Insurance ‘stabilization’ bill would spread pain to everyone

from Grassroot Institute of Hawaii

Hawaii property owners are facing an “insurance Armageddon” of significantly higher rates that some state legislators are thinking might require a variety of new taxes to mitigate, according to Joe Kent, Grassroot Institute of Hawaii executive vice president, who spoke recently with host Johnny Miro of the H. Hawaii Media radio network.

In particular, the Legislature is considering SB3234, which Kent said would only “spread … out the sickness throughout the rest of the economy” without any certainty that it would actually solve the problem.”

Worse, he said, “if you look through the bill, it’s a bunch of blank spaces. It says conveyance taxes will increase by blank percent. Or short-term rental taxes are gonna have a blank percent tax on them.”

Kent said the insurance crisis stems from many causes, including years of deferred building maintenance and recent disasters such as the 2018 Hawaii Island eruption and tragic 2023 Maui wildfires. The 2021 collapse of an ill-maintained condo in the Miami area that killed 98 people also brought attention to the risks insurance companies are facing.

In Hawaii, Kent said, about 400 condo buildings have been deemed “sick” and now are virtually uninsurable — unless they can be brought back to insurance standards, which would cost millions, possibly billions, of dollars.

Kent said also part of the problem is Hawaii’s strict insurance regulations that have kept rates artificially low for many years, causing some insurers to pull out of the market altogether.

Kent suggested that allowing insurance companies to raise their rates more freely could result in lower costs for consumers in the long run.

Meanwhile, he said, “Our taxes are already so high, and if you add taxes on top of that, that burdens everybody. So is that really better than what we have right now?

Kent added: “I wish there was a silver bullet here, but at the very least, the issue should be studied more.”

TRANSCRIPT

4-14-24 Joe Kent on Johnny Miro

Miro: Good Sunday morning to you. I’m Johnny Miro. Once again, it’s time for our whole public access programming on our radio stations on the island of Oahu and Kauai, available terrestrially and also at hawaiistream.fm with the Live 365 app. And with me today another member from the Grassroot Institute.

You might want to keep an eye on your property insurance bill because it’s going up across the state. Yeah, some condominium owners are seeing their rates go up amazingly by 1,000%, meaning they have to pay thousands of dollars extra.

There’s a bill out there, a Senate bill, it’s 3234. Joe Kent of the Grassroot Institute of Hawaii is here to explain the problem. He’s vice president. And also how it could affect you even if you don’t own a home.

Good Sunday morning to you, Joe.

Kent: Good morning, Johnny.

Miro: Well, a thousand percent. What’s going on with insurance?

Kent: Yeah, well, this is “Insurance Armageddon,” so the industry says, and it is affecting different properties in different ways and, yes, some properties are saying that their insurance rates are going up by 1,000%. Others, most, are going up by, you know, 10% or 15% per year in many cases. And that’s still a lot, by the way.

And what’s going on is that insurance companies are realizing that Hawaii’s had it pretty lucky for a long time, but that luck is ending. We haven’t had any major disasters until the lava flows in 2018, and then, of course, the Lahaina fires, the tragic Lahaina fires that happened last year.

And now the insurance industry is perking up and saying, “Well, wait a minute, let’s take a closer look at Hawaii and whether the rates match the risk.”

And so that’s why rates are going up.

Miro: I see major insurance companies pulling out of states or certain areas of states. Yeah. So something’s going on out there.

You just explained some of the recent events that have affected potentially insurance availability and affordability here in Hawaii. What specific issues, Joe, are causing concern among consumers and industry stakeholders?

Kent: Well, if you own a condominium unit, you should check your insurance, your hurricane insurance. Is your condo fully covered? Is it 100% covered? And if it’s not, that could affect a lot of things.

That could affect the insurance, or excuse me, that could affect the interest rate that buyers get when they purchase your property and take out a mortgage.

It could affect the rates that the condo can get for loans and things. It just makes it really difficult to buy or sell these condos, if you can’t get insurance on them.

