Senate Standing Committee on Commerce and Consumer Protection

Good morning, everyone. We are convening the Joint Committee on Commerce and Consumer Consumer Protection and Commerce and the Committee on Commerce and Consumer Protection. It is Thursday, April 3, 2025 about 9:36pm In Conference Room 329, we are convening for a joint informational briefing.

The purpose of this informational briefing is for the Hawaii Property Insurance Association and the Hawaii Hurricane Relief Fund to update the committees and public on their plans for providing insurance relief for eligible parties and to justify any potential legislative funding requests needed.

On behalf of the House, I have myself as Chair, Representative Chun as Vice Chair, and Representative Tam as a Member. Thank you, Chair.

Thank you for hosting us. And on behalf of the Senate CPN Committee, myself as Chair. Our Vice Chair, Senator Fukunaga is here. And also joining us from Maui is Senator Hashimoto who serves on the Ways and Means Committee.

All right, well, are they going to give presentations first and then we ask questions. Who wants to volunteer as tribute?

We'll go first. Okay, go ahead. Good morning, Chairman Keohokalole, Chairman, Chairman Matayoshi and esteemed Committee Members. My name is Mike Nonaka and I have the privilege of serving as Vice Chair of the HHRF Board. Joining me today are my fellow board Members, Acting Insurance Commissioner Jerry Bump and Ms. Leslie Doerr.

Also with us are representatives from our consulting firm AON, Mr. Dan Chun and Mr. Paul Eaton. On behalf of the Board, I would like to express my sincere appreciation to the Chairs and the Committee Members for the opportunity to provide an update on the current state and future plans of the.

As you may know, this Board convened for the first time in July of 2024 with a clear mandate to assess whether current market conditions necessitated the reactivation of the HHRF.

To guide our assessment, we review the findings of the Condo and Property Insurance Task Force engaged with several insurance industry representatives and work within the framework set forth by the Governor's proclamation relating to condominium insurance stabilization. Following this comprehensive review, the Board determined that there was indeed a clear and urgent need to reestablish the HHRF.

The first step in this process was to engage expert guidance to help structure and implement a sustainable solution. After a rigorous selection process, we retain AON to assist in developing a strategic long term plan.

In the next few slides, we'll provide information on the current State of the HHRF and our plan of action and timeline to offer our hurricane insurance product. This slide highlights accomplishments, current state and timeline to carry out our plan of action. The top horizontal bar indicates what was accomplished to date after AON was formally retained.

They were initially tasked with furthering the work performed by the Condo and Property Insurance Task Force to confirm its initial findings and do a deeper dive into the segments most impacted and the root causes for same.

Based on the extensive assessment performed, the recommendation was that the HHRF could provide insurance capacity to alleviate the scarcity of coverage and create competitive forces in the marketplace and be a backstop for condo associations who are struggling to find surplus coverage and at a reduced premium.

Subsequently, a plan was formulated for the HHRF to provide excess hurricane capacity for condo associations to achieve higher hurricane limits to help transfer risks, facilitate real estate transactions and refinancing options for condo owners. The middle bar represents the present day in the HHRF operations table. Current efforts are focused on developing the infrastructure and answering this fundamental question.

How will the HHRF interface with agents to provide quotes, buying coverage and collect premiums? This servicing mechanism will play a critical role in determining staffing requirements for the HHRF. Next steps to be completed in April to keep us on this timeline are to 1.

Finalize the servicing model and either vet and choose the most qualified entity or entities to be a service administrator or determine staffing requirements to underwrite buying and adjust losses in house. 2. Establish financial capacity by approving a reinsurance program structure and marketing plan. Reinsurance will be utilized to extend the HHRF's financial claim paying ability.

Its form and structure have not yet been finalized, but a draft proposal will be submitted to the board later. 3. As indicated in the filing with the HID or Hawaii Insurance Division table, we will submit underwriting guidelines, policy forms and a rating manual to the Division for approval.

The current plan is to have all of this completed and the first policy issued in June 2025. This slide focuses on designing the HHRF hurricane coverage. Looking at the table titled Building Types, this outlines the targeted market in Phase one. This initial phase will prioritize fire resistive concrete high rise buildings with demonstrated maintenance standards.

While the Day one goal is to provide coverage for all construction type including low rise condos and Wood frame townhomes, this will likely be addressed in a Phase two expansion plan. The middle table is a graphic depiction of where the HHRF policy would sit in an Association's property portfolio.

The HHRF would provide coverage above any sublimited hurricane coverage limit and would extend up to $350 million. This $350 million currently being used for analysis satisfies approximately 99% of the condo associations. Looking at the financial capacity table, the HHRF plan is to pay initial claims from the existing $170 million Fund, less initial startup costs.

The addition of reinsurance will extend its financial capacity. The long term consideration is to be able to expand the HHRF appetite and attract new insurers to provide hurricane coverage that would add capacity and be positioned to take the place of HHRF.

I would like to turn the presentation over now to AON to talk you through how the HHRF's financial strength will be built.

Thank you. Just a short introduction or introductory statements on financial strength. So the amount of required capital is a function of how much financial risk the HHRF or the state is willing to take. The HHRF has $170 million, which is not an insecurity, significant amount of money.

But if you think about it in practical terms, if you write two associations valued at $100 million each, then you have the ultimate liability of $200 million plus some expenses. So that $170 million is technically not enough. But then you have to think about what are the odds that both are completely destroyed in a hurricane event.

That's a probability game and that is sort of the type of decision or gamble, I guess you could say, that somebody needs to make. So our recommendation is that the HHRF leverage reinsurance in some form and we will explore them all. Treaty or portfolio coverage, a facultative or sort of individual Association at a time.

Cat bonds, parametric, the. These are all words that maybe you're not familiar with, but these are all the avenues that we're going to explore to bolster the financial strength and extend the HHRF's ability to pay claims should a hurricane event hit. Now, the unknown factor is we can only project how successful the HHRF is going to be.

The private market conditions appear to be improving, but we know that the market conditions can turn at any time. I don't know if anyone anticipated the market crisis that we're in right now, but I'm sure there were signs. But I'm not sure that anyone anticipated it sort of degrading as fast as it did.

I mean, there's other considerations out there that are sort of outside factors that could play a role. I don't know that anyone expected a wildfire, not a hurricane would be the catalyst of kind of where the insurance market for condo associations is at today. Excuse me, could you pull your mic a little closer? Thank you.

So my point is that there is a lot of uncertainty and the trade off is that you can hold less funds and take on more risk. Or you can hold more funds or buy reinsurance more conservatively because you're concerned about not having enough money to pay for a catastrophic event.

So unlike a private insurer, the HHRF has the distinct advantage of being a state entity with the ability to assess the insurance industry, maybe even levy a tax after an event occurs. I think we would all like to avoid those scenarios. So the question, you know, I guess the direct question is how will the funds be used?

I personally don't like to waste money and I don't want to see the state waste money. The question for me is more value. Is the HHRF getting good value for the capital it already has and any additional capital that it is allocated?

So there are startup costs that are unavoidable unless we all decide here that the HHRF should not launch and then we can stop right now. We do not think it is prudent to assume that $170 million is enough if a hurricane event happens. So there will be risk transfer or reinsurance costs.

Our goal for the HHRF is to be self sustaining, that the rates that it charges its condominium associations and policyholders is enough or adequate. It's not our intent for the state to subsidize any premium. Now there are two scenarios that need to be considered.

What happens if the HHRF is very successful at launch and grows too fast or faster than we're anticipating? The related point is what happens if the HHRF is requested or mandated to expand beyond condominiums to all residential property? The second consideration is that we have metrics as respects how much protection the HHRF needs to buy.

But what if a hurricane of epic proportion hits Waikiki Diamond Head? Kakaako. Right. You know, they're albeit low, there is a probability that that could happen. So to go back to the beginning of what I said, you know, there's a choice that somebody needs to make. Does anybody over capitalize to protect the worst case scenario? Occasionally.

But typically the answer is no because people say it's bad value. But does the worst case scenario actually happen? Sometimes. And unfortunately the answer is yes. If you ask any one of the insurers that insured homes in Pacific Palisades, they would say absolutely yes.

So the original funds, the original initial capital of $170 million that you see on the slide here is enough to launch operations and cover initial expenses. Any additional funds will accommodate what I just said earlier, potential rapid growth, the expansion of coverage.

Because we are initially suggesting that we start with concrete fire resistive high rises and we'll just add to the financial security should a large scale event happen.

Thank you once again for the opportunity to brief you on the current and future State of the HHRF. We welcome any questions you may have and appreciate any comments or feedback. Thank you very much.

Or want to arcade to go first. Do you want to do Q and. A or have them we do Q and A for HHRF. Unless you think there are joint questions to ask. Go ahead. House Members, any questions on for HHRF?

Yep, wherever you want to and we'll just ask one question each until because we need to pass it back to the Senate too. Thank you.

So when you roll out this coverage in June it came up during previous hearings but the will it will you only be eligible to purchase a policy through the HHRF if there's a rejection or denial from is it all insurance carriers versus versus just unaffordable policies where condominium associations don't feel like they can afford to pay 1,300% more than they previously did.

