Senate Standing Committee on Commerce and Consumer Protection

Good afternoon, everyone. We're convening the Joint Committee on Commerce and Consumer Consumer Protection and Commerce and the Committee on Commerce and Consumer Protection. It is Monday, January 27, 2025 at 2:00pm in Conference Room 3329.

We are convening the agenda today for the purpose of an informational briefing for the Hawaii Public Insurance Association and the Hawaii Hurricane Relief Fund to update the Committee and the public on their upcoming plans for providing insurance relief for eligible parties. First up, we have. I'm sorry, on behalf of the House, I have. There's myself.

Do we need to go through or not? Maybe we. I mean, first. Did you convene already? Maybe we'll just let Members introduce themselves.

Sure. We'll just go down the line and let everyone introduce themselves. I'm represent Chair Scott Matayoshi.

Good afternoon. Cory Chun. I'm the Vice Chair.

Good afternoon. Representative Kim Coco Iwamoto.

Hello. Representative Garner Shimizu.

Thank you, Chair, for convening this Joint Legislative briefing on behalf of the Senate. I'm Jarrett Kyohokalole and I'm Chair of the Commerce and Consumer Protection Committee. Thank you for joining us.

Carol Fukunaga, Senate District 11. Thank you.

All right, well, we have two groups we'd like to hear from today. We've got HPIA and HHRF. I think we'll first hear from HPIA. I believe they have a slideshow, slideshow presentation for us. So why don't we do that first?

Can you hear me okay?

Yes, we can.

All right, thank you.

Just for the people in the audience and the people testifying, if you don't speak into the microphone, other people will not be able to hear you outside the room, too.

Okay, thank you very much. So I'd like to address Chair Matayoshi and all Committee Members. Thank you for the opportunity for HPIA to be here today and to provide a little bit about the entity and its plans going forward. I'm Teri Fabry. I'm currently the Plan Administrator for HIPA.

With me today, I have HPIA Board Chairman Matthew Chung and Scott Sterenberg of Marsh, also the plan administrator. For today's agenda, I would like to cover seven points, and then we can open up for question and answer.

I'd like to give you a little bit of the history as to how Property FAIR plans were formed in the United States. Then we'll zoom into Hawaii and how the HPIA came into being, how it's structured and its governance.

Give it a little bit about the history and background, and then we'll talk about how the HPIA products have expanded over time and tell you where we are today, what's offered, the exposure, the financials.

We'll go over some key financial metrics and then we'll talk just a little bit about what reinsurance is, because I'll be referring to that during the presentation and then we will conclude with where the HPIA board is taking HPIA. So the first slide. What is a FAIR plan?

So back in the mid to late 1960s, there was several major civil disorders that had erupted over various parts of the United States, primarily Los Angeles, Newark and Detroit. The availability of property insurance at that time was already severely limited. But with these riots that really exacerbated the problem.

In July 1967, the Kerner Commission and the Hughes panel were established by the Federal Government to review the study the problem and identify some recommendations. Their recommendations include instituting property FAIR plans. FAIR stands for Fair Access to Insurance Requirements and that this be done in all states.

The coverage offered would be basic property insurance, fire insurance that includes extended coverage perils such as smoke, hail, wind, collapse, vandalism, mischief, and it was to cover dwellings and content.

Congress responded to these findings and cognizant of the need to provide reasonable access to insurance while responding to the insurance industry concerns, they passed the Urban Property Protection Reinsurance Act of 1968. The first property FAIR plan was created in 1968 and over time we have reached a point where there are 33 states now with property FAIR plans.

Risks that are placed with a property FAIR plan are generally higher risk and must meet certain minimum eligibility requirements. The most common being the risk must have been declined either by two or three voluntary market. We also call them admitted carriers in that state.

FAIR plans are generally more expensive and provide limited coverage because their intent was just to provide basic fire insurance and to serve as a safety net for those consumers who could not get insurance in the standard market. Also, FAIR plans are meant not to be a lifestyle.

They're meant to be a temporary stopping place until consumers can obtain coverage back in the admitted marketplace. The governing documents for each property FAIR plan were developed on a state by state basis as insurance is regulated at the state level, not the federal level.

This has resulted in many variations in the property FAIR plans between states, specifically eligible areas, eligible risks, rates, coverage forms and endorsements. So for example, some states will offer only residential property insurance in their FAIR plan. Some will offer personal and commercial. Some that offer commercial don't include condominiums.

So it just differs based on what that state's needs were. The growth or depopulation of policies written in a fair plan is widely connected to the activity in the voluntary insurance market. So if the voluntary insurance market is strong, people can get coverage there and there's very few policies written in the FAIR plan.

Also, the growth of a FAIR plan policies are determined impacted by man made and natural disasters and other financial conditions in the state. There's been explosive growth in many of the FAIR plans across the United States. You've probably read about Florida, California, Texas and and some of the eastern seaborne states.

Colorado is the latest state to implement a property FAIR plan. They've hired their Executive Director and they're currently developing their rate forms and will be filing those with their Colorado Insurance Commission. And they're also doing a cash flow and capitalization requirements study to get up and running.

There are a handful of other states that are also discussing the implementation of a property FAIR plan. So if we zoom into Hawaii, let's take a look at historically what's happened here and what led to the creation of HPIA. In 1983, Kīlauea lava flow destroyed 16 homes in the Royal Garden subdivision.

And then six years later, that same flow destroyed over 100 homes in Kalapana. In response to the lack of availability of homeowners insurance, the Hawaii Legislature created HPIA. Effective July 1, 1991 HPIA issued its first policy nine months later. Private insurers had stopped writing in Lava Zones 1 and 2.

Because lava is a known risk and it's just not insurable. There's no predictive modeling or risk analytics that helps with the pricing. Lava also represents a 100% total loss and there are no mitigation efforts that are successful in preventing or stopping lava flow.

So the HPIA was created to stabilize the residential property insurance market by providing basic fire insurance. All insurance companies authorized to write insurance in the State of Hawaii provide property. Casualty insurance companies are automatically a Member of the Association.

So that means they share in any profits and they would be sharing in any losses if the Association had incurred extraordinary losses or was having cash flow problems.