And so, yeah, it’s definitely affecting a lot of people.

And so I think we addressed but why are these insurance rates going up so much?

Miro: Well there’s a number of – it’s like a “Who done it?” mystery. Why are the rates going up? And there’s actually many who-done-its.

First, you’ve got buildings, old buildings across the state. I mean just in Honolulu, most of the condo buildings were built in the 1960s and ’70s, and our housing regulations have made it such that it’s difficult to upgrade or maintain them or build new structures or options like that. So we’re just left with these really old buildings.

Now the maintenance fees on these, the focus has been on keeping the maintenance fees low over so long. And some people have taken the maintenance fees and put them into upgrading the building, changing the pipes, upgrading the elevators and so on. But others haven’t. They’ve just prioritized keeping the fees low.

And now, their pipes need to be replaced and they don’t have the money. And so the insurance companies are noticing this.

And plus, like I said, you’ve got the Lahaina fires, the lava flows, the hurricanes, and this Miami building, the surfside condominium …

Miro: Oh, yeah.

Kent: … which, a couple years back just collapsed out of nowhere seemingly out of nowhere — you know, a hundred people died in that collapse — and the insurance industry, the banks took notice, and now they’re really scrutinizing all insurance.

Miro: So this sounds like it has more to do with the infrastructure and the age of the building other than for like the natural disasters, but maybe they’re both combined in what their thought process is.

It looks like the Legislature is trying to make moves to solve this somehow. What is this SB 3234? What exactly does that bill do Joe?

Kent: Yeah, so the Legislature to the rescue, right? Or is it?

The bill basically tries to raise taxes to solve the problem? I mean basically this is all about money. And who’s going to pay for it?

Who’s going to pay for all of the upgrades to these buildings? And specifically, there are around 400 buildings that the industry has deemed as sick, uninsurable. No insurance company wants to touch these buildings. And so who’s going to pay for the upgrades?

Who’s going to pay for the insurance for them? And the answer here is taxpayers.

And so they’re increasing conveyance taxes for this. You’ve got new tourism taxes, short-term rental taxes, increased insurance taxes across the board, and fees across the board.

So it’s going to be people other than those who have to pay for the problem who are going to pay for it.

Miro: Are those 400 structures, are they pretty centralized or that spread out around the island? Do they have …

Kent: You know, it’s such a mysterious .. I’m glad you asked. It’s a mystery, actually. We keep hearing in the hearings about these 400 buildings, and eventually you’ll see one or two, but I’m not sure where they all are.

Miro: OK. Is that a temporary fix what we’re looking at here with this SB 3234? What’s your opinion?

Kent: It says, like, “Don’t worry these taxes are just temporary in the bill,” but there’s nothing so permanent as a temporary tax. So you know hold on to your wallet because it’s not really clear if these taxes are going to expire in five years or so. And it’s not really clear even how much the taxes will be, and if you look through the bill, it’s a bunch of blank spaces. You know, it says conveyance taxes will increase by ”blank” percent or tour, you know short-term rental taxes are gonna have a “blank” percent tax on them.

Well, all of this blankety-blank has been going through the state legislature all year on this bill and now it’s at the very end. It’s probably going to go into its final committee or conference committee. and we still don’t know what, how much those blanks will be.

So this is kind of a taxpayer-rights problem now because how can they pass a tax bill when the taxpayers can’t even see what the bill is.

Miro: Joe Kent with Grassroot Institute. Let’s explain what is the conveyance tax and how does it relate to the real estate transactions in Hawaii? If people aren’t familiar with that.

Kent: Yeah. So the conveyance tax is paid when you purchase a property. So if I purchase a home, then someone’s got to pay the conveyance tax, either me or the seller; we would negotiate that. And it’s a percentage of the property.

So this sick-building problem that I mentioned, the 400 sick condominiums, you know, this is basically a condominium problem, but if we’re tacking the tax onto conveyances, then that affects homeowners too.

