All Over the Map.

Homeowners insurers are increasingly drawn to the Hawaiian market to balance their exposure in more catastrophe-prone regions of the mainland United States.

Hawaii, a scattering of volcanic islands in the central Pacific Ocean, has a decidedly smaller shoreline than hurricane-prone Florida has. That, together with Hawaii's position as a very small area in the vast Pacific, help explain why the nation's 50th state doesn't often find itself in the direct path of a tropical cyclone.

To reinsurers, that makes the Hawaii homeowners market an appealing prospect for diversifying their risk portfolios if they also are involved in homeowners business in Florida or California, with its frequent earthquakes. To direct writers, the temperate climate of Hawaii can offer a safe haven against the hailstorm and freezing losses so prevalent on the mainland.

"Hawaii catastrophe risk does offer opportunities for diversification, given that correlation to other regions is low," said Craig W. Tillman, vice president, modeling/analytical services, for RenaissanceRe Ltd., a major provider of property/casualty reinsurance.

"Hawaii risk seems pretty independent of other risks," agreed Mike Wey, vice president, underwriting, for State Farm Group, the leading homeowners insurer in the Hawaiian islands, with nearly 17% of the market in direct premium written in 2000, according to A.M. Best Co. data.

In fact, the last major storm to hit Hawaii came in 1992, when Hurricane Iniki raked the islands, leaving $1.6 billion in insured losses. Ten years earlier, Hurricane Iwa left its mark--a $137 million insurance loss. But the frequency of major storms is greater in Florida, where Hurricane Andrew swept through in 1992 and Hurricane Opal in 1995. Florida has recorded 24 major landfalling hurricanes since 1899.

Hawaii is a relatively small and compact insurance market, said Patrick Leahy, vice president of pricing and product for First Insurance Company of Hawaii, which is partly owned by CNA Insurance Cos. The state's insurance industry; however, is vulnerable when catastrophes strike. "The homeowners line in the state in 2000 generated $127 million in premium, of which less than half would be associated with hurricane perils," he said. "Iniki was a $1.3 billion storm, of which at least half was personal. So even though hurricanes don't happen very often, there's not a lot of money in the bank over the years when they do."

State Farm and other direct writers well remember the aftermath of the financially crippling Iniki when two domestic companies went belly-up and other insurers retreated from personal lines. That insurance crisis prompted the state to establish the Hawaii Hurricane Relief Fund in 1993 to provide coverage for Hawaii homeowners. The fund stabilized the marketplace and encouraged insurers to re-enter. By 1997, private insurance companies were returning, and, as of December 2000, the relief fund had stopped writing new business.

To many, this is a signal that the Hawaii homeowners market is back in force and competition is heating up.

After Iniki

For Honolulu-based First Insurance Company of Hawaii, the losses from Iniki hit hard. The immediate effect was a $300 million gross loss that had to be recapitalized by Continental Insurance Co. and Tokio Marine & Fire Insurance Co., which shared ownership of the domestic insurer at the time, Leahy said.

"The aftermath was that reinsurance costs skyrocketed-they went up about 10 times," he said. "The capacity of the reinsurance program that we had dropped by close to two-thirds, and the retention in the program went from virtually nothing to $25 million. So it forced us to take a real hard look and then a hard line on the exposure that we had."

The company decided that to protect itself and its policyholders in the long term, it had to get out of the personal property business. It nonrenewed all of its monoline homeowners policies. "We had a personal package at the time that had a guaranteed-renewal endorsement in it for five years, so we did not nonrenew that book of business, except for the policies that were coming up on their fifth-year anniversary," Leahy said. "We also had a significant commercial lines book, and although we didn't nonrenew all of that business, we nonrenewed a significant amount of it."

When the relief fund was formed, it gave First Insurance the ability to get back into the personal property business, which it did, Leahy said. Meanwhile, the company was exploring opportunities to be independent of the fund. "We were able to put together a reinsurance program that was a multiyear program and, in 1998, we got out of the Hurricane Relief Fund and rolled all of that business into First Insurance Co.," Leahy said. So when the fund elected to stop doing business late last year, it had no impact on First Insurance.