So in the event HPIA doesn't have enough money to pay its obligations, the HPIA Board of Directors authorizes an assessment which would go against virtually all Hawaii property and casualty insurers, even those that write just workers, comp or auto, thereby affecting all insurance buyers in the State of Hawaii. The Hawaii Insurance Commissioner approves any assessment requests.

To date, there have been no assessments authorized by the HPIA Board of directors. The HPIA board is made up of 12 Members, eight of whom represent a Member insurance company. They're elected to the board by Member companies.

The other four seats on the board are appointed by the insurance Commissioner and they reflect the public on each of the following. O'ahu, Kauai, Maui and the Big island or the island of Hawaii. One thing that makes the HPIA unique compared to other property fair plans is that it has no employees.

So the HPIA board of directors contracts with either a local insurance company or another insurance entity, a third party, to perform all the operations of HPIA, which include underwriting, policy servicing, premium billing and collection, claims adjusting, financial statement preparation, statistical reporting, rate filings, liaison with the Insurance Department, and many other duties that a typical insurance company performs.

And this authority for the plan administrator, which is also maybe referred to as a servicing carrier, is granted by the plan of operations. Since June 29th of 2020, Marsh has been a wholesale insurance brokerage company who's had a presence here in Hawaii for over 54 years, has been the plan administrator.

Marsh has a dedicated team of insurance experts who are focused solely on administering the HPIA program. And lastly, HPIA is subject to regulatory oversight by the Hawaii Insurance Division, just like all the other admitted carriers.

So the Hawaii Insurance division reviews and approves any changes to the plan of operations, which is its governing document, and any rate form and rule filing requests. This is scintillating information, right? Right. Okay, so where did HPIA go after its initial creation? Shortly after it was created, the hurricane Iniki hit Kauai.

So September 5, 1992 the we call it the non lava market was just destroyed and carriers pulled out. So HPIA expanded its authority so it could provide homeowners coverage to consumers throughout the entire state. So HPIA developed has two products. One, we call it the Lava program for those consumers who live in lava, zones 1 and 2.

And then the non Lava program is for the consumers elsewhere in the states. Since that expansion, the HPIA Board increased the dwelling limit. We also refer to that as coverage A. That's the maximum amount offered per policy from 125,000 to 250,000. Subsequently it was increased to 350,000 and currently is at 450,000.

In 1996, RLI was looking to enter the State of Hawaii as a residential property insurance writer and they bought HPIA's book, which was about 10,000 policies at that time. So the HPIA portfolio virtually went to zero and then has regrown since that based on the market need. So what's the HPIA doing today?

HPIA has four products that it offers to Consumers, they're all residential property. The first is homeowners. We refer to it as an HO2. That's for dwellings that are someone's primary occupant, primary residence occupied daily.

We also offer a renter's policy, an HO6, which is a condo unit owner's policy and then a dwelling fire, also referred to as a DP2, which is for dwellings that are secondary homes or used as long term rentals. HPIA does not provide coverage for dwellings used as short term rentals.

At the end of 2024, there were just over 2,200 policyholders with HPIA. And the policy count is split almost 50/50 between the lava program and the non lava program. What's interesting is that the total insured value or the exposure isn't 50/50.

So almost 80% of the limits offered is for those consumers who live in lava zones 1 and 2. As of the end of the year, the total insured value was just over $900 million. That's almost reaching the peak in the last 16 years.

So HPIA has been on an upward trajectory for quite a few years, especially after the 2018 lava flow on the big island. Late in 2024, the growth of new policies for people living in lava zones 1 and 2 did slow.

HPIA had already absorbed the policies for people who were non renewed when one carrier exited the State of Hawaii and then another carrier stopped writing new business. So HPIA is the only option for people that live in lava zones 1 and 2.

Due to changes in the workforce, companies are now encouraging people to come to the office instead of work from home. So not as many people are looking to move to paradise and buy a home where they can work remotely. So there's not as many. Home sales plus mortgage rates have been rising dramatically and are now over 7%.

So we aren't seeing as many new policies because there aren't as many home purchases in lava zones 1 and 2. We are seeing significant growth in the non lava portion of the book though, and that's for a couple of reasons.

There was one admitted carrier who is no longer going to write personal lines in the State of Hawaii. And then other carriers are pulling back on how much they're willing to write and or tightening their underwriting guidelines after the losses from the Lahaina fires and due to the increase in their reinsurance cost, it.

The HPIA plan administrator, board of directors and the insurance commissioner look at a lot of different financial metrics. To analyze the health of HPIA, I wanted to share three with you today the chart in the top left compares direct written premium with reinsurance cost.

Direct written premium is the amount of premium that HPIA collects for the policies written. That's the dark blue line. So, in 2018 HPIA collected about 2 million in premium. That's grown to over 5.5 million at the end of last year. The light blue line represents the reinsurance expense.

This is the amount that HPIA pays to other insurance companies to transfer some of the risk. And in another slide, I will go into just a little bit of a detail about what reinsurance is. The reinsurance expense has grown faster than the direct written premium since 2018. Reinsurance is the largest expense of the HPIA.

The reason HPIA purchases reinsurance is to protect the association in the event of significant losses from volcanic eruption and lava flow. The importance of reinsurance was demonstrated in 2018 after a month's long flow destroyed 149 homes that were insured by HPIA. Losses totaled over $30 million.

And because of the reinsurance program, HPIA only retained 5 million of the 30 million. The cost of reinsurance has grown significantly because the price has increased and because the amount of policies that we're writing in the lava zones has grown. Therefore, the HPIA Board a year or so ago had to reevaluate their purchasing strategy.

They used to buy enough reinsurance limit to cover all of the homes in a particular neighborhood or area if it was totally destroyed from volcanic eruption or lava. And a neighborhood for example is defined as Leilani Estates, Nanavale Estates, or Hawaiian Beaches, Hawaiian Shores, and Hawaiian Parks. We group them all together for our analysis.

So, the board was no longer able to do that because the cost of reinsurance had increased so dramatically. For this year, in 2025, the board decided to reduce their reinsurance expense by almost a quarter of million dollars.

What that meant was they increased the retention or the deductible the amount they would pay in the event of a catastrophic loss, and they took a co participation or a share of the losses in the tower above that first $10 million. This decision was not made lightly as it exposes a significant portion of the HPIA balance sheet.

For example, in the event of a catastrophic event that's $100 million. HPIA would pay out the first 10 million in losses and then they would participate up to the 100 million and they would exhaust 56% of their surplus in that one event.