Miro: Well, so what are the chances Joe of these tax hikes going through at this point?

Kent: Well, it’s still very high actually. This is kind of the last tax bill that is standing, which is, I guess that’s a good comment,by the way, because there have been so many tax hikes this year and they all died except for this one.

But this is, like, a monster omnibus tax. It’s not just one tax, it’s a bunch of them all rolled together in one with blanks. And it looks to me, if you look at the legislators’ eyes on this, they’re very intent on passing it.

Now, whether they do or not, maybe they’ll make it into a study or something, which would probably be a good idea, by the way, because there are so many holes in the bill and the concept right now. It’s just being patched together.

Miro: I think there were six sponsors on this bill. How would this solve the problem? Even if it’s a difficult pill to swallow, would this bill solve the problem somehow, some way?

Kent: Yes, it would. It would pay for a big bill, and, but it’s not really clear if the medicine is worse than the disease though.

So yes you’re paying for the bill but what is the downside? You’re taxing all of the rest of the economy here. And that’s difficult in Hawaii. Our taxes are already so high. And if you add taxes on top of that, that burdens everybody, and so is that really better than what we have right now?

I mean what we have right now is a bunch of properties who did not update or maintain their buildings, and now they’re in a really troublesome situation such that they have to, you know, the chickens are coming home to roost. They have to pay a big bill for that.

That’s a problem, but now spreading that problem to, you know, not you or me, but the-fellow-behind-the-tree way of taxation, that’s spreading out the sickness throughout the rest of the economy. And it’s not really clear if that’s solving the problem.

Miro: Yeah, because it sounds like this conveyance tax would impact, as you mentioned, home buyers, sellers, the real estate market potentially as a whole. It sounds, like you mentioned, there’s a benefit, but at a cost, the drawbacks would probably outweigh that of introducing a conveyance tax here. What’s your take on that, Joe?

Kent: Yeah, there’s a big drawback, and you have a drawback too on this short-term rental. They’re trying to create a brand new tax, which is a short-term rental tax. And that tax is so complicated that even the Tax Department is unable to calculate the potential revenues that it could bring in.

It’s kind of funny when you watch the hearings because the legislators are, like, kind of pounding their fists. “Can’t you get me a number of how much this is going to bring in?” And the Tax Department says, “We can’t.”

And they say, “If I rent my home for 30 days, am I running a short-term rental or is that just a regular rental? And what’s the difference?” You know?

Every county has a different definition for what is a short-term rental and what is it not. And so, you know, that’s just a bunch of confusion.

But plus, you’re adding a new tax, another tax for insurance broadly. So, you know, all property insurance will have a little tax or fee tacked onto that. So yeah, this is a whole swath of the economy.

Miro: SB3234 is the bill. Can check it out. SB3234 amends laws relating to the Hawaii Hurricane Relief Fund, Hawaii Property Insurance Association, so we asked the question since they are mentioned in this, tell us about the Hawaii Property Insurance Association Joe; it’s mentioned Does it have a role in this drama too and how so?

Kent: Yeah. So, there’s so many mechanics to this, but, this is the final mechanic. This is the insurer of last resort, and this is already created, it’s already a thing, the Hawaii Property Insurance Association.

It’s a state-created, quasi-government entity that was created back in the day when the insurance market pulled out of the lava zones on the Big Island — Lava zones 1 and 2; there near the Puna area.

And the thought back in the day was well no insurers will insure any homes in this area. And so we need the state to come in and guarantee insurance here.

And so when they did that, up popped, you know, hundreds and hundreds of homes there that were, you know, under this umbrella of the HPIA, and but, lo and behold, the insurance industry was right. You shouldn’t actually insure homes under an active volcano, and we saw that in 2017 or ’18 when the lava flows actually wiped out a bunch of those homes, hundreds of those homes.

