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Via Hawaii Magazine:  Insurance Crisis Worsens in Hawai‘i’s “Condoland”

About 400 condominiums carry less than 100% insurance coverage. The shortfall means that many potential buyers can’t get mortgages.

It’s been a bad year for Hawai‘i Condominium Associations, with many seeing the price of their master insurance policies increasing 300% or more in one year. A few buildings saw those premiums increase by an extraordinary 900% to 1,300%.

It’s unlikely to get better any time soon.

And a growing number of condos are now carrying master insurance policies that provide less than 100% replacement coverage, which means if there’s a hurricane or other disaster, there may not be enough funds to rebuild. It’s driving some buildings to seek coverage on the pricey secondary market.

It’s creating a domino effect for everyone in “Condoland,” says Sue Savio, president of Insurance Associates in Honolulu, with condo owners, buyers, sellers and lenders all feeling the impact.

“It’s financially a serious concern,” says Savio, who estimates about 400 buildings are carrying less than 100% coverage. “I think it’s probably worse than ever.”

Rates for hurricane insurance and regular homeowner policies in Hawai‘i were already being driven up by disasters around the U.S. and the world when the deadly Maui wildfires happened last summer, putting Hawai‘i on the insurers’ radar as a wildfire state. Property and casualty insurance companies that operate in Hawai‘i pay to share their risk with the global reinsurance market, a system stressed by hurricanes and other catastrophes worldwide.

State Legislature Didn’t Intervene

The insurance woes are not limited to Hawai‘i. In California, travelers insurance recently said it would raise rates an average of 15.3% for more than 300,000 homeowners while dropping coverage for others deemed wildfire risks. State Farm had already announced it won’t renew 30,000 policyholders in California this summer. In Florida, high insurance rates and rising homeowner association fees are impacting condo sales and prices.

Hawai‘i’s Legislature tried to address the condo insurance problem during this year’s session with a bill that would have revived the Hawai‘i Hurricane Relief Fund and expanded it to allow condos to get coverage, but House Bill 2686 failed to make it out of conference committee in the last days of the session.

A condo building or complex carries a master hurricane policy to cover the cost to replace the property, which can total tens of millions of dollars in many cases, with annual premiums in the tens of thousands or even hundreds of thousands of dollars.

Over the past year, Hawai‘i condo associations have seen one-year premium increases of 300% to 600%, which is four to seven times the previous cost, says Elaine Panlilio, AOAO Group Unit manager at Atlas Insurance Agency. A few buildings are looking at increases of 10 to 14 times the amount of the previous year’s bill.

Few Standard Insurance Options

There are four standard insurance companies that write property and hurricane policies for condos according to Hawai‘i’s rules. One of those four, State Farm, will only do renewals; it hasn’t issued a new policy in Hawai‘i since Hurricane Iniki in 1992.

First Insurance Co. of Hawaii and Dongbu Insurance continue to write policies, but earlier this year, the fourth, Allianz, cut the limit on its hurricane coverage to $10 million per customer, Panlilio says.

“If you’re looking at one of the newer Kaka‘ako condos here, the replacement cost for these buildings is $300 million,” Panlilio says. “If they’re not purchasing additional hurricane layers, they only have that $10 million layer of hurricane coverage.”

Failing to maintain 100% coverage can put a building on a blacklist with lenders, which makes it difficult if not impossible for a buyer to get a mortgage on a unit. Mortgage giants Fannie Mae and Freddie Mac, both of which purchase mortgages from banks and other lenders, require coverage of 100% of a building’s insurable value, which is why many banks won’t lend on units with less than 100% coverage.

Condos can add layers of other policies to close that gap, but it’s very expensive.

For example, Panlilio says that a $300 million building with only $10 million in coverage would have to buy an additional $290 million of hurricane coverage. Those additional policy layers would cost that building anywhere from $800,000 to $1 million a year, she says.