But it's open. You just gotta pay for it.

Thank you Rep. Iwamoto. So in the actual bill, Senate Bill 1044, there's language in there where you have to be declined from a license to insurer that would be one of the three admitted carriers that you're that are currently writing. It wouldn't be.

And if those carriers only want to write a portion that means you're being denied for the rest of the building value and so the rest of that building value then they could come to HHRF.

And in fact in the slide presentation where we talk about the attachment point is HHRF would come in and attach after whatever the emitted carrier, carrier or licensed carrier is willing to provide. Okay, thank you.

Members, questions.

Vice Chair I guess to follow. Up on Acting Insurance Commissioner Bump's comments, does the division have any information as to you know how many of the condo associations are currently being covered by the admitted carriers and to what extent are either many or a majority or a small number having to purchase through surplus lines?

I'm actually going to ask our HHRF's consultant who did the market analysis and market survey and hopefully you guys information.

We have estimates of it. So and I'm forgive me, I'm trying to recall I had a conversation very recently about this. I believe that 60% we so these were discussions with agents about their books and how they're getting insurance on their books of business for the policyholders that they serve. Right.

And so my recollection of those discussions is approximately 60% of the associations were needing surplus lines coverage. So that's, that's at least a first order approximation. It's a good percentage of the market you have. The estimates we have for the total marketplace in Hawaii are, let me round up to 2,000 associations.

It's probably a little bit less than that, but close to 2000. So you're talking about potentially 1200 associations that are dealing with coverage outside of those admitted carriers. It's a significant market.

The other thing that I would point out is, and we don't have necessarily concrete data on this, the number of buildings or sorry, associations where they are going with less than full coverage. So I don't have market scan on that to be able to say what percentage.

But many of the associations that are getting coverage via surplus lines because of the costs associated with that are choosing, excuse me, to go less than full coverage in order to have some coverage in place, but also balance against affordability.

That of course creates the problem that they're not fully insured and then their buildings don't qualify for, for example, loan terms with Fannie and Freddie, which makes it difficult for the owners to sell.

Thank you.

Sorry, I want to just follow up on that a little bit because we talking about demand here.

And if you're saying that there's going to be a high demand because 60% of associations are on surplus lines, that doesn't necessarily mean it'll be a demand for the product that you're offering because per your slides, it's only concrete fire resistant structures. I mean, we're not talking about Wood frame, we're not talking about all of those.

The concrete fire resistant ones are probably, I mean, I would guess much more of them are not unsurplus lines because they're much more insurable anyway. So of the subset of condos that you folks are insuring, how many of those are going to are on surplus lines?

So it's an excellent question. The there's an extra element to the assessing the demand for the HHR of policy, which is the direction that the market is going as, as we keep in touch with agents here in Hawaii about the direction of renewals.

There is, and I think you've potentially heard this from some of the agents that have potentially made public statements about it. Prices are coming down and in some cases are coming down rapidly. So for example, if an Association was paying $300,000 pre Covid and now they're paying 3 million because they hit a 10x increase.

That's not the total market, but there certainly are examples of that happening. If they're down a third off of that, that's a significant savings. But they're still feeling the heat relative to where they were pre Covid. Right. That there's definitely a concern as far as that goes.

So there's a few things that we're balancing that I think are relevant to the question that you just asked. First, is the HHRF is supposed to be actuarially appropriate in the prices that it sells to be long term viable and not subsidizing the coverage to these homeowners associations via tax rolls or other financing mechanisms. Right.

So there's only so low an actuarial appropriate price can go and that we're setting rates based on that. And there are dynamics to individual, any individual or insurance organization's pricing in terms of their expense ratios and how they're doing business and how much it costs for them to be in business.

Nonetheless, there's sort of a pricing floor that the HHRF will hit that the private market can meet. And if the private market does meet that pricing floor. Well, in other words, if everybody's actuarially accurate, there's only so low that the price can go and therefore if they.

We're getting a little off top because I was. My question was for demand. I do want to get back to that though. But I know Rep. Tam had a, had a question too. I was just kind of following up but I'll ask for clarification bit. Yeah, yeah, thank you. My, my main for later.

It's going to be what actual demand you folks are facing and justifying that with the price tag. If you don't mind, Senator, I'd like to let down ask a question or. Would you guys like maybe.

Yeah, I mean inclined as well. I think if you can just rephrase your answer in more straightforward language because we're getting real deep into the insurance speak.

Understood. Yeah. So from a demand perspective first, we don't know. Right. That's the plainest answer I can give you because there are regardless of the product that the HHRF designs, there are reasons why the private market might simply meet the need of the policyholders coming off the peak.

And so everything else the HHRF does could be unimportant because the private market is working. It's coming back to a stable state. I just want to acknowledge that as a possibility. So then the next thing is we are creating rates and forms that will address all Associations, low rise, high rise, Wood frame, fire, resistive concrete, et cetera.

We will be filing those with the Department of Insurance in the next few weeks. Mid April is the target. The question then is how many of these associations can the HHRF support? Day one? That answer depends on, in some ways, the reinsurance support the HHRF gets.

So, for example, if we can build sufficient reinsurance support for all construction types and all Association types, then the HHRF should be open to all of those types of associations on day one.

Right. I think the question is whether the demand is going to be there and whether you need more than 170 million. Yeah, totally makes sense to us that the more money you have, the more reinsured, the more insurance we can insure. I think that's the simplest way to say that the more money you have, the more.

Right.

The more insurance you can write. But the question is whether there's going to be demand sufficient to exceed the 170 million you have on hand and whether that justifies the extra, however much you're asking for.

The best answer is, I don't know. It will depend on how many applications the hhs.

Yeah, it's tough for us to justify. Right. Giving the amount when we have no justification for, for the number that we're giving, because it might as well be 500 million or 20 million.

So, you know, I would provide this additional context, which is the $170 million is a generous amount of funding to get the HHRF started. What we have modeled out is that you could support 300 associations representing over $10 billion worth of limit with appropriate reinsurance on the 170 million. Right.

So that, that, say that number again.

300 associations at least representing over $10 billion b billion of deployed limit. In other words, if you added up all of the value of all the insurance policies that the HHRF deployed, it would be in excess of $10 billion.

Potentially they can support that on the 170 million with appropriate reinsurance in place, which is, I mean, we're actively canvassing the insurance market to produce that support, the reinsurance market to produce that support. So that's a significant amount of capacity deployed and represents, if we round up to the 2000.

To make the math easy for me, in my head, 300 out of 2000 is 15% of the market potentially is supportable on the existing funding. And it is. There's a decent chance that that supports at least the year one demand for the HHRF. But I want to be cautious about my Inability to predict the future.

Okay, thank you.

Thanks for the patience with the answer.

Appreciate the answer. Thank you. So my question is about Fannie Mae and Freddie Mac requirements. Have you looked into whether or not the HHRF could provide supplemental insurance to ensure that these market rate insurance could meet that 100% so that a loan can be given? I don't know if that's allowed, but have you looked into that?

I'm not sure I understand the direct question, but you know, the.

If someone wants to get a loan, the Fannie Mae requirements are like they need 100% insurance coverage. Right. So I know that many of these insurance companies are not providing 100%. That's why these banks are unwilling to loan and that's why there's blacklist.

So I wanted to know if HHRF could provide that supplemental 20% so that someone can meet the 100%, if that's possible.

Yes, that is, that is actually the purpose of the HHRF or one of the goals that it would serve. The supplemental coverage provided by the HHRF to achieve full hurricane limit coverage would satisfy the Fannie and Freddie requirements for hurricane.

I think the panel's looking at potentially you could broaden it now beyond hurricane.

That's correct. Right.

And provide that kind of gap coverage. To the units for other types of.

Right.

For HHRF, Michigan, for HPA. Are you thinking more HPIA rather than HHRF? Because HHRF is going to be only hurricane, I think.

Correct, yes. The scope of the HHRF would only be able to is to only deploy supplemental limits on the hurricane portion of the insurance policy.

I'm just looking at our historical track record of hurricanes versus wildfires and other disasters.

Well, I think that was maybe a follow up to RIP Tem. Do you want to. Was that the question or no?

No, just a jump.

Okay, well then the Senate will take one more question then.

That's fair. That's fair.

I have a follow up. Okay. So what I think I'm hearing is with the money that is in the hurricane Fund right now, there's just a slice of the total universe of condos that need the help that you can start with. So there are a lot of calculations that are being made right now about where to start.

And so my question is why are we starting with what might appear to be the safer segment of the market, like the high rise concrete buildings with fire sprinklers already? Why are we starting with those guys to provide hurricane coverage to when those are likely not the buildings that are going to fall over in a hurricane event.

And then at a $350 million, those seem like quite valuable buildings. Why are we starting with those guys?

So the answer is twofold, right? First off, those buildings, because they have significant limit requirements, may not have full hurricane coverage. Second, that's the basic answer. Secondly, from a market appetite standpoint, and that's from a kind of reinsurance, reinsurance insurance market appetite standpoint, that is the most attractive.