Right now, HPIA's largest neighborhood of concentration is $286 million, but they only have $100 million of reinsurance coverage. So, if that largest neighborhood was totally wiped out, there wouldn't be enough coverage to pay out all the claims, and it would be a situation similar to what the California Fair Plan is in.

If we move to the chart in the top right, "Net Income, Net Loss," you'll see that HPIA has lost money six of the last seven years because of that. HPIA liquidates a portion of its investment portfolio every year to cover operating expenses.

After the 2018 lava flow, HPIA approached the insurance division and asked for a significant rate increase in 2020 to cover that higher cost of reinsurance. The HPIA went back to the division in 2023 and asked for another increase, though not as substantial. Even with these rate increases, the HPIA has been unable to break even.

A rate filing was submitted again to the division in the second quarter of last year and that filing is still pending approval. After significant conversation and negotiation with the insurance commissioner, the original rate request was revised downward and is now less than 20%, which is significantly under the actuarial indicated rate need to get to a break even.

So, let's jump back. I mentioned that I would talk about reinsurance. Let's just take a minute or two to talk about that so we can. In layman's terms, it's insurance for insurance companies.

HPIA, an insurance company, would pay premium to another insurance company and then that company would pay a portion of the losses in the event of whatever is covered under the treaty.

It allows for a company to diversify its portfolio and spread risks and is typically helpful to a carrier who has geographically concentrated risks to spread out their exposure. We talk about a hard market.

That means reinsurance companies are tightening up their underwriting guidelines, raising their rates, and they're kind of in the driver's seat when insurance companies like HPIA go to them to buy reinsurance. Typically, reinsurance is negotiated on an annual basis and there is a correlation between the increases in reinsurance pricing and the amount of insured losses globally, so worldwide.

So HPIA, though we're just here in Hawaii, writing risks in Hawaii, our reinsurance is affected by what's happening, happening in Asia or Europe or other parts of the United States. So, reinsurance - can you still hear me, okay? All right. So, reinsurance is a transaction just between HPIA and one or more insurance companies.

The policyholder is not involved. Each contract is privately negotiated and it is tailor made to the specific type of risks that an insurance company writes. So, the reinsurance program for HPIA is tailored just for the peril of volcanic eruption and lava. HPIA does not have any reinsurance cover for wildfire or any other perils.

And the board made that decision consciously because there wasn't significant concentrated exposure in any one area to justify the cost of reinsurance. So, for example, with the Maui fires, HPIA only had five total losses.

HPIA just wasn't writing many policies in Lahaina because the admitted market was very healthy and homeowners there could get coverage in the standard market. I could do a whole presentation just about reinsurance.

Probably want to go a little quicker though.

Okay, all right, well then maybe I will skip this next one.

This next slide just talks a little bit about two different types of reinsurance. So where is the HPIA headed? Four key strategic initiatives have been identified to date. The board is confident that they have been fulfilling HPIA's mission of stabilizing the property insurance market.

But to continue to do so and to offer more products, we had to take a step back and look at the system that is being used. Every insurance company uses a policy administration system. That's what they use to do their underwriting, policy, issuance, claims and billing. The system HPIA uses is over 30 years old.

It's written in a programming language that barely anybody knows how to develop anymore. It's old and brittle, not flexible. It has many limitations, and a key one is that it doesn't allow HPIA to accept payment other than by check and payment in full. In 2024, the board of directors approved the replacement of the policy administration system.

This will be a cloud-based system that gives HPIA the same functionality as all of the admitted carriers. It will allow us to offer some convenience to our policyholders so that people can pay on installments. They can now pay with credit cards, ACH, and debit cards.

It will also give us the foundation that we can expand the existing product portfolio as well as offer new products. It's a major and complex initiative.

We kicked it off July 1st of last year and we're estimated to go live, if we stay on schedule, August 1st for new policies and then 45 to 60 days thereafter with renewals. It'll take a few months to stabilize the system and then we can look at adding more product lines. So, the second priority is financial stability.

It's critical that HPIA charge an adequate rate for the policies that it writes. It must achieve rate adequacy in order to cover the losses it pays and expenses, including reinsurance, so that it can remain a long term, financially sustainable entity. As a fair plan, HPIA does not build any profit into its rate making calculations.

We're just striving for a break even. The HPIA board is committed to doing an annual actuarial analysis to look at rate need going forward. So, we're tackling this from all ends. We're looking at it from rate. We're also looking at it from the expenses incurred by the organization.

As I mentioned earlier, the board made a decision to reduce the reinsurance expense by 3/4 of a million dollars. Additionally, the plan administrator, Marsh, and that's my boss here, I don't have the authority to negotiate things like this, he offered to put some skin in the game and for the system implementation agreed to absorb the salary and benefits of a project manager for the system implementation, which is estimated to be between 200 and 250,000. Additionally, the board has agreed to extend the current plan administrator's contract in exchange for a reduction in fees.

So that will be taking place and will be effective the middle of this year. The HPIA Board has also agreed to reduce the amount of commission that it pays to the agents to write policies with us. And then all the expenses that are just incurred operationally are reviewed at the board level on a quarterly basis.

The third initiative is to expand the one of the current products which is the HO6 or Condo Unit Owner's Product. Currently this product, HPIA only offers a dwelling, so this covers the interior of a condo. That limits $5,000 and loss assessment limit is only 1,000. We know that doesn't meet market needs.

So, rates and forms are being reviewed and developed so that this can then be put into the new system once it's up and running. And lastly, new product offerings. And that's why we're here today, right, to talk about developing a commercial property product for condominiums in the State of Hawaii.

Rates, forms and rules are being looked at and we're also working with other fair plans to see what they're offering in their states to see if we can utilize what they've already developed. The biggest question should the board of directors decide to implement this product would be how much money is needed to capitalize the association.

As shown on a previous slide, the HPIA is very thinly capitalized already for the risks it writes. There are many factors that go into the equation of determining how much capital is needed. Things to be considered in the equation include: what kind of a limit would HPIA offer, how many policies would HPIA write, what kind of rate would the insurance division approve, if we used a model, what's the return period? Are we looking at return period of 1 in 50 years, 1 in 100 years, 1 in 250 years? And then of course, the cost of reinsurance and the type of reinsurance.

