Dealing with the Insurance Crisis

by Tom Yamachika, President, Tax Foundation Hawaii

One pair of bills being pushed very heavily in this past legislative session was House Bill 2686/Senate Bill 3234, relating to the stabilization of property insurance.  The bill was introduced because it appears that the property insurance carriers are starting to look at Hawaii as a high-risk place, like Florida and California.  Premiums are rising at astronomical rates, assuming that insurance is available at all.

Neither bill made it through to the end of the legislative process, but our governor has said that the issue is important enough so that he is creating a Climate Advisory Team to study the issue and bring recommendations to next year‘s legislature.  One of the first projects the Governor is giving the Team is to “recommend steps to create a durable fund to mitigate the impacts of dynamic climate change and to develop a fair and comprehensive structure to resolve claims related to future disasters. This is necessary to stabilize the insurance market and defray the financial burdens arising from the increased impacts of climate change.”

Those bills would have created a fund that would cover some of the risks incident to writing certain kinds of property insurance.  To fund it, the bills would have jacked up transient accommodations taxes on transient vacation rentals, conveyance taxes, and perhaps other taxes, by undetermined amounts.  Presumably, the recommendation from the Climate Advisory Team will be along similar lines.

Let’s think for a moment about what was really being proposed here.

Insurance is a means to spread out the risk of large costs, such as the damage from a hurricane or tsunami, over a large pool of people so each person pays only a little bit and the money collected is available to cover some of the costs if the catastrophe insured against actually comes to pass.  Because insurers typically buy reinsurance, the pool of people over which the risk is spread is often global and not just simply from within the State.

Taxation is a means to spread out the cost of government among all the citizens who are subject to that government.  One of the things government can and does do is set money aside for catastrophes or emergencies. To that extent, it behaves the same way as insurance, but it distributes the cost over a different set of people.  That set can vary depending on what kind of tax is used, but usually consists of mostly residents (with some, perhaps, being exported to tourists).

When government uses its taxing power to create a fund making insurance more affordable, that power perhaps can be justified if the thing that’s being insured against is something everybody’s in danger of. Creating a hurricane relief fund, as was done years ago after Hurricane Iniki, is justifiable for that reason.

The bills, however, also proposed to set up a fund to pay for volcanic damage if houses are built in certain zones that are relatively close to the volcano.  If someone builds in one of those zones, Madame Pele speaks, and hot lava rolls over the house, then the fund helps pay for the loss.

That one is a little tougher to understand and support. A property owner decides to build a house close to a volcano, is warned of the risk, but builds anyway because the property is cheaper there. If that is their decision, then why do the rest of us taxpayers, who live nowhere near the volcano, have to be on the hook for lava damage?

Finally, many of the complaints of astronomically high insurance rates come from condo owners where the risk can be traced to no or inadequate maintenance done in prior years. The bills don’t propose to foist that kind of risk upon taxpayers, which seems to be the right decision.

We hope that the Team’s recommendations, and further legislative proposals to stabilize property insurance, would limit taxation proposals to those shoring up the kind of risks that we all bear.