As we explore different options for providing risk transfer and financing to support the HHRF. I guess I could say that that's sort of the path of least resistance. Now we are working towards and exploring the option of providing, as Paul mentioned, coverage for all construction types day one.

And I heard that, I heard that with the forms.

I just have some concern about the expectation that there will be less resistance if the perception publicly is that the HHRF is going to start with the most valuable buildings in the state versus the older buildings that are less valuable, that are full of residents, that are on fixed incomes potentially.

So I'm hoping that you're going to be able to say that you're not likely to be. You're not building this program to begin by providing gap insurance for the richest people in the state in the fanciest high rises in the state.

First, of course not. And a couple of things, right. So first, the number on the page. The 350 million. This is a public hearing, which means anybody who has interest in this discussion is going to be looking at those materials. It's now a matter of public record that includes potential reinsurance partners that might support this program.

It's important to have a cap, a definition of what's the coverage that the HHRF may be providing into the marketplace so that those potential reinsurance partners have a view that there's something concrete. They're going to be, sorry, bad word. There's something, there's something finite that they're going to be supporting. Right.

So in other words, it's an up to, if the majority of the need is, for example, between $10 million and $100 million. What we want to do is specify a Max coverage in the public record for the purposes of clarity.

It doesn't mean that the focus is on providing coverage only to buildings that are or associations with $300 million of value. Right. Just want to make sure that you're.

Asking us for 200 million more. Well, right, so I just want to make sure we're clear that once we go live on this program, all this money isn't just going to get eaten in the first tranche, isn't just going to get eaten up by, you know, rich people who are looking for cheaper coverage than surplus lines.

Coverage, to be very candid about it.

Sure.

Understood. And honestly, the $350 million cap, I mean, I was going to go down this line a little later too, but the $350 million cap seems rather high. The point of HHRF, I don't think, and as you've already stated is, is not to help the downtown beautiful Kakaako Towers.

It's to help the kind of average Hawaii resident, or maybe even lower than the average Hawaii resident who is kind of struggling right now with condos that are not in good repair, that are not necessarily fire resistant, appropriately maintained, not Wood framed. That is kind of the segment of the population we're trying to reach.

The 350 who also live downtown and in Kakaako, right?

Yeah, they live all over. But I think the 350 $1.0 million cap may be inviting those wealthier apartments who are probably more sophisticated and probably ready to jump on opportunities like this to apply and take and just eat up all the, all the space that you, all the capacity you have.

So I mean, can you justify the $350 million number based on. I mean, I understand where you're coming from, don't get me wrong, you're trying to go for the lowest hanging fruit and that's not necessarily a terrible way to go if you're running a for profit business. But I don't think that's what you folks really are.

I think you are an arm of, I mean, I think your purpose is to help more of the average Hawaii resident. And I'm not sure the low hanging fruit is the average Hawaii resident.

So this program may need to be re geared to focus more on the people who are really suffering here rather than the rich people who are, you know, it's hurting them. But they're also living in a $5 million apartment, you know, condo kind of thing.

The feedback is welcome. And I think there is an element of portfolio construction that we are considering which is that if we only provide coverage for the most damageable structures, that that is a more challenging exercise than if you were to have a more balanced portfolio that has construction types that are less damageable.

I think that the most efficient way that we can create, the most effective way that we can create pricing efficiencies for the HHRF to best utilize its funds is to create a balanced portfolio from that perspective.

But to be Frank, the $350 million cap is going to skew your portfolio, right? If you want to adjust the portfolio to make sure that's getting the people in the middle, you would set that at a lower amount to have the Max cap be that three story walk up in Moeliili.

You know, I don't think the $350 million cap, and maybe I'm wrong and I don't own any buildings in Moelili, so I don't know the exact cost of them, but it sounds like the $350 million cap is set higher than the average kind of structure that needs it in Hawaii.

So do you have that justification for the 350 $1.0 million number? Why is it, why is it there?

The intention was to capture as many condominium associations as possible.

And again, I don't fall to your reasoning for that. But maybe that's not the goal here. Maybe the goal is not to capture as many, you know, pretty well maintained structures as possible. Maybe the goal is set it lower so that you can capture them too, to a certain extent, but they'll be capped out.

Then they'll have to go to surplus lines. But then we could have more capacity for the people in the middle who don't have a $350 million plus building that they're living in.

So that's why I'm so concerned about this cap and that's why I'd like for you folks to justify it because I want to make sure that we're hitting the average Hawaii resident and not the, honestly, the more wealthy of us.

I guess if I can just finish up because it was my question to. Begin with and it's gonna follow up on five seconds.

I think I understand your, your answers relating to building out a balanced portfolio and trying to signal to the appropriate entities who are watching who we're going to need to partner with and bring back into the fold to make this all work.

My question was more specifically around, centered around how the board, working with your experts putting together this plan, is going to make sure the people who eat first are the ones who are hungry.

Especially if you're asking us for 200 million more dollars.

I mean like some, like DHS does need some kind of needs-based assessment, you know, of, of the applicants, right. So you can see, okay, you can have a metrics of these are the ones that are in the worst trouble.

They're the ones who have the most residents with fixed incomes in them that are below a certain AMI, right? I mean something like that, where you can start to identify as some of these really at-need buildings.

And so I'll yield on that and allow you guys to answer, but what we are hoping, what we were hoping for today, at least me and I would appreciate if you could provide us some follow-up so that we can see it is how the course of action you're taking right now is going to implement that approach.

And if you can show us so that we can see it, because I'm not an insurance expert, and I'm not going to assume the members are. If you can help us, just if you can illustrate to us how this plan is going to allow for that, then I think that would be very helpful.

And if we're going to take an approach where we're not feeding the hungry first, then. Then the illustration better be real clear, you know. So I'll yield if you guys have no response.

The simplest answer here I think, is the intention to provide coverage that is broad and avoid the, avoid the possibility that in an attempt to dial the coverage in in a very specific way, we put too many rules in place in the form of underwriting or otherwise that complicate the process of having the HHRF ready quickly is.

So one other dimension here is time. It is viable that the HHRF could be up and running in June, writing all association types. And I think it is a noteworthy suggestion to say let's start with smaller policies. 90x of 10 instead of 200 or 300x of 10, and that is going to focus.

So again, for simplicity purposes, you let anybody who wants to apply for that coverage, so you're not putting too many rules in place that increase expense because you have to do a lot of verification and potentially slow the process of.

Because you have to write all the rules and the apparatus for putting these rules into place, and for example, specific underwriting guidelines around only certain types of associations or buildings would potentially slow things down. So the.

And again, it's a good suggestion to say well if you provide a smaller policy, that even for the larger buildings that choose to apply for that policy, it would not provide all the coverage that they need, and that means that they are buying extra coverage over and above an HHRF policy to supplement their full needs.

And that's done via the surplus lines markets, and the beliefs is that they can afford that, I think is a perfectly valid suggestion. So. And yeah, I'll stop at that. It's a perfectly valid suggestion.

Yeah, no, I really appreciate the Senate's line of questioning here because I totally agree with it.

Thank you.

My point, as I think you've just said, is that setting the cap at a lower rate will allow, will prevent those larger, more expensive condos, those luxury condos frankly from, from eating up all of your capacity and not leaving anything for the rest of them.

So yeah, if they need to pay a little more after because their building is so valuable that they vastly exceed the 100 million dollar cap or whatever cap you do, you decide to put and that leaves more capacity for the other wood-framed condos, the other walk ups, the other less valuable buildings who actually can get 100% under you folks.

I mean that, that I think goes more towards the state purpose that we stood at HHRF for up in the beginning. So I think that we feel much more comfortable funding you folks more if we knew that the capacity, if we knew the 100 million that you're asking for is not getting taken up by luxury apartments.

But did we have any more questions on our side? Okay.

Mortgages. Yep, that was good question.

More affordable?

Just to follow up with the discussion about Fannie Mae and Freddie Mac for the luxury buildings. Are buyers using Fannie Mae and Freddie Mac to make those purchases of luxury buildings? I don't know why I thought Fannie Mae and Freddie Mac was for.

I don't know.

I mean I have no idea. But to be honest, I don't know.

If us from the insurance side. That might be more of a question for the banks. Yeah, that's fair. What kind of loans that they're, they're, you know, deploying on these more expensive buildings, and whether or not those loans get sold to Fannie and Freddie on the more expensive buildings. But yeah, we wouldn't have that kind of knowledge.

Okay, so just, just kind of wrap up the, the cap, insurance cap question on the 350. I assume you folks are going to go back and re-examine that cap and determine whether that should be set at another rate, and get back to us. Is that fair?

I just want to make sure we have a follow up here.

I'll chime in. So obviously, what we're reporting is where we're at today, the board. I'm only speaking as one board member and I, but we are still working through the parameters. Everything is in constant decision-making. This, this decision can be discussed. We're having weekly board meetings, so we'll have another one on Tuesday, and this will be it.

It probably, it depends on whether or not it can be added to the, to the discussion because it needs to be on the agenda for sunshine. But we are trying to rapidly get all these factors put in place so we can go live by summer.

So yes, I can assure you that this will be a topic in future board meetings to discuss about that cap.