Talking with HPIA's current reinsurance broker, they had a condo mall risk in another state, not Hawaii, for $20 million limit to buy facultative reinsurance. It's $1.2 million. And I've heard ideas thrown out that HPIA could easily enter the commercial property market for condos and just pass on to the consumer, to the AOAO, the cost of facultative reinsurance.

So, in that example, that's $1.2 million plus the rate that HPIA would be charging to cover for the losses and expenses. HPIA has not completed an analysis to determine what the appropriate capitalization number is. I've heard many figures thrown out. They range from a low number of $30 million to more than 2 billion.

And it all depends on the assumptions used and those factors in the equation. As the plan administrator, my recommendation to the board is to do a cash flow and capital analysis study. So, to send out an RFP to identify the firms who would have the talent and the skills to do that and then to complete that analysis.

I've been in conversations with the Colorado Fair Plan executive director and they're going through the same things right now. So, I trust that this information has given you some insight into who and what HPIA is, its history and background.

And I can assure you that the board is committed to fulfilling HPI's purpose and providing stability to the property insurance market in Hawaii. Thank you for the time, your time. This concludes my prepared remarks.

Okay, why don't we ask them some questions before we move on to HHRF, just because this is fresher in our mind. Members, do you have any questions on house side? If you have them, just indicate. Okay, thank you.

Thank you so much for your presentation.

You're going to need to talk into a mic so that other everyone can hear.

Thank you for your presentation. What was the total payouts for claims? The relationship between numbers I'm looking for relates to a news article that Governor Green basically disclosed.

I guess he went into the DCCA's records, and he disclosed that during the past 20-year period, 38 billion in premiums were collected, 14 billion in claims were paid out, and then the profit or the remainder was 24 billion. And one might think of that as profit, but no one's - but what's not included is the amount of money that all the premiums, all the interest accumulated over that period of 20 years. So, the $24 billion profit might actually be more. But what's also not included is operational costs.

But so, if you were to break down the numbers for HPIA for the last 20 years, those three sets of numbers, so the total premiums, total claims paid out, and then what should be left? Right.

So that's a good question in terms of like, you know, loss ratios are really important. Just as a really broad picture in the commercial property and casualty market, for every dollar of premium you paid, generally there's what's known as 100% combined ratio, meaning there's a dollar that's spent in claims and in expenses.

Now for HPIA, the base expense and really the massive expense is that the reinsurance expense. So, if you look at those two lines, it was right next to each other. So that really kind of drives the program.

And if we looked at our loss ratio over time, we'd find that our loss ratios on a non-cat or - with a non-lava flow year are favorable. And when we have the lava flow, it becomes extremely unfavorable, such that like when we had the 2018 lava flow, we incurred a $30 million exposure.

HPIA was protected by its reinsurance, but suffice to say, had more than 100% loss ratio that year. So, yeah, go ahead.

Representative Yamamoto, if I could direct you to the Financial Metrics page. I believe it was the one that looks like this. On the upper right-hand corner is the net income. Right. So, you can see, I believe, baseline is kind of -

Slide seven.

Oh, sorry. Okay. Baseline is where the years are. That's like breaking even, if you will. So, it looks like the only year that we ever were over the break-even line was in 2019. And after that year we've pretty much. When you mentioned the 38 billion premium and the like half of it being profit, that number, as you mentioned, has a lot of minuses.

All the minuses are all the salary, the rent that every company has to pay, the reinsurance that those companies have to pay too. So, in reality that makes insurance companies look terrible, I'm sure, and like they're just grabbing all these dollars. But in reality, a lot of it is paid to other people.

And I believe most insurance companies aren't running at like 10% net profit every year. I'm throwing out a big number like that. But I'm pretty sure most insurance companies aren't pulling that kind of number in after paying all their expenses.

So HPIA for sure, though I can't say we're a part of that pool of other carriers because those are not for profits. Right. We're a nonprofit and, as Terry had mentioned, the money that comes in is all just like put back in so that we can stay afloat.

She had mentioned that last year we had to liquidate our assets basically, and that was just to pay the bills. I believe the equivalent would be us going into our sock drawer to pull out the money that grandma gave to us so that we can keep the electricity going, in that sense.

I know that sounds drastic, but basically no insurance company operates like we do. The insurance company would be closed by now. Yeah.

So, it's a nonprofit staffed by volunteers with a mission to help people in the state who can't find insurance and of course have some guidance and some talking with the, with the government as well, you folks. So, yeah, but I hear what you're saying and yes, some companies make more than others. HPIA? No, though. Yeah

Well, definitely - sorry for me, chair.

I guess as a follow up, you know, I know the lava type of market is fairly discreet and you know, kind of contained; you know where they are and you know when it happens. In the condo insurance market, you know, there's several categories of different kinds of condo structures.

And so I'm kind of wondering how, you know, your model, which is kind of a nonprofit designed to address a discrete group of insured, would translate for condo insurance types of claims that may arise or the need for assistance where, say, for example, you know, on Oahu we have roughly 39,000 units that are covered by the city's fire sprinkler ordinance.

And that's, you know, one group and then you have a much larger group, you know, 400 plus buildings, is that, you know, directly translatable into the kind of model that, you know, you're bringing forward?

Yes. So, thank you for the question. So, Terry was going to get into the wonderful reinsurance slides, right. That everyone was happy when it got put away. So, what you're describing is exactly where we're headed with that as far as a model like you say. So, the two types of major reinsurance are treaty reinsurance and facultative reinsurance.

Most regular -

Can we go to slide 9 please on the board and then for reference to the members. Sorry to interrupt.

Thank you. Yeah, that, that looks better than what I'm saying.

So, most insurance companies have what they call treaty reinsurance means, "Hey, big reinsurer, I have 500 properties in this geographical area, and I would like you to help me reinsure those properties." If I can't pay out, like, let's say 30 of them go down all of a sudden.

That type of insurance is usually developed for a risk that is fairly or more predictable, I should say, and less likely to have 30 or 40 go down at once. I believe we're here today because we're talking about buildings and units that are having a hard time getting insurance.

And that's for the physical characteristics of the building itself, which could be its maintenance and such, that type of risk. If you said to a big reinsurer, "Hey, I have 50 condominiums that are failing in some areas of maintenance, can you write me a treaty reinsurance?"

