Hawaii Insurance Risk In Spotlight After Maui Wildfires

The Hawaii wildfires could be a foreboding sign of what's to come regarding the state's insurance risk.

An insurance crisis has taken hold in states with a high risk of costly natural disasters, specifically areas subject to increased impact from climate change, such as coastal states like Florida, Louisiana and California. In July, Farmers Insurance became the fourth major insurance agency to leave Florida in the past year, citing the increased risk of hurricanes. Other states are likely to follow as the risk of natural disasters and their anticipated damage grows. The crisis has limited homeowners' options for insurance and caused premiums to skyrocket.

Last week, deadly wildfires raged across Hawaii. The fires spread across several islands, spurred by winds from Hurricane Dora, and hit Maui particularly hard. It is believed the fires were generated by a mix of hot and dry conditions, but their direct cause is not yet known.

As of Tuesday, at least 99 people were reported dead from the devastating fire that engulfed parts of Maui, and the island's historic town of Lahaina was mostly destroyed. Thousands of people were displaced, and hundreds of others remain missing. Search-and-rescue efforts continue to comb through the rubble.

It is the most recent example of how natural disasters can raze entire cities, but experts said the insurance crisis hasn't reached Hawaii yet.

Steve Bowen, the Chief Science Officer at global reinsurance firm Gallagher Re told Newsweek that Hawaii is not at the point of an insurance crisis like other states, such as Florida.

"Florida, Louisiana and California are certainly dealing with a more urgent situation," Bowen told Newsweek.

However, Hawaii is "emblematic of what we are seeing throughout the country," Bowen said.

The wildfires in Hawaii are shaping up to be the second costliest disaster in Hawaii on record regarding insured dollars. Hurricane Iniki in 1992 will likely remain the costliest with a loss of $3.4 billion in insured dollars in today's money. Insurance estimates from the wildfires are between $1 billion and $3 billion, but it could take up to a year for the numbers to be finalized. Bowen said that the economic costs, of which a sizeable portion is generally not covered by insurance, are expected to be much higher.

However, Hawaii has experienced insurers pulling from the market. In July, Universal Property and Casualty Insurance Co. of Florida announced its intention to withdraw from the Hawaii homeowners, condominium and renter's insurance market, impacting about 1,500 home-and condominium policies. The policies will terminate by August 31, 2024. The agency cited its "limited traction" as the reason it was leaving the state, according to a report by the Hawaii Tribune-Herald. The agency didn't mention the increased risk from climate-related disasters as reason to flee.

Bown said that the recent wildfires in Hawaii could cause regional insurance carriers to "take a step back" and reevaluate the risk. However, the ability of insurers to predict risk from wildfires is still limited at best.

"Risk modeling for wildfires is still in its infancy," Matthew Wibbenmeyer, a fellow at nonprofit research organization Resources for the Future, told Newsweek. "Insurers are not able to predict with a high degree of confidence what the risk is at a given location. Not being able to do that, some of them are dropping out of the market."

In addition to a challenging risk assessment, Wibbenmeyer said that the burned area from wildfires has quadrupled in Hawaii over the last few decades.

However, Hawaiian politicians are working to combat an insurance crisis before it has the chance to take hold.

For example, state Representative Greggor Ilagan proposed several solutions in July to mitigate the excessive cost of insurance, including seeking a state subsidy for the Hawaii Property Insurance Association to make premiums more affordable and to establish a consumer alert system that notifies policyholders when their insurance provider plans to leave.

Newsweek reached out to Hawaii Governor Josh Green's office by email for comment.

Update 08/16/2023, 11:53 a.m. ET: This story was updated with additional information.