Okay, I have more questions about demand, but Senate, did you want to.

I just want to see. Go ahead.

I just had one comment that I think could be helpful for this conversation. In Honolulu, there's approximately 360 fire-resistant buildings that are concrete steel reinforced construction. So the pre-1975 is pre-sprinkler requirement. So, fire resistant doesn't necessarily mean that it's a beautiful brand-new Kaka'ako building.

It could mean a building where the, they don't have sprinklers which is a really key target market. So if you think about that 360 buildings, the vast majority do not have sprinkling. Those are the challenge to get insurance for. And so I think it's a decent cohort to start with.

I don't want to make any comments as to the sufficiency of capital. We're going to get into that with the HPIA presentation. But it is a decent sized cohort of buildings that I think a lot of local people live in there that aren't necessarily, they're not very expensive or rich buildings.

So what's the average cost of those buildings do you think? What do they need for insurance? Do you have any idea?

What they need for insurance?

I mean is that average building without sprinklers, is it a 100 million dollar building? Is it a.

Oh yeah, yeah. So the average. Yeah. On a per-location basis. Rough. Yeah. On a per-location basis, most of those buildings are going to be below 100 million.

But there are, there are buildings, and I've worked on many of these placing the insurance for the 30-story steel reinforced concrete buildings that are pre-1975 that are valued approximately at 350 million dollars. So those do exist. There's a lot of people living in them.

Okay. So.

Those are the buildings that aren't, you know, obviously they're not as, they're not as expensive as like the stuff in Kaka'ako.

I'm wondering, HHRF, can you adjust the cap based on the building, or does it have to be a hard cap? Because I mean, if we're talking about a luxury apartment building versus a 1975 apartment building that is 300 million dollars just because it's so big.

I mean, is it possible for you guys to give them a greater cap and a kind of a per capita per individual, case by case basis in order to kind of get that middle section of the population that,that's hungry?

The. Yes, technically, we can dial the rates in however you'd like. The, the challenge becomes the operational component of verifying eligibility that differs by class.

That, so that's what it comes to is there's, there's both expense associated with that and potentially slows down stand HHRF in the first place and makes it more effort to get a policy for any particular applicant because there's things that they have to do to demonstrate eligibility for the policy that they're seeking.

Yep, that's, that's fair. And maybe that's a, maybe that's something you could tackle later. I'm not necessarily saying you have to do it like right in the beginning, but knowing that it's possible is good for us to know.

Yeah. I would further Scott's comments that the largest buildings in our data, or I shouldn't keep saying building, it's really an association because sometimes there are multiple structures. But the largest associations in the dataset that we have are above 500 million. There's a couple, maybe in the neighborhood of 600 million. Right. So I just want to.

You have exceptional property values here in Hawaii, and that's, I think everybody knows that better than I do. So, just pointing out that as much as 300 million is an enormous number, and if anybody wants to give me 300 million dollars, I'll happily accept it.

The reality is that the marketplace here and the really big, really high-end associations are north of half a billion dollars. There's not that many. Right. So there's also this question about the definition of what are the associations the wealthiest members of the buying population are getting into? I don't have good demographic data on exactly that.

I'll just point out that there are older concrete reinforced buildings or sorry, reinforced concrete buildings, that could be two to 300 million dollars in value for the association. And the really big ones are going to be north of half a billion.

And to be fair, those can still be helped by a lower cost cap. They'll just be helped less, not the full amount.

That's totally true. And we have existing analysis from February on 40x of 10 as a layer of insurance that the HHRF could provide. So, we.

Can you explain what you just what that number means?

40 million dollars instead of 350. So, sorry. Yeah, the 10 million dollars. We have been suggesting from the beginning that the HHRF provides coverage above 10 million because that minimizes any competition with the existing admitted insurers. Yeah. So the 40 million dollars would be above the 10 as opposed to the number that's on that slide, that's 350.

So basically, 40 instead of 350 is your simple answer is what I meant by that. So that analysis is immediately available. We'll have to squeeze that through the sort of risk budget analysis in terms of how does that, how much of that insurance could the HHRF provide on, say, the 170 million, like how many associates?

Anyway, we'll add that, and then we can provide that as well.

40x of time, it sounds like 90x of 10 might be more reasonable. But anyway, yeah, some analysis might be nice. Please.

Quick comment. Because we're talking about public funds, we're putting to this, right?

Okay, so why I understand the efficacy and delivery to market? That's a kind of a private sector look. We're talking about public monies. And so it behooves us to have a process in place.

Oh sorry. A vetting process, I'm used to yelling louder. Vetting process in place, right?

You gotta come in a little.

Because we're talking about public monies. I mean the Chair's point, it's a very, very bad look if it comes out in the media later on that the State of Hawaii taxpayers subsidized a very wealthy high end condominium property that was probably mostly offshore owners that were involved in transit accommodation. You see what I'm saying?

It's a really bad look when you have a lot of hungry people out there who are on the verge of losing their homes on fixed incomes, if we are not if we're taking care of groups like this. So, having a process in place is important because we're talking about public money.

Otherwise, I would agree with you more on these processes could slow down the delivery of the product to the market. But we're talking about again trying to make sure the public monies we're putting to this are going to the public good. So that's kind of what I wanted to say.

My understanding is that this would be in the form of a loan, and the HHRF would be responsible for the interest payments. So the coupon on the bonds that would be raised, for example, and would be responsible for paying back the principal. So it would, there's at no point has the, either the H.

I don't want to speak for the board, this board speaks for themselves. But Aon has made no recommendation that the HHRF receive any subsidy from any Hawaii taxpayer or from the legislature. The, the question at issue, I believe, is borrowing funds. And there's. It still is borrowing money, but borrowing funds that would then be repaid with interest.

The. I understand.

Can you. Can we pull up the slide? I believe it's slide four.

And I think maybe. I think maybe I would ask either Mr. Nonaka or Jerry to explain the proposal of the addition, the specifics on that proposal relating to additional capital of 200 million. It says reimbursable general obligation bond proceeds.

Yeah.

That's what you're referring to, right?

Yeah. I will attempt the best as possible to explain that.

So I guess to set the table coming back to when and I've only been on the board for two months now, but I was there at the beginning, and the underlying goal that the HHRF undertook was to be able to provide coverage to as many associations as possible and to provide a cost savings.

So in all the analysis that. That's how we've been proceeding. We appreciate all the feedback as you go in that direction. But part of that process was as we entered into the legislative session, and as we continue to work through and get feedback from the vendor.

And initially, we had told them, you need to come up with a solution with the existing money that the HHRF already has. We understood the financial condition of the state budget, and they did that. They came back with. And phase one, start with this move for that.

But we also said we wanted them to do additional analysis on how much additional money would be needed if you wanted to roll this out to all Association types. Right. And a lot of that it really comes down to the word demand. Right. We're talking about, where is the demand?

And so this ask of 200 million is based on maximum demand or somewhat of a maximum demand scenario. Now, understanding again that we couldn't ask for 200 million directly, we wanted.

We talked to BNF, we talked to the attorney general and they presented this option of reimbursable general obligation bonds, which would be if authorized, the HHRF once it, it's already going to go live before this could even happen. Right.

At that point in time, we would then determine is there the demand and would we notify BNF, please proceed with issuing these bonds so we can obtain this additional capital so we can purchase additional reinsurance to now expand out the capacity of the HHRF to cover more associations.

If there isn't the demand, we're not going to authorize the release of those bonds. The HHRF is not going to take on those funds unless there's.

Again, if you go to the slide on the far right hand corner, there's also the opportunity in the bill, which the money would come from these additional bonds to disperse funds to HPIA. HHRF is a state agency. HPA is not.

In order to provide these general obligation bonds, reimbursable general obligation bonds to HPIA, it would have to flow through a state agency.

It is like a line of credit.

And does it, do these reimbursable bonds count toward the bond cap?

So I guess just to clarify. So it's essentially somewhat of a line of credit.

It is our understanding in conversations with BNF and the Attorney General that as long as the reimbursable general obligation bonds have a pledged revenue source, and in this case it would be insurance premiums, they would not count towards the state's debt ceiling or towards the CIP budget or any fashion in that regard. We understand.

Thank you. Because it's my question, I'll stop there because I think we probably got to move to HPIA at some point.

Yeah, Gregor had a question, but I don't know.

Well, if I could just ask one more. You know, we're going on this, we're having this discussion about the high-value buildings versus the low-value.

And so, you know, we've asked for some clarity going forward about exactly who lives in these buildings that we're trying to target and what sort of universe we're talking about. I'm wondering why you alluded to earlier having a sort of a broad portfolio to try and attract capital.

And so I'm wondering why that hasn't been an answer to some of these questions that we've been asking here for the last 15 minutes. The whole point of reinitiating you guys was because we have insurers and reinsurers that are hesitant to return to Hawaii.

And I'm just wondering why that wasn't the answer to why you are trying to roll this out in the way you're proposing.

Well, I think the response there would be that we've received feedback throughout the course of this process and understanding that... Look, I mean just to be very clear that we have board, we had a board recommendation and approval to launch with the concrete high rise buildings. The immediate feedback basically was what about everybody else? Very reasonable.

