The devastating wildfires that have engulfed Hawaii have occurred during a time of significant change for the insurance industry, particularly in a location that was previously considered low-risk by underwriters.
Historically, residents of Hawaii have enjoyed low home insurance rates, ranking as the most affordable in the country according to Bankrate, a consumer financial services company. This is because Hawaii has experienced relatively few natural disasters when compared to states like Florida and California, where extreme weather events have become more frequent in recent years.
However, the recent destructive fires in Maui, which resulted in the destruction of numerous homes and the need for billions of dollars in reconstruction, may prompt insurance companies to reevaluate their rates and coverage policies, similarly to what has occurred in other disaster-prone areas.
Insurance rates are typically regulated at the state level, with varying degrees of government involvement. States like Hawaii, which have robust private insurance markets, have not required significant state intervention in rate-setting.
Following the impact of Hurricane Iniki in 1992, Hawaii’s Legislature established a fund to provide hurricane insurance for homeowners. However, this fund ceased operations in 2002 when the private insurance market fully recovered.
Throughout the United States, private insurers have started to withdraw from areas affected by natural disasters, leaving the overall insurance market in a vulnerable position. State Farm, the largest provider of homeowner insurance in California, announced earlier this year that it would no longer offer coverage in the state. Similarly, homeowners in Florida have faced difficulties in securing storm coverage as insurance companies exit the market due to climate change-related risks.
Considering Hawaii’s relatively strong private insurance market, there is a possibility that the situation could become more precarious in the future. However, insurance companies will require time to assess new data and estimate their potential losses before making any significant changes.
David Marlett, a risk management professor at Appalachian State University, believes insurers will need to account for the increasing frequency and severity of wildfires in their calculations. This shift has already been observed in California.
Furthermore, the global reinsurance market, which serves as a critical support system for private insurers, is facing uncertainty. Reinsurance companies, which insure insurance companies themselves, have been grappling with mounting risks and costs. The prices for reinsurance have surged in 2023, leading insurers to reduce coverage in certain areas and exclude certain types of damage.
In summary, the wildfires in Hawaii have exposed the need for the insurance industry to reassess their risk calculations and coverage policies. With changes in rates and coverage on the horizon, both insurers and homeowners in Hawaii will need to navigate an evolving landscape of risk and uncertainty.
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