You may find 1 one day, but it would be astronomical costs and unfeasible. So, what we move to, however, to try to address that is facultative reinsurance, which is, "Hey, maybe I'm not going to ask you to do 50, but can I do them one by one? Can you make me a deal on this one building, give me all those conditions and terms," hopefully a favorable premium, but quite difficult if the building is in poor shape. And that translates, like you just mentioned, to the individual unit owner in that building.

Because if big building doesn't have his insurance, little guy that lives inside the building can't sell his house, nobody wants to buy it from him. And that's, I believe, the problem that you're seeing in the, in the news too. So going back to your question, we don't have a model for writing a bunch of condominium insurance buildings.

Most likely it will have to be on a one-by-one basis at this time. I highly doubt we could get a reinsurer to agree to look at 50 bad buildings and write us a treaty policy. So it would be, the model would be one by one, actually.

Thank you.

Any other house members have any questions? I've got a couple. So, I am concerned about the timeline for writing new policies when you folks expand. But you said that you gave a timeline of August 1st for writing new policies and 40 to, I'm sorry, 45 to 60 days after that for renewals of policies.

And that was based on your upgrade of the computer systems, is that correct?

Yes, that's right. This is for our existing homeowners and dwelling fire policies. Right.

Okay. So this is for the existing HO2.

Not, not talking about commercial buildings at all right. Just for the policies we currently hold.

Okay. If you were to expand to condo buildings, how long or what's the timeline you're looking at for writing new policies for those?

We've had some internal discussions about that. I think besides time, funding is the major obstacle, actually. I would have - we would have to have the board agree to go that direction. First of all, I believe we're not properly capitalized to start that line of business.

I'm going to put a number out there, but please don't hold me to it, but I've heard that it can cost alone just to add that product to your computer system could cost anywhere between 500,000 and $1.0 million, let's say. Just to say my computer is ready to write that.

But there's also other hurdles and difficulties, as Terry had mentioned, which is the actuarial analysis, getting the reinsurers to even start considering this. And as I mentioned, it won't be treaty. It will be one building by one. So maybe one day that first test case building will probably get in the news.

If it gets written through HPIA, it's probably several months before that product could be developed as well. Because for ours, for an existing product, they already kind of know about the HO2, it took - it takes a year. Right. So, it could very well take that long for the commercial side too.

And I'm skipping on a lot of other things that need to happen along with just the concept of writing it. But I would say funding is the major obstacle. And then time the second. Yes.

And then PUC, I'm assuming you'd have to go to the PUC for the rate?

To the insurance division, yes, but I - yes, but with all the actuaries giving the right numbers, with the pushing probably from the government and the need, it's on them to agree to the rates that our actuaries decide.

But yeah, ultimately, again, the board of directors has to agree to it too, as far as it being sound for. Because our job is to make sure we don't go bankrupt so that we have so that we don't ask State Farm, Allstate, all those other insurance big names, you know, that they don't have to chip in.

So far, they haven't had to chip in. In every other state they chip in. Not every other; in many other states they chip in.

Just to recap, so 500,000 to $1.0 million for the computer system. About a year from when you start that to when you can actually issue policies, is that the approximate timeline you had?

We're looking at conservative estimates. Yes, sir.

Okay, thank you. Members, another round of question. Senator McKelvey,

Thank you, chair. I appreciate it. The more I hear about it, the more. Guys, I think you're really not set up to do this at all, period, which is to be a fair like other states have, which is take all comers as insurance of last resort for PCI.

I'm hearing you're going to have higher prices, higher and higher, if you're, if you're expanding; lower benefits potentially, which leaves systemic underinsurance and under coverage. And so, what I'm seeing is that basically the same challenges of existing fare plans. Colorado, you go to the website, it makes it very clear this is last resort. Right.

So, in California, they're trying to re entice more private underwriting. The 85% thing I think I've thrown out there before. So, I guess given all these challenges, no reinsurance for fire, you know, no funding, staffing and such, you're not really set up to be a true fare program.

And if you are, you still aren't getting over the hurdles that the other fare programs are facing. So, should we be looking perhaps to trying to tap more into the private sector market for these types of PCI coverage of last resort, or am I missing something? I mean, it just seems that we're not.

You guys aren't set up to do this. And even if you were requiring huge amounts of care, capital and other resources, you still may have the same issues facing the other fair plans in other states.

Absolutely correct, sir. The HPIA is not set up to write condominium insurance. It's a new developing event, emergent event. I believe some of the catalysts were the Lahaina Maui fires, because what it did is it made a lot of our standard carriers gun-shy, reevaluate what they like to write.

And they started to not want to write some of these buildings because their reinsurance costs were going up. It's all tied in the global, you know, reinsurance market. So, yes, you're absolutely correct. HPIA is not set up to do this without a serious obtaining of a large amount of money. That part I -

Just add one thing. So, when an insurance company or anybody addresses this issue, they come up with what's known as a loss cost factor, which takes all of the data of all the losses and they calculate a number that says, "Okay, this is what's going to go into the cost of insurance."

One of which the key component of that is cost of capital. So, your cost of capital is really important when calculating that loss cost factor. Once you have that factored down, now you can apply it to the exposure basis, meaning a $50 million building, $100 million building, a $300 million building.

And so that cost of capital is what's provided by the commercial market in a global marketplace. What happened in Lahaina, what happened in California, is financed around the world. Right? So, the only way HPIA would be able to so-called compete against that is to subsidize that cost of capital.

So that would be one method to lower the cost. Now granted, you would need to only be able to underwrite to the extent you had capital available. Okay, so think about a $300 million building. Well, HBIA can't come in and write a $300 million building. You could have a $300 million loss. That would be catastrophic.

So, but we can only take a small percentage of that. A quota share, it's what it's called in the business; maybe a 5% quota share or something along those lines. Again, though heavily dependent upon the cost of that capital. Reinsurance is another form of capital. So that's just the reason we were able to, Matthew pointed out, that we're able to survive is because we're using that reinsurance market to get by on just a break-even basis. So, we feel like we're trying to balance a lot of the stakeholders here, the insureds, you know, the insurance division, the board and the greater industry trying to balance all of those.

But I think your point is well taken, Senator McKelvey.

Members on the house side, any other questions? I guess it's my turn again. So, you said that the fair plan is not supposed to be long term and HPIA is clearly a version of a fair plan. But in Hawaii we've had lava zone coverage forever, a long time. How is that working?