The company now is 50% owned by CNA and 50% owned by Tokio Marine, said First Insurance President Allen Uyeda. CNA has its base of business primarily in the United States, and Tokio Marine is primarily in Asia. But in the increasingly global business world, they are trying to establish partnerships to help them serve their clients worldwide, Uyeda said. While Tokio Marine has many important clients in the United States, it does not have a big presence there, he noted. "Because we have a larger market share, we can have a bigger staff, we can bring better service to their clients than they could with a small regional office," Uyeda said.

Like First Insurance, State Farm took a reeling blow from powerful Iniki. "That catastrophe came to a total of around $150 million for us at State Farm," Wey said, noting that about $100 million was on the homeowners side and about $50 million was on the commercial multiperil part of the business. "Without a doubt, it really wiped out about 10 years' worth of total premium," he said.

From State Farm's perspective, this was a learning experience, Wey said. "One of the things that we learned is that we were probably a little underpriced in terms of our rate needs," he said.

After viewing new catastrophe-modeling techniques, the company realized its policies were probably 20% to 25% underpriced, Wey said. The company also took a hard look at its underwriting practices. "It's always a time, post-event, to reanalyze your underwriting guidelines," he said. "I wouldn't say that there was a tremendous amount of change. But it underscored our continued concern with property that is located near the water's edge that is exposed to, particularly, water surge during a hurricane event. It underscored clearly the continued need to support the loss-mitigation opportunities in the construction area."

These days, State Farm looks at spread of risk quite closely from an underwriting perspective. "As a domestic company our opportunities to spread that risk on a global basis are not there as they are for some other more global organizations," Wey said. "We've taken some steps-not so much on a primary basis but on a secondary basis-to spread some of that risk."

In March 2000, for example, State Farm was involved in a $200 million earthquake swap with Tokio Marine & Fire. The companies agreed to swap their quake risks in the United States and Japan in a bid to lessen their concentrations of exposure. The deal was considered unique, in that its triggers were based on the magnitude of the quake rather than the amount of insured losses. The percentage of the coverage limit to be paid increases with the severity of the quake.

The two companies know what it is to be at the center of a monumental catastrophe. State Farm paid more than $2.5 billion in claims from the 1994 Northridge, Calif., earthquake. A year after the Northridge quake, Kobe, Japan, was struck by a massive quake that caused more than $100 billion in economic losses, although relatively little of that was insured.

Modeling the Risk

The Hawaii market also looks promising to Risk Management Solutions, the Newark, Calif.-based catastrophe-modeling firm, which released its upgraded Hawaii hurricane model in August. The company said this new version will offer improved risk-assessment capabilities to insurers that are re-entering the market or that want to start writing hurricane coverage there.

The other leading modelers, Applied Insurance Research of Boston and Eqecat of Oakland, Calif., a subsidiary of EQE International, also have hurricane wind models applicable to Hawaii. David Lalonde, senior vice president of AIR, said his company worked with the Hawaii Hurricane Relief Fund right up to the time it stopped writing new policies. "We're seeing more activity," Lalonde said of insurers' use of AIR's model. "Clients use the model to see whether they want to retain the risks themselves."

State Farm is licensed with RMS and Eqecat to use their catastrophe models, Wey said. The insurer then runs its own data through the commercial models.

RenaissanceRe relies on a combination of vendors' models as well as its own internal model, REMS, a property exposure management system. "Using multiple models in underwriting allows us to avoid individual model bias as well as gauge the range of modeling uncertainty for a particular risk or regional peril," Tillman said.

First Insurance employs several commercial catastrophe models, including the RMS Hawaii model, in writing its homeowners and commercial policies. The company also is the largest commercial insurer in Hawaii, Uyeda said.

