Hawaii Bill Seeks to Expand Captive Insurance Role in Catastrophic Risk

Hawaii lawmakers are advancing legislation that would clarify and expand the role of captive insurance companies in addressing catastrophic property and casualty risks, reflecting ongoing pressures in the state's insurance market. The bill has passed the Senate and is now under consideration in the House.

Senate Bill 2950, as amended (SD1), proposes to expressly authorize captive insurers to underwrite, reinsure, or otherwise assume catastrophic risks, subject to approval and ongoing supervision by the state's Insurance Commissioner. The bill is intended to address market instability driven by Hawaii's exposure to natural disasters, geographic isolation, and periodic reductions in underwriting capacity.

According to the bill's findings, catastrophic risks, including hurricanes, wildfires, floods, and earthquakes, have become increasingly difficult to insure through traditional markets, particularly for commercial and institutional policyholders. Lawmakers noted that uncertainty around the scope of permissible captive activity has limited broader participation in addressing these exposures.

The proposed legislation would define "catastrophic property and casualty risk" to include low-frequency, high-severity events and related losses, such as business interruption, layered liability exposures, and aggregate losses from a single occurrence. It would also allow captive insurers to participate in reinsurance arrangements, risk pools, and other risk-sharing structures tied to these risks.

Under the bill, captive insurer participation would generally be limited to commercial, industrial, governmental, nonprofit, and institutional risks, rather than personal lines, unless specifically approved by the commissioner. The measure also grants the commissioner authority to impose enhanced capital, surplus, and risk-based solvency requirements, informed by catastrophe modeling, stress testing, and actuarial analysis.

Additional provisions require captive insurers engaging in catastrophic risk underwriting to provide detailed reporting on exposures, reinsurance arrangements, and financial condition. The commissioner would also have authority to require catastrophe modeling, stress testing, and independent actuarial opinions as part of ongoing oversight.

Supporters of the bill argue that expanding the use of captive insurance mechanisms could help stabilize Hawaii's insurance market by retaining risk capacity within the state and providing alternatives where traditional insurers have reduced participation. Public testimony cited recent climate-related events and insurance availability challenges as drivers for considering new approaches.

However, the proposal has raised concerns among regulators and industry stakeholders. In testimony before the Senate Committee on Commerce and Consumer Protection, the Hawaii Department of Commerce and Consumer Affairs opposed the bill, citing potential consumer protection gaps and regulatory challenges. The Department noted that captives are not currently subject to the same oversight as admitted insurers, particularly with respect to rate regulation and market conduct.

The Department further cautioned that allowing captives to underwrite risks beyond their affiliated corporate groups could blur the distinction between captive insurers and traditional insurers. This shift, it argued, could introduce broader regulatory implications, including potential alignment with National Association of Insurance Commissioners accreditation standards.

Similarly, the Hawaii Captive Insurance Council highlighted structural concerns, noting that the state's captive insurance framework is built around insuring risks within a defined corporate family. The organization indicated that the bill introduces a risk-based model that could allow coverage of unaffiliated entities, representing a departure from the existing statutory structure.

As drafted, SB 2950 reflects a broader policy discussion taking place across jurisdictions regarding the role of captives in addressing capacity constraints in catastrophe-exposed markets. While some states have explored expanding captive insurance flexibility, the extent to which captives should participate in broader insurance markets, particularly for catastrophic risk, remains an evolving issue.

The bill is now under consideration in the House, where stakeholders continue to evaluate how expanded captive insurer authority could be balanced with regulatory oversight and consumer protection objectives.