And so the HPIA still exists, and it still serves as the insurer of last resort in that area. But what this bill would do is expand the HPIA to the rest of the state, and basically say that now the HPIA will serve as the insurer of last resort for all of these different buildings, and especially these ones, these 400 or so condos, that can’t get insurance.

So, you know, that might seem like a good idea because, OK, at least we have an insurer of last resort, but the devil’s in the details though, because what if this creates a moral hazard? A moral hazard is like when something warps what you would have done.

So now we’re sending a message that if you don’t take care of your building, if you don’t spend on the upgrades and maintenance, don’t worry, the state will bail you out and you can fall under one of these programs. And so, will that then inspire more buildings to fall sick and and more taxes to pay for it and so on? So I don’t know if there’s an easy way out of this problem.

Miro: Joe Kent, executive vice president of Grassroot Institute of Hawaii. So, you just said you don’t know, but you got to put that Grassroots Institute thinking cap on and, Joe, what do you think should be done to solve this insurance crisis?

Kent: Yeah, again I wish there was a silver bullet here, but at the very least, the issue should be studied more.

It sort of popped up in the middle of session as this dire issue that no one had ever heard of, and all of us wonks were trying to catch up to understand it.

I mean, even now, at the end of the session, very few people are, I think, aware of the complexities of this. So those complexities should be studied.

I mean, we don’t even know how much this would cost. Is it millions of dollars? Is it hundreds of millions of dollars? Is it billions of dollars?

We don’t know how long it would be. We don’t know if the solution is making the problem worse. We don’t know to what extent those who kept their properties while maintained are paying for this for those that didn’t, right?

And so at the very least, we need some kind of a study perhaps.

But also the state should ease down on its clamping of insurance companies. I mean, let’s not forget that it’s not a free market of insurance that we’re talking about here. You know, local insurers are clamped down by the state. And so if they want to raise their rates, they have to beg the state for permission, specifically the state insurance commissioner, and the state has tried to keep those rates low.

That’s been nice, but now they’ve been too low for too long, so the insurance companies are saying, and so now there’s this kind of problem that’s manifesting in a different way.

Now those insurance companies are saying that if the insurance rates don’t match the risk and the cost, then they’re leaving town. The insurance companies will just pack their bags and take a one-way trip to the mainland, and then we’ll be in an insurance desert, they say.

And so, you know, one way to fix that is to give insurance companies more freedom to raise their rates if need be.

Now hopefully, those raised rates [would be] lower than the 1,000% increased rates on the secondary market.

That’s a whole ‘nother concept by the way, the secondary market. If you want me to go into that, I can.

Miro: Yeah, let’s do that.

Kent: Basically, the local insurance market is sort of the first market, and they ensure smaller things. But the secondary market ensures the bigger, catastrophic events. A lot of that is like events like Lahaina, where you had a wildfire disaster. It was, you know, before it was a very low risk. It was at least seen as that. And so the secondary insurers did that.

And so, but on the secondary market, they are not clamped down by the state insurance commissioners. So they can charge whatever rates they want. And that’s why if you can’t get insurance on the first market, you have to go to the second market where insurance rates are astronomical. You know, we’re seeing some between 500% to 1,000%.

And so I’m wondering what would happen if we just allowed more insurance companies to raise their rates more freely and naturally, or if that’s a solution at all.

Miro: Yeah, wow. When you were discussing the bill, it does sound like we know, we see it. There’s some sunshine there, but there’s also a lot of cloud cover. So it sounds like there’s a lot of haze that people are starting to sift through and figure things out as far as the cost concerns on this.

Now you went over a lot in detail right there. If there is anything else people should know about this, SB3234, and anything else surrounding the Hawaii property insurance, well, the taxes that possibly could be raised here with this bill?

Kent: Yeah, well there’s another cost here, which is the ability to sell your home.

And so, you know, actually I just bought, my wife and I just bought a small little condominium with our meager budget and our interest rate almost jacked up at right on the last day, by the way, and interest rates are already high so, for the interest rate to jack up so much on the last day. We were kind of scratching our heads, like, “What’s going on here?”