I mean you said 80% of your liability is lava zone, which is crazy to me. And clearly lava is a situation a lot of other states don't have to deal with. I'm wondering though if the numbers might start to look better if you start to integrate condo buildings and non-lava zone plans, will the per capita kind of numbers move around at all? If you expand the risk pool, will this actually help you?

I guess, I think it could be possible. Now the there are carriers who go in and out of writing lava zone too. Some came in and some go out. Obviously, it's not a very hot policy that anybody wants to really write. Surely you could build up a book of condo business, but they will have losses too.

We'll have to also pay a lot just to get it done. I don't think we have a study at that moment. But conceptually, if those condo buildings stayed loss free. Sure. But we all know, I don't think that's, that's probably not going to happen. And again, those condo buildings, they're not meant to stay forever too.

There will be more markets for them to get out. They can fix themselves. The lava guys can't fix themselves. That's, that's the problem. The condo building can, you know, make their place nice again in concept. That could work. But yeah, we don't have a study currently with the, the numbers on that.

Like you know, projected loss, how many condos we would have to write to start to bring us out of being negative every single year. Okay.

You know, diversification of risk is a core principle which will allow the long-term sustainability of HPIA. So, we are cognizant of that and trying to balance the portfolio as best we can between lava and non-lava. And if there's a small commercial slice in there, meaning the condo, large commercial slice, if there's a small piece in that, that would add to the diversification of it, subject to, you know, the limitations of our capital.

My understanding is that you folks already can dip into other areas. Like if you found a need in the market, why haven't you? If that, if diversification is a goal, it sounds like you should be trying to write in all kinds of different areas to diversify that risk.

So again, that kind of goes back to our model, which is to be the carrier of last resort. We don't try to broaden our reach. We have zero marketing. We're not trying to get the policies. We basically do sit and wait for the policy to be brought to us based on the ones that we already write.

So, of course, it started with homeowners, and it hasn't been expanded beyond that because that was how it started initially 20, 30 odd years ago. We're not the last resort yet for those guys. That's why. Okay.

Members -

I mean, sorry, I mean just - but to come back to this, I mean you're kind of - if you're insurance carrier of last resort and you have coverage, it's so low. I mean you're kind of having the systemic under insurance and you're not going to be able to build.

Is there a way for, I guess if you were to be put in this role that you could use facultative reinsurance insofar as hardening and deferred maintenance and other types of things to help to bring up the ability to, for these plans, to I guess have better benefits or lower cost insofar as that approach.

I'm sorry, Senator, did you mean facultative for an individual house?

Yeah, yeah.

Yeah, so facultative reinsurance for an individual house: while conceptually it sounds like it could be done, I think what it would end up is that the cost would be just prohibitive, unfortunately. Let's say that 450 guy, I need seven.

So, you're going to tell me that I'm 250 short if my place burns down? And we'd have to say yes, that's the max we can provide now. Okay, what else can I get? Is there an excess surplus policy I could get for the 250 balance?

I think I've heard of it out there, but the, the reinsurer probably doesn't want to go into. They're going to say it's not worth their time and the cost would be crazy, and then the homeowner would just end up not being able to pay for that extra 250 in coverage. That would translate through us, basically. Unfortunately.

Yeah. There's no way any one home would be viable from a facultative reinsurance perspective. Unless you owned $100 million home. That would be the only possibility. There's a certain cost of capital that is incurred. There's a minimum premium that each reinsurer would accept. And so, you could never do it on a per home basis.

Even on a large building with $100 million. It's very difficult to achieve any efficiency in pricing through facultative reinsurance because all of the carriers that are writing this line of business already have a robust reinsurance program behind them and they're gaining the efficiencies by spending the cost of that reinsurance across many, many, many insureds.

So, if we try to do it just on one risk, we don't get that efficiency. Oh yeah, yeah. You know, here's a good example. We just recently finished the reinsurance program for a condo development with mixed use, both high rise and single family. The premiums went from I think 300,000 to 3.6 million two years ago.

And this most recent renewal, we have it down to $2.1 million. So that was done through leveraging a lot of insurance companies. So, they went from a program with one insurer to a program with 18 insurers to now a program with about 32 insurers.

But we were able to save $1.0 million of premium in this past year. So, the market is coming back to us and is helping our insureds. It just, you know, it takes some time.

Yeah, I think there's no more questions on the house side. Any more questions on the senate side. Maybe we can move on to HHRF. Okay, HHRF, you guys are up. Okay.

I'd like to thank the CPC, CPN. I'm going to drop off from this meeting. Terry will fill me in on the HHRF site. I really appreciate you giving us the opportunity to, to discuss with you and you guys have our emails, I believe.

Thank you for being here. Appreciate it. And just a reminder of the reps. Just make sure to talk into - senators to talking to the mic so people can hear you outside the room.

Good afternoon. Am I coming through? So, my name is Ed Haik and I'm here on behalf of the HHRF. I'm the chair of the HHRF and in my day job I'm with a related company to Terry and Scott.

I'm with Mercer and previous to recently joining Mercer, I had spent a long time, 27 years with Bank of Hawaii and had the privilege of working on the HHRF portfolio since the late 90s through the end of my time at Bank of Hawaii. So that's how I was approached by Commissioner Ito to join the board.

And we are in a much different status than HPIA. We are in a startup phase in response to the difficult markets. But by way of introduction, that's who I am. And I'll turn it over to Mike Nonaka, Vice Chair.

Hi, good afternoon. I'm Mike Nonaka, Vice Chair for HHRF Board. My day job is I'm with Business Insurance Services. We're a retail insurance agency here in Hawaii. We're located statewide. I'll turn over.

We don't have any slides for you today. The HHRF in its recent incarnation has focused on number one, making decision. Can the HHRF make an impact and is there a need for that? The need question has been answered by in the affirmative: yes, potentially there's a need and potentially there's an impact. That was step one.

Step two was to engage with an institutional consultant that would have the wherewithal to help make that evaluation. So, three different consultants were contacted. Aon, Guy Carpenter and Willis. Ultimately, Willis declined to make the finals presentation, but Aon and Guy Carpenter did. Aon was selected most recently. We're in process of contracting with them.

So that will be the consultant that will give us an overview of what the status of the market is and potential paths for ideally making a positive impact to effectively what is a very difficult market.