And so we are exploring mechanisms and ways that we can actually do that day one. The question around attracting new capacity to the islands versus let's just call it recycling capacity that is already here. That's really the purpose. And I think that there may be a way to construct a financial vehicle that actually will support being able to expand the scope of the HHRF to all construction types.

Let me give Rep. Ilagan. Have a brief answer too. We got to move on.

So what I'm hearing is that you may not have the data set to be able to identify the vulnerable population that we want to make sure are insured. If we are asking you, if we're asking you to figure out how to get that data set, you're saying that the cost will increase, and the more restrictions, more data we want to be able to identify the vulnerable population that we want to make sure is getting insured first.

The cost is going to rise. So what I want to ask you is there a way to maybe instead of... Because your strategy is to capture everyone, make sure that we understand what the demand would be once we capture everyone. But we want to make sure that we capture the vulnerable population. Is there a way to safeguard the portfolio and actually identify the diversity?

For example, we want to make sure the vulnerable population is 80% of the portfolio. Can we make sure that we have a provision in there where you take all the applicants in, but you make sure that only 80% of those applicants are the ones that we really want to make sure has those insured. Is there a way to do that with the data set that you currently have, or do you need more data to be able to identify more of the vulnerable population?

We have an inventory of associations and the physical characteristics of the building stock in those associations. So construction type, location, age, like when it was built. Right. We don't have demographic information about the residents of the associations, for example, which I think could be part of the question that you're asking.

Also the difficulty... This is your prerogative. Obviously, it's your money. How you define who those classes of people are and how you instruct to provide eligibility that differs by class of individual is extraordinarily fraught in my opinion with the operational day to day task of actually providing insurance rapidly to a market that is struggling with affordability issues.

I don't argue with the intent at all. I think, this is an opinion, that doing something like saying we're going to provide a policy at the HHRF that is limited to $100 million of coverage or $200 million of coverage. What we can do rapidly, for the purposes of the Senators and representatives in the room, for example, is we can show you an analysis that says here's the ages of the associations and the profiling of the values associated with each of those AOAOs. Right.

And so if you offered $100 million worth of coverage, how many old associations would potentially be eligible? How many new associations would be eligible? How many giant associations would be eligible versus more modestly sized associations? And we could do that for say, $100 million, $200 million and $300 million of coverage.

Possibly that approach would be simple enough to accomplish most of your goal without the complications of defining classes of individual and exactly where they live and enforcing rules about percentage of class and eligibility. So at the very least, let us provide that analysis and see if it is somewhat satisfying to say at different amounts of insurance that the HHRF provides, here's the profile of associations that would be eligible. Acknowledging that I, and we at Aon, can't say who's living in those associations specifically. Is that a reasonable step?

Yeah. I think just to add... I'm sorry, go ahead. Just to add further comment too. I think what we'll definitely take back is the comments made today. So I thank you very much on that. But defining what vulnerable means, I think that's very important in how we shape our underwriting guidelines. And to address Senator Keohokalole's point and Senator McKelvey with respect to feeding the hungry. Again, that falls into the vulnerable definition. Right. We need to go back and relook at that.

If I may add a supplement to that comment. My understanding from working with identifying the causes of pain across the marketplace is that the majority problem for the smaller associations, where presumably you have a demographic at lower income levels, is not the hurricane risk. It's maybe part of the problem.

They're struggling to afford the fire risk on their buildings and they're... And that's where suddenly the issue of like sprinklers and pipes becomes very relevant. The HHRF does not have the ability to address that problem because it is specific to coverage for hurricane. So we can, we can hopefully provide more affordable hurricane coverage.

And per the comments that Jerry made, potentially use some of these funds to then be loaned to the HPIA to facilitate the HPIA developing a condo program. But part of the problem facing the exact demographic that you're acknowledging is not the hurricane part of their risk, it's the core all other perils or fire risk.

So just one, you could say yes or no. So following up with providing affordable hurricane coverage. Is the premiums going to be less than the surplus line premiums?

Yes. Yes, it's going to be less by our intention. The surplus lines market has tremendous flexibility. And if they decide to undercut the HHRF, well, either way, the Hawaii policyholder wins. But it is designed to provide more affordable coverage than what's accomplished in the surplus lines market today.

Thank you.

All right, well, speaking of repiping and other things wrong with the buildings, HPIA, you have a presentation for us.

So thank you, Aon and Insurance Division and HHRF. Maybe Teri, if you can refresh everyone's memory by introducing, having you guys all introduce yourselves before you start. Thank you.

Of course. Thank you very much. Chair Keohokalole, Chair Matayoshi, and esteemed Members of the Committee, thank you for the opportunity today to provide an update on the HPIA. I'm Teri Fabry, and I'm one of the HPIA plan administrators. And I have with me Matthew Cheung.

He's the HPIA board chairman. And Scot Sterenberg, also HPIA plan administrator. So I did hand out to each of you here present an updated hard copy of the slide presentation. It's been mentioned a little bit earlier that HHRF and HPIA are different types of entities.

Oh, I think you have to share your screen.

Thank you.

Thank you for pointing that out. Sorry about that. So HPIA and HHRF are two very different entities, and the HHRF has been dormant for many years, whereas the HPIA has been actively providing solutions to Hawaii consumers. And so for that reason, I wanted to just quickly review HPIA's financial position and.

And how we're currently leveraging the capital to provide solutions for Hawaii consumers. So the Association was initially created in 1991 in response to the 1983 Kilauea lava eruption that destroyed over 116 homes. The first policy was written in early 1992. HPIA's mission at that time was just to provide coverage to homeowners in lava zones 1 and 2.

It. It was expanded shortly thereafter, however, to provide relief to homeowners in the entire State of Hawaii. HBIA has responded to market need and it's expanded and contracted over time. So the policy count has grown and shrunk. At its peak, HBIA had 45,000 policyholders.

RLI to enter the Hawaii insurance market bought the HPIA book, and so then the policy count dropped to almost zero.

For the last few years, the policy count has been growing 20 to 30% due to the lack of availability of insurance options for people in lava zones 1 and 2 and the hardening of the market after the Maui fires. The HPIA, the structure of the entity is that it's a nonprofit unincorporated Association of Member carriers.

So every insurance company that's authorized to write business in the State of Hawaii is automatically a Member. Since the inception of HPIA, HPIA has contracted with a third party to run the operations of the HPIA. That includes all the underwriting, claims, adjusting, financial reporting, et cetera.

In the beginning, the HPIA partnered with the Hawaii Insurance Bureau and one or two Member carriers. That servicing contract has moved back and forth between two insurers for the last 10 or 15 years. However, in 2019, when HPIA sent out a request for an RFP, there were no carriers who responded to that bid, including the incumbent.

So there were no insurers who were either interested or that had the capability to service the HPIA. So the board had to look for other alternatives and ask two other companies to respond to that bid. Marsh was one of them, and Marsh was selected as the administrator in 2020.

Marsh has had a local presence here in Hawaii for over 50 years. Marsh services hundreds of captive insurance companies and risk retention groups and has a significant pool of talent, insurance talent that includes underwriting claims, adjusting financial accounting and tax. Marsh's contract expires June 302027.

Historically, the HPIA Board has sent out an RFP every three to five years.

Last year the board opted to extend Marsh's contract in exchange for a reduction of fee because they felt that the continuity of the plan administrator was very important to the completion of the one key strategic initiative, which was the replacement of the Legacy Policy Administration system.

I expect that the HPIA Board will send out a request for RFP again likely in 2026, since the current contract expires June 30th of 2027 and there's a significant amount of time involved in the transition from one plan administrator to another.

The HPIA is governed by a 12 Member Board of Governors, eight of which are Member insurance companies and several of them who are also Members of the Hawaii Insurance Council. So there's some crossover there. There's one seat that represents agents and three that represent public consumers, those on the Hawaii Island, Maui and Kauai.

So what is HPIA doing today? HPIA currently has over 2,200 policies in force. We talk about the exposure. We also refer to it as Total Insured Value or TIV for short. That's the sum of the dwelling limit, personal property, loss of use and other structures.

So for those 2,200 policies, HPIA has almost $1.0 billion in exposure and of that, almost 55% or over 500 million is just for the homes located in Lava Zone 1 and 2. Since the Maui fires HPI has, HPIA has seen a significant increase in demand for homeowners insurance for areas other than the lava zones.

HBIA has responded to that need appropriately. The board and the plan administrator monitor the financial condition of HBIA through several key financial metrics, three of which I've got shown on this slide. The first one is direct written premium in comparison to the outlay for reinsurance expense. The dark blue line represents the direct written premium.

As of 12312024 was about 5.6 million and you'll see that the reinsurance cost exceeded what we collected in direct written premium. Reinsurance is critical to the sustainability of HPIA. Without that reinsurance, HPIA would have suffered significant losses from the 2018 lava flow.

Senators, Representatives I just wanted to make one note that may not be apparent to everybody is that a normal insurance company is about 10 to 30% reinsurance costs per year, but we're consistently over 100.