Deferred Maintenance Is a Problem

While the overall issue with the skyrocketing rates has more to do with global disasters, the condition of individual buildings also plays a factor. If a building has had many claims, or hasn’t updated its plumbing or other aging infrastructure, the association can expect a steep hike in premiums.

Alex McLaury, an agent with ACW Group in Honolulu, points to one 10-story condo that was “riddled with water claims.” Because of that, its carrier declined to renew its insurance policy.

The condo’s premiums went from $30,000 or $35,000 under the original insurer to $200,000 on the secondary market, then about $250,000, he says. This year, the premium was $375,000. Because insurers on the secondary market are not bound by state rules or rates, they can charge more than standard carriers.

“Any building that’s currently underinsured can get insurance,” McLaury recently told a gathering of the Hawai‘i Mortgage Bankers Association. “There is still insurance available. Those (policies) especially are going to be vastly more expensive. But for the excess hurricane insurance, that is available.”

To pay those higher insurance bills, associations might raise maintenance fees, assess owners a special payment or borrow money.

“They don’t have that extra $200,000, $300,000 for insurance premiums. They didn’t budget for it,” Savio says. “Some people are assessing, others are trying to finance it, like eight, nine, 10 months of the year, but then next year’s as bad. They’re still going to be short.”

Savio says some associations say they’ll take the money from their reserve funds to pay for insurance, but she reminds them that they will have to put that money back. Others say they just won’t take the full coverage because they can’t afford it, especially those in concrete condo buildings that are more likely to withstand hurricane winds.

“I mean, I understand their thinking. And I understand everybody’s thinking on this,” she says. “And they’re hoping the Legislature will do something.”

But House Bill 2686 failed to clear a conference committee a week before the session ended on May 3. It would have revived the Hawai‘i Hurricane Relief Fund, which currently has a balance of $160 million, and opened it up to condos, and also would have added to the Hawai‘i Property Insurance Association funds.

McLaury says part of the sticker shock is a result of Hawai‘i’s property insurance rates being “artificially low for a long time.” Unlike Florida with its near-annual hurricanes and California with its frequent wildfires, Hawai‘i had been mostly free of major disasters until catastrophic wildfires swept through Lahaina and Kula on Aug. 8.

Hawai‘i tends to run one or two years behind mainland trends, says McLaury. He says he recently heard a property insurance broker from the mainland say that last year was the worst she had seen in 45 years in the insurance industry.

“I think we’re now getting into probably our worst year,” he says. Rates on the mainland have started to stabilize this year, so maybe Hawai‘i can expect to see stabilization in about two years.

However, reinsurance companies have deductibles for insurance carriers that are two or three times higher than before, he says.

Because the insurance carriers have higher deductibles of their own, “they have a greater exposure, so that greater exposure is going to mean that they’re going to have to charge more to offset that exposure,” McLaury says. “That’s one reason I don’t think we’re going to see a rate reduction for the next couple of years. I don’t think we’ll ever get back to where we were … like in 2018.

Reduces the Pool of Potential Buyers

Home sales are being affected at those 400 or so buildings that no longer carry 100% replacement coverage because most banks won’t write mortgages for units in those buildings.

“Sellers may have a di¡ cult time,” says Victor Brock, a legislative chair at the Hawai‘i Mortgage Bankers Association. “They get the pool of potential buyers diminished because it’s cash buyers, or people that can come in with bigger down payments, not the whole big pool of potential buyers. And then if someone wants to refinance, they might have very little luck.”

Meanwhile, House Speaker Scott Saiki says that while there are no plans to call a special session to deal with the insurance issue, he doesn’t rule it out. He told Gov. Josh Green that he and Insurance Commissioner Gordon Ito would monitor the situation over the summer.

“If we begin to see major impact with transactions, with the ability for people to borrow funds to purchase units, then we may have to consider it,” Saiki says. “This issue is not just about the availability and cost of property insurance but all of the ramifications which impact buyers, sellers and existing homeowners who need to insure their properties.”

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The Great Wealth Transfer: A New Era of Opportunity

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