How Hawaii made its lava disaster worse

As Hawaii residents continue to flee the Kilauea eruption, Hawaii legislators are pondering a special session to address the damage. Ironically, their past actions are partially responsible for the scope of this disaster; after all, it was a state-created insurance group that incentivized living next to an active volcano.

The past few weeks have seen increased lava flow and volcanic fissures that have caused mass evacuations, with fast-moving lava flows now threatening small towns in Puna and Pahoa. But this volcanic activity isn’t as sudden as it seems. Geologically speaking, Kilauea has been continuously erupting since 1983.


A particularly devastating eruption in 1990 cost millions for private insurers, who decided that enough was enough when it came to insuring homes near Kilauea against lava damage. Soon, most insurance companies stopped insuring property in Lava Zones 1 and 2. The market had spoken. It was simply too risky to live that close to Kilauea.


But that wasn’t acceptable to Hawaii policymakers, who decided that if local insurers wouldn’t willingly insure high-risk property, they could do so under compulsion.

In 1991, the Hawaii Legislature created the Hawaii Property Insurance Agency (HPIA). In theory it was intended to be a nonprofit insurance carrier of “last resort,” formed to provide property insurance to those who lived in Lava Zones 1 and 2 and couldn’t get insurance on the private market.

Private insurance companies must join HPIA if they want to do business in the state. As part of HPIA, they contribute to a pool that shares the expenses, losses, and profits of the association in proportion to their market share of casualty and property insurance written in the state.

Of course, insurers have a mechanism to help them cope with the expense of participating in HPIA — the age-old method of passing costs on to their customers. In essence, property owners across Hawaii end up subsidizing the cost of this high-risk insurance though their own high rates.

But HPIA did work — if you consider encouraging people to live beside an active volcano to be a success. By 2008, there were approximately 2,400 HPIA policies in the region, representing $700 million worth of insurance for an area that should have been uninsurable.

Hindsight makes it easy to say that people should have known it was too dangerous to live there. However, in a state where it can be difficult to find affordable housing, HPIA’s willingness to insure homes in Lava Zones 1 and 2 provided a false sense of security. The signal that there was an extraordinary level of risk involved in buying a home in the area had been eliminated through government meddling. Creating HPIA was tantamount to reassuring people that it was safe, even desirable, to live above a network of lava tubes.

Now, thousands are homeless and Hawaii is in a state of emergency. And the long-term economic effects are likely to go beyond the damage to homes and property.

State Sen. Russell Ruderman, whose district was hit hard by the disaster, is pushing for the Legislature to meet in special session to establish resources and recovery plans for those who lost their homes and businesses in the eruption.

And Hawaii residents are bracing themselves for even more expenses. One local told the Grassroot Institute of Hawaii: “Here on Hawaii Island we have been paying inflated insurance rates for our properties, and now there is already talk of raising the property taxes because of large projected losses in county revenue, and costs will greatly outstrip the projected (county) budget, which is due June 20 and has to be balanced."

In other words, Hawaii citizens have to pay for the incentivizing of living in the Lava Zones through higher insurance rates and now will have to pay again through higher taxes. There’s no escaping the fact that disasters must draw on the public purse. But the state didn’t need to exacerbate the problem

If legislators do meet to discuss aid to victims of the volcano, they should add a pinch of prevention to their metric ton of cure. Meddling in the market increased the number of people left homeless by the eruption and added to the expenses borne by all taxpayers via the need for cleanup and relief efforts.

Policymakers can correct this mistake by listening to the warning private insurers gave nearly three decades ago. Stop requiring HPIA to insure property in high-risk areas. It’s not just a question of economics. It’s a matter of safety and common sense.

Malia Hill is the policy director of the Grassroot Institute of Hawaii (@GrassrootHawaii), a public policy think tank dedicated to the principles of individual liberty, free markets and accountable government.