Profits from Hawaii's $500 million
market are tops in the nation, but isle
insurers point out they have lowered
premiums several times

By Rob Perez
Star-Bulletin

Hawaii's $500 million-plus auto insurance market is so profitable that the state's top regulator says he will order rate reductions if insurers don't voluntarily lower prices over the next several months.

One mainland insurance economist called the industry's profit levels in Hawaii wildly excessive -- a charge company representatives dispute.

For 1996 and 1997, the most recent years in which data is available, Hawaii's auto insurance market was the most profitable in the country, topping all other states by wide margins, according to Auto Insurance Report, an independent industry newsletter.

In 1997, for instance, Hawaii insurers earned 26.4 percent profit on each premium dollar collected, the report shows. The next highest state: Connecticut, at 17.7 percent.

And preliminary data indicates 1998 was another very profitable year for the local industry, said Hawaii Insurance Commissioner Wayne Metcalf.

If the major carriers don't file requests for rate reductions within the next several months, Metcalf said, he will use his agency's power -- authorized via a major reform law that took effect in January 1998 -- to pursue forced reductions.

Metcalf said he would rather see market competition trigger the declines, but the state will intervene if that doesn't happen.

Industry representatives, however, say the market is working and that competition is driving down prices.

The state's second largest auto insurer, AIG Hawaii Insurance Co., already has a request for a 7 percent reduction pending with Metcalf's division.

And a spokeswoman for the state's largest auto insurer, State Farm Mutual Automobile Insurance Co., yesterday said the carrier likely will file for a reduction by year's end.

AIG, State Farm and Allstate Insurance Co., the No. 3 carrier in the market, have been among the companies that have lowered rates the past several years, partly because of lower costs.

Part of the rollbacks also stemmed from the 1998 law, which mandated a 20 percent to 35 percent cut in minimum-coverage rates and a corresponding reduction in the amount of basic coverage motorists were required to purchase.

Beyond that mandatory rate rollback, Metcalf said, companies for the most part have sought only modest reductions of roughly 5 percent or less since the January 1998 reforms took effect. That's an indication carriers haven't been real aggressive in lowering prices to lure customers, especially in light of the high profit levels -- some excessive -- in recent years, he said.

Birny Birnbaum, a Texas-based insurance economist and former insurance regulator for that state, said Hawaii consumers have been paying inflated premiums to support the extraordinary profits."You have been mightily gouged," he said. "By any stretch of the imagination, over a three- or four-year period these are wildly excessive profits for auto insurance."

Birnbaum referred to data from the National Association of Insurance Commissioners that shows the local industry earned a return on net worth -- a measure of overall profitability -- of 22.6 percent in 1995, 27.5 percent in 1996 and 26.6 percent the following year. The national average during those same years ranged from 10.7 percent to 11.7 percent.

In healthy markets, regulators generally consider returns in the 10 percent to 14 percent reasonable.

What's more, the NAIC numbers tend to understate the industry's performance, so Hawaii companies actually were earning even higher profits, Birnbaum said.

While the carriers were earning such stellar returns, their customers were paying on average the second- to fourth-highest premiums in the country, according to an NAIC ranking of the 50 states. In 1997, the average Hawaii premium was $1,034, fourth most expensive nationally.

Industry executives acknowledge that they have had a string of several very profitable years, but they say the profits weren't excessive, are trending downward and that a lot of money was returned to customers via rate reductions or other means.

"I think the companies are giving back the profits we're making," said Linda Gilchrist, chief operating officer for AIG Hawaii.

Since November 1996, AIG Hawaii customers have saved roughly $53 million because of rate reductions, according to Mike Onofrietti, the company's vice president of underwriting.

Likewise, State Farm said it has returned nearly $43 million in dividends to its Hawaii customers the last five years because of lower-than-expected costs, said Carolyn Fujioka, company spokeswoman.

In addition, State Farm has had three rate decreases in the past two years, she said.

When the industry's return is viewed over a 10-year period, Fujioka added, it is less than what banks and other financial services sectors have earned.

Because rate setting is an inexact science, with companies trying to predict what their future claims will be, projections aren't always on the mark. For that reason, companies tend to be conservative in their rate-setting, not wanting to err by collecting too little in premiums.

What makes the process even more difficult is when major changes, such as the 1998 law, are made, creating even more uncertainty. The law forced companies to lower basic premiums, but it also resulted in some savings for the industry.

Now that more than 18 months have passed since the law took effect, giving carriers enough experience to gauge some of the cost implications, Metcalf said he is hoping companies become more competitive in pricing in the months ahead.

One positive sign, according to Metcalf, was First Insurance Co.'s recent filing to lower rates by about 14 percent. The company, which previously wasn't a big writer of auto insurance in Hawaii, now intends to be one. The added competition is good for a market in which only seven carriers now control more than 85 percent of the business, Metcalf said.

"What we've seen with First Insurance is what we hope to see for other carriers," Metcalf said. "If that's not forthcoming, we'll look to other remedies that the law provides."