All Fired Up

Frustrated with skyrocketing insurance premiums, Hawaii's building industry association takes matters into its own hands

February, 2003

Veteran developer Craig Watase thought he had it figured out when it came to insurance. While preparing to renew a policy for one of his projects, he aptly budgeted for a 30 percent increase of his $50,000 property-insurance premium.

So much for planning, Watase soon learned. The new premium for his 70-unit Kapolei subdivision, his insurance carrier informed him, would top $110,000, more than double his previous rate.

Surprisingly, his broker didn’t even flinch at the seemingly impossible increase. “She goes, ‘You’re lucky. You should see some of the others,’” recalls Watase, president of Mark Development Inc. and immediate past president of the Building Industry Association of Hawaii (BIA).

Nationwide, rapidly rising insurance rates have caused big-time worries for businesses, large and small alike. The insurance industry cites a combination of factors behind these hikes: the Sept. 11 attacks, large settlements in liability lawsuits (e.g. mold and faulty-workmanship cases), a weak stock market and a rebound from historically depressed premium levels.

“We’ve seen between 30 percent to 300 percent increases in insurance premiums, from developers all the way down to subcontractors,” says Janet Ng, senior vice president of Aon Risk Services, Construction Service Group. “The market already started hardening before Sept. 11, which really just accentuated the situation.”

While heading the BIA, Watase had lobbied yearly at the state Legislature for a reduction in workers’-compensation costs for employers. After one too many disappointing sessions, he realized that battling the insurance companies was not the answer.

Watase proposed an alternative to his fellow BIA members: create their own insurance company. This year, the association will begin offering workers’-comp and general-liability policies through its new captive insurance company, which will function as a separate, legal entity.

“Initially, our premiums would be competitive with other companies, but the difference is everyone is an owner in the company,” Watase says. “If we manage risk accordingly, after about three years, we should start to see a return on these premiums. That’s the benefit — eventually, there should be a significant rebate on your premium.”

Although forming a captive was the clear solution in Watase’s mind, convincing nearly 500 BIA members was another matter. The captive would need a minimum of $750,000 in startup capital and $2 million in premiums just to get started. Luckily, Watase was able to present some encouraging research: More than a dozen of the 100 state-licensed captives are owned by Hawaii-based corporations, including Servco Pacific Inc. Nationally, building associations in Georgia and Washington state had successfully formed their own captives, as well.

Still, “It was a scary thing for us,” says general contractor Randy Lau, president of Designer Built Systems Inc. “We’re putting up our risk pool of money ourselves, so it was easy to get cold feet.”

That anxiety was offset by members’ frustration with their current policies, Lau says. As a contractor, his concern was that steep premium increases would drive more firms to operate without insurance and thus, without licenses.

As a developer, Watase worries that skyrocketing rates could cause a slowdown in Hawaii’s booming construction industry. “Really, I’m just worried about whether projects are going to move forward or get killed because of these high premiums,” he says.

For many hesitant BIA members, Sept. 11 sealed their decision to support the formation of their own captive. That’s when most of them saw their premiums hit seemingly astronomical levels.

“It’s difficult to get members to not only give us premiums, but to invest equity,” Watase says. “I tell them, ‘You’ve gotta see beyond, out two to four years, and invest in the future.’ That’s not an easy thing to do when some guys are just trying to make payroll. It requires courage, but I expect no less from contractors.”

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