And I would say there is no magic bullet but getting issues on the table and doing a thorough evaluation of where our market's at and where the potential solutions lie are is where the HHRF currently exists in the process of trying to benefit the community and consumers that are all facing similar challenges in the pricing of insurance broadly.

Good. Okay. Questions? You guys want me to start? Any questions? House Members? All right. I am mostly concerned about the timeline. And I know we spoke earlier about this. You said Aon is doing the study. When does the study do?

There is no deadline for the study other than as soon as possible. Everyone is very aware of the interest in all parties to get a solution on the table as soon as possible. So there's been no firm timeline. We're still in the contracting phase, which really is not incumbent on HID or the board.

So far, we understand that Aon has been slow in their response to what the contracting provisions say and what the state needs in its language. But they are working on it. And they. They've been reminded several times of the urgency.

And I think the analogy I gave you, Scot, when you said you were an attorney, I said imagine, you know, you've got 2,000 hours or whatever the standard billable rates are for attorneys, and you've got a case file of Imagine 2 a week, 100 cases or whatever you cover.

Insurance markets, in my perspective, are facing, you know, 2 and 3 times the normal workload due to the crisis. So I know you gave us some. Gave me some suggestions about trying to drive Aon to a quicker solution. I'm not sure. I think patience is required.

And most of these contracts, in my experience from bank of Hawaii, working with government entities, do take some time to contract. But that's. That would be my response. I'll turn to Mike and see if he's got any support to that, because that might not be the answer you're looking for.

So, yeah, I've been in direct contact with Aon, and we've expressed the urgency for which to complete the contract. Right now, it's going through the. The process. They are using a. A company that's not vetted or licensed by the state. I don't. We don't know why. So it's going through that process right now. But we've.

We have been, after awarding the. The RFP to Aon, we have been in communication with them and have expressed the. Expressed to them the need for them to get this.

When was the contract signed?

It hasn't been signed yet. It's still being vetted.

The contract is being vetted. So they haven't even started the report yet.

My understanding is that they've done some preliminary work already. So as the. As. My understanding is that the issues at hand are mostly housekeeping issues. They're not deal breakers. If we can't get this. If they can't get this thing done.

Whose court is the ball in?

I believe it's with Aon's attorneys and with the AG's office, I believe.

But. But who's. Is it with us or is it with them? With AG's or is it with Aon?

Yeah, I don't know the intricate details of that.

If you guys are not under contract yet, can you also start looking for a different company to contract with? Because this is. I mean, it's getting a little ridiculous, I think.

I feel like if it's really just housekeeping, things that should have been dealt with between the attorneys a long time ago. If there are deal breakers in there, then maybe.

But if not, I mean, if you haven't signed a contract yet, I don't see any reason why you can't put a little pressure on Aon by going by starting to talk to other people. That might be able to do it quicker. And also that might just be the better option if Aon keeps dragging its feet.

My concern too is if without this study being done, the timeline to even start you folks issuing policies and get off the ground is at an indefinite future, which is very concerning. Sorry. I want to give them a chance to respond.

I concur with much of what you said. I know there are others that would be interested in the business. I'm not sure that that's a realistic path in terms of accelerating the timeline. I've heard anything from, you know, wishes that policies that the HHRF would be standing and policies would be written as of April to.

It will take how long it takes. And I think comparing a launch date of April versus it will take as long as it take. You heard analysis of how long it takes to potentially add new lines in the HPIA. You know, a year is not a. It's not a fast timeline per se.

Now, if it's, you know, an emergency and we're. We're really pressing, of course you want to do it in less than that, but you know, we're a couple of months from April. I don't know that I'll. It just takes time, very simply. So we could potentially look into that.

I'm sure there, there would be some respondents if we put this back out to RFP, but I don't know that that accelerates the timeline per se.

I mean, if you have other people, other suitors that you know are interested, then why not try it? I mean, it sounds like this is a prelude to what's going to be coming with Aon if we sign this contract too. If they're Dragging their feet this much with this.

I mean, how long are they going to take to do the study? It's concerning. And do you need the study to get going?

I mean, do we have insurance providers in the state right now that we can just contract with to get off the ground to do this, that already have the expertise and the facilities set up to start writing these policies? Why are we reinventing the wheel?

Let me take a crack. The two companies have responded to the RFP was Aon and Guy Carpenter. We did have a vote on it and was pretty decisive that Aon provided the better benefits for us to move forward.

I think if, judging by the comments made at the board meeting and in picking Aon, I think if we were to pick Guy Carpenter, perhaps some of the board Members may feel that there would be a drop off in the level of service that, that we would be getting.

So as much as possible, we'd like to push through with resolving whatever issues there are with contract issues there are with Aon.

This is just for the study. Right. This is not to offer the policies. Right.

This is all. It's all encompassing. So the RFP was to provide a study as to the current State of the market. It was also to look for the different possible alternatives that we have in providing the. The insurance policy. So we could.

One, one alternative was, you know, to go with the HPIA model where we go out to the different carriers and we have them act as MGA per se. Right. Managing General agents per se. And they handle everything from underwriting to claims.

The other alternative would be to actually hire the staff to do the underwriting to do the claims. I mean, I think we would be remiss if we didn't investigate those two areas.

And again, it was felt by the board Members that Aon presented us with those best options to give us the best information for us to make the decision.

Thank you. I'm still concerned. I may ask more questions later, but I do want to give the Senate a chance. Senator McKelvey.

No, it's more of a comment just to go along what he's saying. We have a study and a study. All I know is the constituents are dying on the vine right now. We know the State of the insurance market.

We have the western states going through it, and I guess to wait and wait for a policy when other states are in the throes of it executing, formulating policy. We need solutions now on how we can utilize the HHRF in whatever capacity that will give. I kind of joked with one of my Colleagues, earlier today.

The end result is this. Will this make a meaningful difference in my insurance policy policy insofar as availability, coverage and price goes. Will I lose my home because I can't afford my insurance policy, which means I can't afford my mortgage, which means I'm out of luck? Right. So I guess I will share my frustration.

And again, thank you for allowing me to stray into commentary, but we need actual solutions and this is an ongoing thing where there's many entities in many states working on it concurrently. So hopefully we're not waiting for a study and yet another RFP to try to get a handle on what's happening right now. Right.