Obviously we're a different organization, but I just want to stress that to everyone here that there is some reasoning behind asking for capitalization for us to write the new condos. It's not like extra extra. It's just to get us started and to not have to go bankrupt basically.

So, yeah, again, over 100% reinsurance is unheard of for any insurance organization typically. Just thought I'd make a mention of that.

As the cost of reinsurance has risen dramatically and the exposure or total insured value has grown significantly, the board of directors has made a conscious decision to reduce their expenditure on reinsurance.

What that means is that they're exposing more of the balance sheet to risk and putting more pressure on the capital that we have, which which is less than 35 million. You'll see the net income loss chart on the upper right hand side.

There's only been one year in the last six years that the HBIA has broken even or made money. Because of the net operating loss, the HPIA Board has had to liquidate a portion of its investment portfolio between 2 and 5 $1.0 million every year for the last five years.

It's important to note that there is a Within the statutory framework, there's a provision that addresses the solvency of HPIA such that the premium HPIA charges should be sufficient to appropriately Fund the Association to break even.

For that reason, after the 2018 lava flow, the HPIA Board has asked for rate increases three times, the last of which was submitted in 2024. It was approved nine months later. So it just recently went into effect.

So as you can see from these slides, HPIA's surplus has been shrinking over the last six years and due to the rising reinsurance costs, HPIA is leveraging to the greatest extent its to provide solutions to the homeowners of the State of Hawaii.

And the HPIA is doing all that it can to respond to the growing need for homeowners, which was its original intent before SB 1044 Bill was put forth and the Governor's proclamation was issued.

Thank you, Terry.

I'd like to go over the strategic initiatives coming up for HPIA. Obviously, the commercial property policy is the biggest question right now. I'll make it clear from the beginning. I believe that HPIA, with board approval with the current plan administrator, has the capability, the know how and the will.

I think to do this, it's just a matter of getting the go ahead and knowing that we're secure and having an outlet for funding as needed. So the policy Administration system, item number one on this slide in spring 2024, the board authorized this. At the time, it was not talking about condos as much.

Of course, this is because we had an old system that we needed to change over to a new one that's modern, flexible, able to be accessed by our agents directly.

I won't go into the detail of what it does here, but basically it makes it online and more current, like what you would experience, let's say, going to any big name insurance company that you go to here now to get a policy. Your agents can go there and they get you a policy from there.

And we're trying to mimic that function and make it more accessible to an agent at the same time.

I would say the important things, if I may. Excuse me. I'm sorry to interrupt. The Senate session begins at 11:30. The house is at noon. We had so much fun with Hhrf. There is a limited amount of time left.

So I respectfully ask if you can please speed up the presentation so that there is some time for Senate Members to ask some questions before we will depart at 11:15. And if the House is inclined, then we're fine to.

Absolutely.

I mean, they can keep going if they.

You want it Shorter and sweeter, I can do that too, please. Thank you. Right. Okay. So basically these four line items here are showing what we're doing both technologically and also in operationally to be able to accommodate a commercial product. The computer system is a huge part of that.

The system currently in other states used by other fare plans, which HPIA is equivalent to fare plan, is the carrier of last resort in other states. That system has the capability for the condo policies. We just have to give them the order to add that to the menu. Basically, currently it's homeowners.

And you can see there there's a timeline and what we feel that we could be capable of delivering if. If ordered and agreed upon by the board. So that's our strategics and initiatives right now.

You know, we're trying to add some coverages to our HO6 product, we're ready to go with the commercial property development when the conditions are appropriate. I'll turn it over to Scott.

Thank you. Thank you. Yeah, so now we can get down to the good details of the program design. And we think it's important to, you know, collaborate and present a cohesive solution that will cover most of the needed buildings.

And so HPIA would be writing an all other peril policy that would attach above 10 million and to the total insured value of the building. We think that's an important distinction because that is the area in which the most significant pricing relief can be achieved.

In my other capacity, I help associations build insurance programs and I see the market need for that relief in capacity. HPIA, of course, we have $1.0 billion of insured values. We have $30 million in capital. So we don't have any capital really to deploy here other than through a loan.

And when we deploy that capital to this cohort we feel is the most needed. We would use a variety of different reinsurance mechanisms, one of which could be facultative reinsurance. It could be a treaty, or it could be, you know, excessive loss. There's no one right solution.

And the idea behind selecting fire resistive properties, if we built a portfolio of those buildings, we could then leverage the reinsurance strategy across other construction types at a lower cost. We'd be able to get to more homeowners that need relief. Our rates would not be competitive with rates that are provided to class A buildings.

I know what those rates are. Our rates would not compete with that and we would not be in position to insure well engineered, highly engineered, recent construction high rise condos. So our design and our program is going to be focused on those that need it most.

We do believe though it is a good strategy to work this in conjunction with HHRF. It provides the most seamless strategy to the marketplace. The last slide, we just go on to it and I'll do this very quickly. You know, we have a dedicated team here, dedicated to HPIA.

We've been successfully writing for many years and HPIA has served to stabilize the market through many difficult times. A 2018 lava flow. And we believe that HPIA can provide a similar path and avenue for condo Association owners as well. You know, just making sure that we get rate increases that are corresponding to our reinsurance costs.

You know, we build the right underwriting tool and internal control is very important to us, being very transparent and providing proper internal control. The current program administrator does not have a seat on the board. We serve the Board. And we think that's an important distinction to have that. So with that, I, I would just.

Any other comments or welcome any questions?

Just a really quick last one. I've heard some talk of a consideration of possibly trying to change the current policy administrator to a domestic carrier. I can't say that that's altruistically beneficial.

However, I could say that changing the policy administrator during this crisis or trying to would be very damaging to the timeline and delivery of the product, which is basically a commercial policy for people who can't get coverage above 10 million. Why do I say that?

That means you would have to change, hand over all the vendors that are tied to the organization. The system that they use would have to get online for it. It's. I'm talking months. It could delay months easily. And there's also a cost involved. There is a contract with this current policy administrator. It runs till 2027.

I believe breaking that contract involves some type of legal concerns as well. So I just wanted to address that notion. And my comparable explanation would be, let's say you had a building.

I think we got the message. I would, I would just note before we go into Senate questions on this. Okay. That this presentation was what was expected when the HPIA and HHRF came before these committees in February.

And so this is a second bite at the apple that we are providing as a courtesy to these two organizations because the information presented at the initial briefing was so unsatisfactory to the Members of the committees and to our constituents who were watching and expecting answers. And so I acknowledge your comments.

In closing, we will take it under advisement as we go forward in the deliberations of the legislation. But I would just like to note that you were provided the opportunity to make that statement as a courtesy from the committees because of how unsatisfied we were with the initial presentation at the beginning of the legislative session.

Now I'll open it up for Senate questions. Senator McKelvey.

Is the value going to stay the same under the policies you're underwriting because you have $540,000 per house, right. Under HPIA that saw earlier.

The current maximum coverage, a limit or dwelling limit is 450,000.

$450,000,000. So basically, that's the max coverage somebody. Could get using you guys at this time?

Yes.

And I mean, pardon my ignorance, but I mean, I don't think I can build a Costco shed for that. I mean, so, I mean, I guess my point is, is that I understand it's having insurance and Name only to get loans and such.

But there comes a point to where, like, okay, the coverage I'm getting is so obviously low, I'm never going to be able to rebuild with it. Right. That's what I'm.

Is there going to be any kind of a discussion on how to provide greater coverage limits for the reality that many of the homes outside of Puna are worth much, much more and will cost much, much more to replace?

Yes, Senator, there already have been such discussions. The board was unwilling to raise that maximum limit, though, until the last rate increase was approved. And now that it's been approved, the board will go forward with more discussions on that. And I can tell you that the average limit that policyholders buy is significantly less than 450,000.

Minutes.

So how much money do you need?

Yeah, so the original capital minimum capital amount that we're requesting would be 20 to 50 $1.0 million.

And that's for what?

To serve as the initial capital base to launch the commercial product.

And so that's, that's the program contemplated. I mean, it's. It's essentially the. If you want to go back to that.

Yeah, yeah, that's right.

Which is the.

Yep. Right there. The capital requirements policies that will.

That will essentially partner with the Hurricane Fund. And so we're. We're still seeing this $350 million so limit. And it's essentially the same framework. You're just covering the other perils.

That's right. That's right. And so that insured value limit of 350 million would capture a significant portion of the cohort that we were targeting. Now, many of those buildings are going to be significantly below that 350 million. It's going to be closer to 50 million. So, you know, that would be the anticipated.

Given the, Given the number of condos in that arena. So that.

You're reflecting it, though. Right. So if HHRF goes down, you guys will probably go down for your cap, too. Is that fair?

Say it again.

You're. You're reflecting HHRF. I mean, it's almost the same slide. Yeah. So if they go down on their cap, you're going to be going down, too. Is that the intent? Because you said you're kind of trying to mirror and match HHRF.

No, what we're doing is mirroring and matching the strategy in terms of underwriting strategy and going into market for capital, though. So the sufficiency of capital. We need capital to be able to launch the commercial product.

Right now, our capital is dedicated to the existing exposure basis if we take on a new exposure basis, more buildings, more insured value, we need capital to be able to serve as insulation against adverse development. Okay, so we need some capital to absorb losses for adverse development.

