Self-Insurance Is No Insurance

by Tom Yamachika, President, Tax Foundation Hawaii

One of our newer lawmakers recently penned a piece, “Consumer-Centered Property Insurance Can Help Condo Owners” (Civil Beat, Oct. 18), floating the idea that condominium associations should consider self-insurance as one way to deal with the difficulties, costs, and practicalities of getting insurance for condominium common areas.

The author notes that self-insurance entails putting away a large amount of money in reserve for disasters, which is what insurance companies insuring such disasters do.  Can’t you just cut out the middleman then?

The short answer is that self-insurance is no insurance.  People have to rely on the self-insuring company’s size, availability of large monetary reserves, and ability to raise more money should the need arise.  That’s why governments sometimes insure themselves.  The federal government, for example, self-insures against traffic accident liability.  It’s big enough to pull it off, and it has the power to tell states that mandatory insurance coverage laws don’t apply to it.

In contrast, the typical condominium association is several orders of magnitude smaller than a typical government.  Lenders, both lending to the association and to its constituent members, often impose strict insurance requirements as conditions for providing new or keeping existing financing.  In addition, condominium associations are always facing pressure to deal with occasional but costly results of aging such as concrete spalling, road deterioration, and water incursion damage.  They simply might not have the ability to keep a large wad of cash around while association members clamor for reducing maintenance fees.  In short, the typical condominium association would have a tough time maintaining self-insurance.

One variation on the idea that might be more easily accepted and accomplished is called captive insurance.  In a typical captive insurance scenario, one large company or a collection of several companies with common interests pays into a fund.  The fund then gets turned into a mini-insurance company so the fund can’t be touched unless a disaster, or other risks that the captive company agrees to insure, occur.  One advantage to doing it this way is that a captive insurer is a legitimate insurance company and, as such, is allowed to buy reinsurance on the secondary market (a privilege denied to mere mortals and ordinary companies).  With reinsurance, the insurer can elect to cover losses up to a certain size, for example, with the reinsurer stepping in when losses go from bad to ridiculous.

Another advantage to this route is that Hawaii has plenty of experience with captives since it became a captive domicile in 1986.  Indeed, at about this time last year Hawaii received the 2023 Domicile of the Year Award at the U.S. Captive Review Awards held in Vermont.  The award was given in the so-called heavyweight category, domiciles that were able to boast gross written premiums of more than $5 billion.  At the time, Hawaii had 263 captive companies from across the U.S. as well as Asia and the Pacific. As of December 31, 2022, Hawaiʻi was ranked as the fifth-largest U.S. captive domicile, and the eighth-largest globally, by number of captive companies licensed. In addition, in 2022, the Hawaiʻi captives had written premiums of $15.6 billion, an increase of $3.3 billion from the previous year and the largest increase in captive written premiums of all captive domiciles globally in 2022.

We offer this as an alternative to self-insurance for folks trying to find options in our current insurance crisis.