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In Hawai‘i, insurance costs are rising. We are not alone in that. This is a nationwide phenomenon.

There are many factors involved including rising property values, monetary inflation, and supply and demand issues. But some states face catastrophe (“CAT”) risk, and in Hawai‘i the main CAT risk is from hurricanes.

Because some insurers write business nationwide and many buy reinsurance (insurance for insurance companies) for CAT risk, the Hawai‘i risk pool cannot be considered in isolation. CAT events in other locations will affect Hawaii premiums.

Real estate is an important part of Hawai‘i’s economy. Mortgage lenders play a big role. A bank will not lend on residential real estate without insurance for hurricane loss. That is partly a decision by the local lender and is also a requirement of the secondary market in mortgage loans (e.g., Fannie Mae and Freddie Mac).

Insurance is a pass-through. Each year an insurer collects premiums in an amount designed to cover loss claims, claims adjustment expense, and administrative costs.

Money flows in and flows out. Insurer reserves are built over a long period of time and are needed because sometimes annual loss claims exceed annual premium revenues. Generally, small losses happen more frequently than large losses.

As we all put our heads together on possible solutions to rising insurance prices, we should bear in mind the idea from a book on policy by Eugene Bardach and Eric Patashnik not to put a proposed solution in the framing of the issue to be solved. That is, we should keep an open mind.

Some questions worth considering:

• Is CAT risk insurable? The answer is “yes and no.” We can insure up to a point, but we cannot insure against the worst-case scenario. We use probabilistic estimates of loss frequency and severity to guess at what might happen, but we don’t have a crystal ball.
• Can we continue to set insurance coverage limits for CAT losses at the full value of the insured building? The answer is “not sure.” If the relationship between loss frequency and severity does not change significantly, the answer is “yes.” If climate change causes a significant change in that relationship, the answer may be “no.”
• Is there a market solution? That is an open question, but one should consider the option of no government intervention and allowing the market over a period of years to sort this out. The ability of a market solution to work depends mostly on the frequency-severity issue discussed in the prior numbered paragraph. To put that more simply, it depends on the weather.
• If there is a government intervention, can it be only at the state level or must it be partly a nationwide, federal law solution? The answer is “not sure,” and it again depends on loss frequency and severity.
• Have other policy decisions made the situation worse? Answer: Yes, and housing issues have been discussed frequently. Note that the decision to extend the mandatory condo association reserve look forward from 20 to 30 years accelerated future costs into the present. There may be other seemingly unrelated policy decisions.

I have a premonition that these matters will be decided by powerful forces beyond my control. But we should all go into any solution with our eyes open.

And we should not unduly blame our policymakers if their solution is imperfect.

Why? Because parts of this are not within anyone’s control. And because no solution can be perfect.