We have $30 million, but we don't have sufficient capital to launch a greater program. So that's why we're asking for. It would be a loan from the HHRF and we would build a capital base. Is that not clear?

I mean, I see where you're trying to go, but if we lower that cap from 350 million, you're necessarily going to have more capacity. Right. So I don't. You're not going to need as much capitalization, you're not going to need as big a bond if we lower that cap.

Yeah, yeah, obviously it's.

So what I'm saying is if HHRF moves the limit down, the Max cap down and you folks correspondingly lower your limit as well, you may not need as much of a bond because you'll have more capacity.

That is certainly possible. Yes.

Yeah.

Now one thing we have to keep in mind is that certainly a per location limit is important when we lower that per location limit. But we're also looking at the number of buildings that we would be insuring. So that capital evaluation. Yes, if we lowered that total per location limit, our capital needs would be less.

Having said that, reinsurance is an important consideration here. Just like we deploy our capital right now, we use reinsurance critically to be able to survive in a catastrophic event, which is exactly what we would do with this program.

I think we might be looking at different things, honestly, and maybe that's where the disconnect is. But on this side of the table, we're not looking at buildings, we're looking at numbers of residents that are getting helped. Yeah, that's right. I don't really care if there's five building.

If one building has as much residents as those five, that's kind of what we're concerned about. That's right. I just want to make it clear, I don't think we're going to really care about how many buildings that you guys are covering.

And formatting your insurance policies to get the maximum number of buildings is not as important to us as how many residents that we're actually helping here.

Well, the more buildings, the more residents.

Not necessarily though. Right. Because you have your 20 story building, that's enormous versus your three story walk up in Moelili. Those both are one building. I'm just saying because you guys are. You keep using buildings as an example.

But we don't, I don't think, maybe I can't speak for everyone here, but I don't think we care about that necessarily. I think we care about the bodies that we care about. The residents. That's right, yeah.

The residents, absolutely. Okay. Yeah. So just on that point, I'll give you a little data point. You know the. On a per unit basis, if we look at a fire resistive building with, you know, whether it be 20 units or 200 units, on a per unit basis, okay.

The insurance cost could go up to $5,000 per unit, sometimes 10,000. Right. On a nice beautiful building with a lot of units and brand new constructed building. Right now the current market rate on that building would be $2,000 per unit. So we're not, our target is not going to be that big nice building.

Our target is going to be those other buildings and our goal is to help those who need it most. That is the focus, just like HPIA has successfully done for many years.

Members, other questions. Okay, we'll yield to the House.

Okay.

I think Rep Ilagan had a question.

Thanks. Thank you. Chair. As a representative who represents the Costco shacks in Pune, that's his house. On the first slide, what I would. Like to ask is you mentioned that you will deliver the same product as when we have the similar to HHRF. Are you talking about premiums? That's upward to 8.

Well, actually it's going to be different because we're talking about condos here. But what are we talking about? Premiums? Is it going to be similar to what you're currently providing now?

So you know, rating the cost of those premiums is really an important part of the whole exercise. One of the elements of the cost is the cost of our reinsurance. And in constructing a program, I know based on current market rates, current market intelligence, where the buildings that are might be fire resistive construction.

I feel like insurance is definitely going to be above everybody's head. I think. How to phrase this, is that the premiums that you will be able to offer, is it going to be a lot more than is it going to be high or is it going to be affordable?

Yeah. We believe that we could offer insurance rates that are. Because our administrative costs are low, we believe that we can pass those lower administrative costs onto our insureds. So when comparison, the market rates of insurance fluctuate just like the stock market. Right.

And we believe based on market intelligence right now our rates would be lower than the highest excess surplus lines rates, but certainly higher. Than excess and surplus line rates for very well designed, well engineered buildings.

I'm very happy for the new customers that's coming in because they'll have more affordable rates. But I'm very concerned about your existing base because you're telling me that you have 22 current policy, 2200 current policies and it's over an exposure of 1 billion.

If you divide that, you're at the limit of 450k per policy and 70% of that is on lava zone 1 and 2. So you're taking on a new base with asking for that 20 to 50 million. Yes. But is this a loan that we're giving you that you have to pay interest as well or are you. Yeah.

Not paying interest on this loan. Yeah. Adds on to the cost of the premiums passed on to the customer.

So what I'm trying to say is right now HPIA has asked for three rates increases and granted they weren't very profitable, but you're going to be taking on more of a high risk portfolio because the vulnerable population is going to be high risk and a diversity of a portfolio that's going to be exclusively high risk is going to be very expensive.

And as what was mentioned before with HHRF is that the ones, the policies that's more appetizing for the market are going to be low risk and you won't have much of that because we want to support the high risk.

So how is it that you're going to provide more of, I mean less, I mean more affordable to the new customers than your existing base that you're currently providing 8 to $10,000 on insurance premiums and that's for a Costco shack that's very expensive for insurance.

Yeah. Just like we operate today, we try to balance multiple stakeholders and in delivering the lowest cost premium we can to the, to the stakeholders within the constraints that we have to operate in. Because we have to have a company that's sustainable and can survive catastrophic events.

So we're very focused on that and making sure that if we have a catastrophic event, we promise to pay and we're going to commit to that payment. Right. We do have a mechanism to be able to recoup, so we know we do have a backup.

But when we deploy our strategy for commercial property, we're going to take the exact same, same strategy. How can we deliver something to the marketplace to create capacity at the lowest price yet we know we're not going to compete with commercial carriers for the best risk. We know we're going to get an adverse selection of risk.

We're very aware of that because that's the world we live in right now. And so we have to balance the, you know, the desire to have lower premiums up against our cost of operating.

And so what I would say is that we've done this well for many years, and we believe we could do it with a commercial property.

I'll leave it to this.

I strongly believe that Administration right now, with the current carrier that you have, if you maintain that you will lower the cost, upgrading your legacy administrative policy system, that will lower the cost and any other ways to be able to lower the cost by adding low risk policies will be great, because your portfolio right now is very high cost.

Very high cost. And granted, that's what you're built for. And I just want to encourage you to continue trying to cut that cost.

Yes, thank you, Representative Iligan. Absolutely. Our fiduciary responsibility is top utmost. You know, HPIA, there's no fad in there. There's no profit at all. It's really just to keep afloat, which I hope the public and everyone here seated can appreciate. It's obvious we're nobody's. The board does this all for free.

Yeah. And for those who don't know, the last option that you mentioned is not acceptable because you're talking about getting everybody's premiums to have to pay for HPIA. So that last option is the guarantee. It's not the. That's not where we should be going. It should be to maintain this current system that we have.

Understood. Appreciate it and understood. Thank you.

I'm going to dig out real quickly, but I just, before I go, I wanted to just again apologize to my good friend from Puna. It wasn't a dig on your constituents. It was to actually reflect the fact that to his very point, very high premiums, very low cost of. I mean, of the value of insurance.

I'm just worried we're creating a systemic underinsurance situation here because people on these policies may not be able to receive build, especially given the high premium. So. Okay, thanks, guys. I'm out.

Yeah. That being said, if you could convince Costco to do a shed sale, I think the representative from Puno would really appreciate that. Yeah. You guys have any more questions on this side? Okay, because I've got a couple. Yeah, so you got one more and then I want to ask a couple. Do you have a.

Is it related to your last one? Because if so, go ahead.

So HPIA, with the current model that you have for lava zones I wanted to ask, USGS has created the lava zone map and that does not forecast what the risk is. It's historical data of lava flows. Are you basing your projection on assessment for premiums based on historical data rather than a model that's actually projecting risk?

Like for hurricane. You have an actual model for hurricane risk. And I wanted to ask you, what are you basing your premiums on? Are you basing it on a USGS map that's historical of lava flows, or are you actually using some sort of model that determine what projected risks are there in the future?

Currently, today, there is no model for the parallel volcanic eruption in lava flow. So we continue to reach out to our business partners. We've looked into developing such a model, but our data set is so small that there would be a lack of credibility. So to answer your question, it's based on projected losses based on historical experience.

And that's what we will have to do until there is such a model similar to that that's used for wind or wildfire.

And hold on, is that best practice to do that for the industry?

Yes.

Yeah. Unfortunately, we don't have a way to model lava flow anywhere in the world. No one has a model to be able to do that. So we can only go on our historical information. And keep in mind, in 2018, we, we sustained a $35 million loss.

All the reinsurers that were providing reinsurance to HPIA took a significant loss, more, way more than the premium they ever collected. And even if they're collecting the premium now, it's still many more years before they even get to break even. So our insurance model for HPIA is relatively simple.

We keep the admin costs as low as possible and we're trying to pass on the reinsurance control. Now. We actively market the reinsurance we get as a broad spectrum, spectrum of insurers, reinsurers involved, to be able to help drive efficiency and pricing. The same thing we would do for a commercial product. We would put.

That's what's really important is create this portfolio that we can leverage across. So we've been successful with that with, with HPIA. And I recognize those premiums are expensive. Terrible. Right. But they are as low as they possibly could be because we need a risk transfer mechanism.