Market Characteristics

Insurers say the Hawaii homeowners market is growing more competitive, although there still is more activity in commercial lines.

"The homeowners side is getting better," Wey said. "It's continued to get better ever since the HHRF came into play." Nearly a decade after Hurricane Andrew, the most destructive hurricane in terms of its $15.5 billion reported losses, the industry is seeing continuing interest in Hawaii as a place to write business, he said.

"It's a fairly competitive market," Leahy agreed. "It's a pretty narrow market--four competitors in Hawaii have 60%, and nine competitors have 91% of the homeowners business. I guess I would call it a somewhat fragile market--it doesn't take much to spook the market. But it's been pretty stable for the last four or five years."

From an underwriting perspective, the Hawaii homeowners market is markedly different from that of the mainland United States.

For example, in issuing homeowners policies, insurers have to consider the proximity of the volcanic islands' lava zones. "It's probably the only place that that becomes an issue--we don't see that in Illinois and Texas," Wey said. There are some fairly small towns that are affected by those lava zones. Insurers also have hillside challenges with some of the continued new development of both individual homes and commercial-residential condominiums and apartment complexes being built on very steep hillsides, he said.

Light Construction

Hawaii has mostly frame houses, and those more than 30 years old usually are built of single-wall construction rather than double-wall construction, said Tony Abad, assistant vice president, personal lines, at First Insurance.

"Also, we have some homes that are post-and-pier type vs. slab type," Abad said.

A number of homes in rural areas have corrugated iron roofs, Leahy noted. "It's very light construction, and the construction system doesn't tie the roofing to the walls, to the foundations, very effectively," he said. "So in extremely high winds, they don't perform that well."

Uyeda added that the warm climate induces a lot of homeowners to build fairly long overhangs on their houses.

"While that's good for keeping the sun out of the windows, it acts like an air foil in a storm," he said. "That's been a point of construction I think people have come to understand better as hurricane risk has become more of an issue."

AIR's Lalonde said Hawaii is unique in that when major storms do make contact, they can hit each island with different degrees of severity. "They don't have to make landfall, either, to have an effect," he said. "The potential is there for a big event."

But the flip side to the homeowners risks, Wey emphasized, is that insurers don't need to worry much about fire perils.

"We have good fire experience in Hawaii," he said. "Because of the moderate climate, there's not a lot of heating and air conditioning that goes on throughout the year, so there aren't the wood-burning stove and furnace breakdowns, those things that you have on the mainland."

All in all, he summed up the liability peril in Hawaii as "pretty vanilla."

"There are not a lot of unique exposures," Wey said. "So from a pure underwriting perspective, it's a good place to do business."

Hawaii Fire and Homeowners Multiple Peril, Top Writers--1996-2000

($ Thousands)


                            2000              1999              1998
                               %    Direct       %    Direct       %
                          Market  Premiums  Market  Premiums  Market
Companies                  Share   Written   Share   Written   Share

State Farm Group           16.81   $35,060   16.75   $32,341   12.12
CNA Insurance Cos.         14.45   $30,129   13.69   S26,427   12.46
Ace INA Group               8.24   $17,178    4.00    $7,725    5.34
Island Insurance Group      7.95   $16,576   10.06   $19,429   11.20
Allstate Insurance Group    7.09   $14,789    8.21   $15,853    8.24




                                      1997              1996
                            Direct       %    Direct       %    Direct
                          Premiums  Market  Premiums  Market  Premiums
Companies                  Written   Share   Written   Share   Written

State Farm Group           $22,844   12.44   $25,913   11.85   $24,341
CNA Insurance Cos.         $23,485    7.57   $15,762    7.43   $15,251
Ace INA Group              $10,063    4.06    $8,447    3.25    $6,682
Island Insurance Group     $21,115   11.91   $24,798   13.33   $27,374
Allstate Insurance Group   $15,539    7.01   $14,592    6.50   $13,349



Source: A.M. Best Co. Statement and Competitive Analysis Report Product