Well, what was going on is the bank was unable to ascertain if the building was 100% insured. And they were unable to see if the building, you know, had all of its deferred maintenance problems dealt with, its faulty pipes, and so on.

Thankfully, the building that we were purchasing in did upgrade all of those things and they did provide proof right at the last second. And because they did that, our interest rates got knocked down dramatically.

And so, if you’re in a condo, you should really look at that ability. Is there a letter that you can procure to a bank or a financial institution to show that your building is sound? Because that could greatly affect your ability to sell your home.

You know, if you’re buying a home, same thing: Check for that stuff before you get to the last day like I did.

But, you know,  this whole insurance thing affects that. It affects if condos want to get a loan too, because they have to pay interest rates as well. So it affects a lot of things beyond just the initial cost.

Miro: Joe Kent, executive vice president, Grassroot Institute of Hawaii, joining us once again this morning. I’m Johnny.

Joe, getting close to wrapping it up on the subject of taxes. What else is happening at the Legislature when it comes to tax hikes or tax cuts? Is it good news or bad news?

Kent: Yeah, well, it’s good news, thankfully.

Miro: Yes, all right.

Kent: Except for the one I just mentioned.

But there are three tax cuts of a sort that are going through. You’ve got SB1035, which would exempt private medical and dental practices from the general exercise tax for Medicaid, Medicare, or TRICARE.

That might sound familiar to regular listeners because last year that bill was moving through, and then it died. And we were so surprised that it rose back to life at the very end of session this year. They plucked the bill from last year and they put it into a hearing, and so it’s moving forward and that would be a good thing because there’s so many doctors in Hawaii who are closing their doors. I’m talking about private practice doctors who are paying more just to stand business than they’re actually bringing in.

And that’s partly because they’ve got this 4% tax that they have to pay that the nonprofit doctors, like at Kaiser, don’t have to pay. And so there’s kind of a disparity there.

So we hope that this bill goes through, this tax cut.

Then there’s another one that would peg inflation to, excuse me, that would peg the income tax brackets to inflation. That’s HB2404. I mean, it’s just amazing. If you have lived in Hawaii for the last 30 years and just kept up with inflation you’d think your tax would be the same but it’s not.

Your tax actually — you have, without you wanting to be, you’ve been pushed into higher and higher tax brackets just because of inflation. Why don’t we peg the tax code to inflation so that you don’t do that? So that’s what that bill does and it’d be a good idea.

And then finally, SB3289 would basically tweak the state’s estate tax, also known as the death tax, so that local families could more easily keep their businesses.

I mean, right now, if you have a mom and pop shop that’s trying to pass the business down to their kid, well, now the kid has to pay this giant estate tax, let’s say 15 to 20%. And so maybe the kid would look at it and say, “I don’t want to pay that. I don’t have that money.”

And they, and so that business would be turned around and sold to some national conglomerate or something.

So this bill would help keep local businesses in local hands. And it would also send a good signal to business that, you know, we want to be friendly to our businesses here.

And so those three bills are moving forward steadily. And that’s a good thing.

Miro: Yeah, that does sound very encouraging to go out on a note when we’re talking about taxes. Tax cuts! Hopefully that indeed is the case. A lot of information and learned a lot today about the potential SB3234 passing, and it could raise insurance especially for condominiums up substantially. We’ll see about that.

Joe, once again great talking to you and we’ll be letting people know where they can go to get all your great work and from the rest of the staff as well as yourself.

Kent: Oh sure, so if you want to find out more about the work we do it’s at grassrootinstitute.org. We’re a non-profit, non-partisan think tank that does the research that is too difficult for a lot of people to do, especially with busy lives and so on. So break it down for you there at grassrootinstitute.org.

Miro: Appreciate it, and have yourself a great rest of your Sunday and we’ll talk to you again real soon, Joe.

Kent: OK, thanks so much, Johnny.

Miro: You’re welcome.

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