Thank you, Senator. I personally do share in your commentary. Being in the business, I do hear it every day. The study isn't meant to be an exhaustive study. And from what we heard during the RFP process, a lot of it did leverage information that was already out there in the public, along with updated interviews with industry representatives.

When I say that there was the study, basically they would conclude or bring us definite conclusions as to what the study had brought forth and then looking forward to the different solutions and their recommendation as to what they feel would be the best avenue for the board to proceed.

In a big solid. We have a lot of good bills out there. A big solid would be you guys to dive in and help us fine tune and craft these and consolidate them so we can moving at least move the needle. Absolutely. Thank you. Thank you, chairs. We appreciate that.

So I just want to continue a little bit more. Anyone have any comments before that? Okay. The study thing really bothers me. I'm going to be honest with you. I'm not sure why you didn't just do an RFP to see what's out there in terms of other insurance brokers or carriers getting this up and running already.

Let them do the studies. Let them figure it out. I mean, they know the insurance market. I don't know why you didn't just put it out there to allow to see what comes back in.

It's like we have to study something to put out an RFP so we can do a better RFP later to get this thing up and running. I mean, that doesn't make a lot of sense.

It's important, I know, to understand the market, but I'm not sure you folks really need to worry about it right now in the sense of if we don't have any product out there, why are we really worrying about anything? It feels like we're delaying and not purposefully delaying but it feels like we're getting delayed and.

And getting people the relief that we need to get them while we wait for the terms of a contract to perform a study, when we should be just asking the people already in the market who already are experiencing this, they're on the ground, what they can offer at what rates. Why are we reinventing the wheel here?

I'm asking again, this doesn't make any sense to me.

I would say that what you're describing is not oppositional to what process we're working through. I mean, these consultants are all related, and there's very few of them. Aon, Willis, Sky Carpenter.

To the point about letting a provider know that we don't know, that we're satisfied with the timing that they're meeting so far, and it has been raised by legislators the idea of simultaneously consulting again with other respondents to the RFPs or to the RFP to see if they can give better clarity to a timing to all these stops.

But yes, a feasibility study, a study is necessary so that you can go to the market and negotiate effectively. And the market's going to be very interested in. In how well you've thought out what your plan is and where you want to exercise to deploy capital is what it comes down to. So we need that study.

There's very few providers that would have. There were only two respondents to that. And so it's not distinct from what you're describing. It's just what phase of the process we're in. We haven't even signed the contract. I believe that they are doing preliminary work and they are trying to move that contract and as best that they can.

Mike referenced that it's an international division of Aon. Aon's been here and done business. But the other participant, Guy Carpenter, I know that they may have interest in reality. Does that accelerate the timeline? Maybe, maybe not. And to Senator McKelvey's point, does this actually result in, you know, immediate or dramatic cost savings to the consumer?

Probably not, because the larger issues that are driving this are the market and global losses. And there's, you know, only a limited amount of places where this risk gets diversified. So you have to do both. Do the study, figure out where you would take risk.

But you also have to recognize that the market is what the market bears. And as long as major losses are occurring in major markets, it makes it difficult to get people to offer less expensive insurance than they currently are.

But that would be what's a reasonable check in for us to check in with you folks again to See if the contract's been signed. Two weeks, a week. I mean, where's this thing at?

I would say quarterly check ins. Sure. So we'll express that and be happy to respond with as much detail as we can provide.

But if I might follow up, the Governor issued an emergency proclamation in the summer to accelerate a lot of this work. So I am also troubled that this discussion about procuring a consultant to initiate the due diligence.

So I think where we're at is you need a consultant to do due diligence, to provide some guidance on what the policies would look like, how much money you need to keep in reserves, what kind of reinsurance, all these hard questions just in a hurricane context.

Okay, what I don't understand is we have an emergency proclamation and we've been talking about contracting this consultant since August. We can fast track procurement under emergency rules and we're in an emergency, but we're not moving like there's an emergency.

So I think that's causing a lot of confusion here that we are going to hear about probably right after this is over from our constituents once they get wind of this briefing on the Internet.

And so I think what I'd like to do and chair, we can obviously work on it with the Members is we're probably going to take a minute and put together some concrete request for follow up in a letter to your board and the insurance division.

Because if you have emergency authority, then I'm not quite understanding what the holdup is. I know you are board members, so ultimately we need someone to execute on these things. And I'm assuming that's the insurance division. Who is your board Executive?

Yeah, the insurance division.

Right. So I think if I might suggest Chair, that's, that's maybe the next step. Because if you'd like to respond to some of our questions about timelines in coordination with the people that are actually executing on these things, then that might be helpful in explaining why we're not moving at emergency speed even though we have emergency powers.

And our constituents sure think there's an emergency.

And if the ball's really, if I may, if the ball's really in the other company's court again, I mean, how long are we going to wait for them to get a contract back to us? I don't think this is a contract that has a lot of nuance to it or a lot of difficult terms.

I mean, it seems like you're trying to run a study on a current market. I can't imagine that is taking that. That has A lot of attorney input and a lot of new provisions that need to be drafted. I mean, I draft contracts, like I don't.

This doesn't seem like that complicated A1, especially for a company like Aon. So we got to get it moving. And I don't know what kind of pressure we need to bring to bear, but I think we're going to try to bring it. So that's kind of fair warning.

I do want us to check in later and I would like you to express our concerns that this emergency is not being handled like an emergency. So, yeah, I'll work with Chair Keokolole to. To do some follow ups too. But we did want to give you folks fair warning of this.

Understood.

We look forward to the letter. And we've got an upcoming board meeting on February 3rd that will be a primary agenda item expressed, you know, well articulated. This is an emergency. We need to get to emergency procurement speed, so. Understood.

And in defense of the insurance division, I believe that they have been working with the AG to get the contract with Aon. And I think it's at Aon. And I haven't heard any updates that it's been returned yet. But we'll reflect your comments and respond as soon as possible. Say within two weeks.

I think that would be appropriate. Yep. And thank you for. I. Sorry, I'm not trying to come down too hard on you folks personally, but we are very frustrated at the speed the board is moving and the speed. Honestly, the speed Aon is moving too. Anything else? Otherwise, we're going to wrap this thing up, I think. All right. Thank you everyone for coming. We appreciate it. We are adjourned.