If we have another lava flow, it could go across Hawaiian beaches, it could take out 100 million. So we have to be prepared for that. And that 100 million wouldn't be just. We're going to be looking for the taxpayer to bail us out. And so that's how we designed it, but it is a balance.

It's not easy, but we figured out the way that we could do it in the lowest cost possible. And our financial statements, anybody can look at them. I'm glad to talk to anyone about everything that we do.

So is there a projected year that's going to be balanced, and is there a plan to lower the cost for premiums once you make up your losses?

Yeah. So one of the ways to do that is to create a pool of risk that's more diversified and then be able to leverage that diversified portfolio for the benefit of all insured.

You won't go there because you're now competing with the market. So how are you going to diversify if you can't compete with the market?

When I say diversify, I mean between lava zones 1 and 2 and non lava. So our lava and non lava. And even in our non lava, there's still a lot of undesirable risks that the private market does not want to write that HPIA does.

So technically, you could diversify in condo insurance.

Yeah. So I believe that if we did write a commercial product, obviously we'd be collecting premium that is uncorrelated with a lava risk. So that uncorrelation could help diversify the portfolio, which ultimately could help to drive premiums down for everyone.

I'd also like to add that in the past, HPIA has done annual rate adequacy reviews, and prior to 2018, the HPIA has lowered rates.

Can we get back to those rates? Stop having loud flows.

Yeah. You have more questions? Okay. You mentioned upgrading your system. Who owns that system? Is it HPIA that owns the system that you're upgrading? So after 2027, when Marsh's contract runs out, or sooner, if other measures are taken, where does that system go? Do you just take it with you?

HPIA owns the system.

Okay. So the money that. It's not really Marsh putting in the money, it's HPIA upgrading its own. And then Marsh is using that system to issue policies and things like that, correct? Yes. Okay.

Because previously, when a Member carrier had done the servicing, they had used their own system for the servicing. So HPIA's data was embedded in theirs. And when the contract moved from one servicing carrier to another, all that historical data was lost.

And so the board felt that it was very important to have their own system to maintain the history of their own data.

Yep. Totally agree with the board on that. So for both. For both of you or all of the people at this table, I don't want to speak for the finance Chair, but I know that his concerns were that issuing these bonds would or may negatively affect the state's credit rating.

You know, bond cap aside, if they're reimbursable or not, I think there is a fear that the state's credit rating, the state's bond rating might be affected if we start issuing large bonds even though they're reimbursable. I wouldn't mind both of you, maybe one from each organization commenting on that.

I can start. I mean, obviously no one here. Jerry, could you send my. Oh, sorry. Sorry. Thank you for the question. Chair Matayoshi. I don't think we have any background or analysis on what affects and doesn't affect the bond rating for the state.

It wasn't a topic that came up for discussion until a recent hearing or a discussion prior to that hearing that concern was raised.

So I think if you still go down this path and there's still that concern, then I think talking to the, you know, whoever on the bond side issues those bonds in the state or does that bond analysis on whether or not it would affect.

And I think to some degree, I've heard that there, even, even if it was authorized in the bill to issue the bonds, that before those bonds are even allowed to be released, that there would be analysis done on whether or not it would impact the bond rating potentially that could, you know, stop the issuance of those bonds at that point in time.

But again, I. I don't want to speak a little bit out of our lane, to be honest.

And the only real reason I bring that up is because sometimes I feel like we're talking about these reimbursable bonds as if they're free money, which I think that it's not. And it does have other impacts beyond the people sitting here. Did you guys want to respond?

I'm just, you know, we rely on. We're going to be relying on a loan from HHRF and we're going to collaborate with them that loan amount.

And to the extent they have sufficient capital to go into their product and can loan us money, then we will design a product around the amount of capital that we're able to receive.

And so there's really no one right amount of capital, meaning that you can start off with lower capital, recognizing your total cost of insurance is going to be higher because you have to rely on reinsurance more. So the more capital we have, the less reinsurance and potentially the lower cost that we can offer the premiums.

Correct me if I'm Wrong. And I'm certainly no bond guy, but if we were to issue a $100 million bond, and even if it wasn't all used, that liability would still be there.

And I think that issuance of that larger bond would factor into the state's credit rating because there would be that open line of credit basically pending. So that's why the size of the bond, I think, does still matter. Even if you folks don't end up using.

If you end up using zero, I think it may still negatively affect our credit rating.

I would agree with that, Representative Matayoshi.

And that's why, again, that's part one of the reasons why this side of the table is a little concerned about the number and the justification because we want to make that number as accurate as possible in order to not have any or have less of an impact on the state's credit rating, potentially.

I'm not saying it's going to. So this is another question for kind of both of you. I was waiting to tell the Senate was done with their things. It seems like both organizations agree that the insurance market itself is kind of trending in a good direction. Right? I mean, at least it's coming down.

If it is coming down. I think the demand for your products might be or will be less, I hope will be less. I think you hope too, honestly, that the demand will be less.

My fear, though, is that the and I know the future is unpredictable, but my fear is that the asks that you're making for these bonds for the amounts are based on the current market, not the projected market.

But maybe you could reassure me that your asks are for the expected demand if the market continues to drop, rather than trying to peg it right now as if it's going to be stagnant.

I can start. I don't think our ask was based on a projected or expected demand because as Paul the consultant, we just don't know what the demand is going to be.

Our ask was to be in a position to leverage to access that capital should the demand kind of reach where we feel it would be at its max. And so that's our short answer, is that we wanted to be able to, we, the HHRF, wanted to be able to help all associations as quickly as possible.

What would that look like? Should the demand be, say, 50% of those associations? And that's kind of, it was more of just providing that capacity if the demand is there.

And that's kind of, I think, our hesitancy because you, you folks are sitting on a pile of cash, not so much over here. But you folks are, I think the, the fear is that, well, maybe that's not fair. Maybe that's not fair. I mean, maybe we should be waiting to see what the demand actually is, right?

I mean, HPIA has some track record, although not in the condo sphere. So you guys don't know what the condo demand is going to be necessarily. You folks don't really know what the hurricane insurance demand is going to be because the market is fluctuating. You're not even in the market right now.

We're still working on the product.

Instead of issuing you folks more bonds just in case, it might be prudent to wait a year to see what happens, see what the demand is, and then come back with a more accurate number later on. And maybe it's going to be 200 million next year.

I mean, maybe, you know, there's going to be so much demand that. But, you know, with your capacity right now, you are able to write some kind of, kind of same. On this side.

The capital we recommended was kind of a minimum capital to launch our products. So that 10, you know, 20 to 50 was kind of our range. Certainly if we wanted to work collaboratively with HHRF and if, you know there's less than that, we would then deploy a product around whatever amount of capital we receive.

Does if you folks lower the maximum cap, does that affect the 20 to 50 million that you need?

You know, our capital really is a minimum capital strategy. So, you know, you could go below 20, but again, you're going to be narrowing in on the amount of capacity you could offer the marketplace. And we really want to try to offer somewhat of a substantial capacity.

That's why we are, we were recommending that if you, if you look at any kind of, you know, when we launched hpia, we started with. Terry, remind me, what did we started with and how much capital?

I believe the state appropriated 100,000 at that time.

100,000. Oh, boy. In 1996. So, yeah, so because we have to offer large limits on a per location basis and there's a heavy concentration of risk, so there's a certain minimum capital we would need.

Okay, do we have any more questions on this side? Okay, go ahead. Kroger.

What's the benefit of ensuring that HPIA is more modern, more efficient, more diverse? Because we can't predict the future. We don't know if there's another disaster waiting to happen in Hawaii. I mean, right now it's trade wars. But one thing that we understand is you're the Last resort insurance with a diversified portfolio with a more efficient system.

Wouldn't it be better for our state to have you in the back burner ready with a low cost premium that could be afforded for our citizens?

The low cost premium. These are all actuarial, actuarially developed. Right. So the premiums, we'd have to like get rid of the lava people, basically.

No, you can't. You, you need, you need to. That's what I'm trying to say, people. You want to have like a reasonable.

There's no other option. That's the last resort insurance. Exactly.

And so we would take a very similar approach with the condo and that we recognize we are the last resort, but we have to have a sustainable program. Back to that sustainable program. We can't fail if we have a catastrophic event. We got to be able to be able to satisfy that catastrophic event.

And so we've successfully done that for 30 plus years. And I know the premiums are expensive for people in your district. I can promise you we are making them as low as possible relative to balancing the multiple stakeholders that are involved and creating a sustainable program. Because it's no good if we go out of business tomorrow.

Please keep working on keeping it lower.

If we have no more questions from our side, I'm going to let them go. But we do. I am going to send out an email, and so is Jarrett, to both the House and the Senate.

We'll send out a memo to the Members asking if other people have questions that were not asked at this hearing or follow up questions to questions that were asked at this hearing. We're thinking 2 p.m. tomorrow, deadline, but we'll make some kind of determination, some kind of arbitrary deadline and then we'll get those to you. Folks.

If you guys could send us a memo back with those answers, we'll distribute it to the Members. Okay, thank you everyone. Thank you everybody.

We're adjourned. Thank you.