the reduced risk of hurricanes during 1996 because this was not an El Ni– o year. While no systematic research has been done to assess the potential impact of the HHRF risk-based premium structure, it appears from anecdotal evidence that the public does respond to information about the hurricane risk and about information about opportunities for reducing the cost of hurricane insurance.

Hopefully, the Insurance Commissioner will approve the Hawaii Hurricane Relief Fund (HHRF) risk-based premium structure. If he does, HHRF should initiate an aggressive public information campaign informing people about the hurricane risk and the incentives for retrofitting homes recognized by the new premium structure. When new policies are sold and existing policies are up for renewal, HHRF should provide similar information.

State and county civil defense agencies, the mortgage banking and private insurance industries, and others concerned about the availability and cost of hurricane insurance coverage in Hawaii should support Hawaii Hurricane Relief Fund’s (HHRF) public information campaign. They should develop campaigns of their own using video tapes and printed materials already available from HHRF, the Federal Emergency Management Agency, Hawaii State Civil Defense, the City and County of Honolulu, the Red Cross, the University of Hawaii and other organizations. Even if only 1% of Hawaii Hurricane Relief Fund policy holders retrofit their homes each year as a result of such programs, we will begin to reduce the risk of future losses.

If the Hawaii Hurricane Relief Fund is to survive, much more will be required. In 1993, the Chairman of the State House Consumer Protection Committee introduced legislation to provide tax credits for retrofitting homes. Several other legislators expressed support for the bill, but it never passed out of committee. When tax credits for hurricane protection were suggested to several legislators in 1995, they said there was no hope of getting support in either the house or the senate. Hopefully, the state legislature will enact legislation for disaster mitigation tax credits in 1997.

Hawaii’s economy is now beginning to recover from the worst decline since the early 1980s. Hundreds of small businesses have failed and thousands of people have lost their jobs. What sort of economic decline would result from another major hurricane? How many businesses would fail? How many people would be unemployed? What impact would a catastrophic loss on Oahu have on the cost and availability of reinsurance? What would the prospects be for an economic recovery if hurricane insurance was not available in Hawaii? Can we afford to ignore the problem?

12.5.96