STAND. COM. REP. NO.1134

Honolulu, Hawaii

, 2001

RE: S.B. No. 1067

S.D. 1

H.D. 1

 

 

Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2001

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred S.B. No. 1067, S.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO LIMITING HURRICANE PROPERTY INSURANCE RISK,"

begs leave to report as follows:

The purpose of this bill is to reduce the potential for residential hurricane insurer insolvency in the event of a hurricane, by requiring the Insurance Commissioner (Commissioner) to use an actuarial analysis to evaluate a residential hurricane insurer's ability to pay claims.

Testimony in support of this bill was submitted by the Insurance Division (Division) of the Department of Commerce and Consumer Affairs and Hawaii Association of Realtors. The Hawaii Insurers Council opposed the bill.

Currently, there is no legal authority allowing the Insurance Commissioner to determine, on a continuing basis, whether an insurer of catastrophic risks is over exposed. Under the law, insurers must meet certain capitalization requirements before doing business in Hawaii. The licensing process also allows the Division to examine an insurer's ability to pay claims. However, the Division cannot legally withhold a certificate of authority if capitalization requirements are met.

After an insurer receives its certificate of authority, it is subject to triennial examinations which may be accelerated depending on the Division's review of the insurer's quarterly reports. Should a review of these reports reveal that the insurer has a cash flow problem or that its finances are suspect, the Division may initiate supervision or seizure proceedings in an attempt to remedy the situation. For a typical insurer that pays claims regularly in addition to collecting premiums, this process allows the Division to detect adverse trends and take appropriate corrective action to stave off an insolvency.

On the other hand, when an insurer covers mostly hurricane risks, there is no slow "bleeding" of the company for the Division to detect. Until a catastrophe does occur, everything will probably appear fine on paper. Premiums will continue to be paid and coverages will be placed. The insurer will not be held accountable for policyholder claims until a hurricane strikes. When this occurs, if the insurer has insufficient assets or reinsurance to meet its obligations, it will be too late for the Division to take any other action than to seize control of the insurer and proceed into liquidation.

This bill attempts to provide the Division with the tools needed to assess the financial health of residential hurricane insurers.

This measure has been amended in light of concerns expressed by interested parties and a compromise developed by the Division. The requirement of an actuarial analysis has been removed. Instead, this measure:

(1) Provides that insurers will obtain an estimate of the maximum loss the insurer faces in the event of a 100 year hurricane, that is, a hurricane of a severity unlikely to occur more than once in 100 years;

(2) Requires that the Commissioner be given access to that estimate, as well as financial information, aggregate premiums, coverage limits, and other information necessary to determine the insurer's ability to cover its 100 year hurricane insurance exposure;

(3) Authorizes the Commissioner to further examine the insurer's financial health and commence supervisory and other appropriate proceedings if the insurer's capitalization and available reinsurance is determined to be inadequate; and

(4) Takes effect upon approval, but provides that insurers will not be subject to the Act until January 1, 2002.

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1067, S.D. 1, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1067, S.D. 1, H.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Consumer Protection and Commerce,

____________________________

KENNETH T. HIRAKI, Chair