J.P. Schmidt, Hawaii, Insurance Commissioner

Although it is undeniably one of the 50 United States, Hawaii’s location at the edge of the Pacific Rim yields creative business opportunities throughout the world. The state’s captive insurer law already has reaped dividends, and Hawaii’s port of entry law is just starting to, according to Hawaii Insurance Commissioner J.P. Schmidt.

In this exclusive interview conducted by Insurance Journal’s Andrew Simpson at a recent meeting of the National Association of Insurance Commissioners, Schmidt shared how forging relationships with China, Japan, Korea, Taiwan and Vietnam have helped to build Hawaii’s insurance industry.

Yet Hawaii is not single-minded, Schmidt indicated. With an eye on helping others to reap rewards, too, he said Hawaii hopes to start an Insurance MBA program at the University of Hawaii. The graduate curriculum would not only train local talent to become industry leaders, but the program also would allow the state to bring in regulators and executives from Pacific Rim regions so those developing economies could benefit and learn more about establishing a good insurance market.

Read on to find out more about how Hawaii is developing a healthy insurance industry.

Hawaii is in an ideal location in relation to other countries. What opportunities and challenges does that present?

J.P. Schmidt: We have very special relationships with the countries around the Pacific Rim. As a result, there are numerous business opportunities there. We’ve been very successful in the captive area. A number of Japanese companies have set up captives in Hawaii. Of course, Hawaii is in the top 10 domiciles in the world for captive insurance, and No. 2 in the United States.

If you look at the domicile, based on the amount of capital assets as opposed to the number of companies, we’re in the top five in the world. Some very large companies have set up captives in Hawaii. And we have very special relationships with various countries. Chairman Wu from the China Insurance Regulatory Commission and a number of his deputies have come to visit and talk with me. We also have good relationships with Korea, Taiwan, Vietnam and a number of countries around the Pacific Rim.

Can you explain Hawaii’s port of entry law and discuss whether any companies have taken advantage of it?

Schmidt: As a result of our relationships, I thought it was natural for us to adopt the model port of entry law from the NAIC. That allows an alien insurer, an insurance company from another country, to have an easier time doing business in the United States. The foreign insurer is able to come through Hawaii to accomplish that. We enacted that two years ago, and we have had several inquiries. We issued our first certificate of authority to Dong Bu, a Korean insurance company, one of the largest property-casualty insurers in Korea. So, it’s already showing some success.

That company then will be able to write in the other states?

Schmidt: Yes. It will be a much easier process for them.

What lines of insurance do they write?

Schmidt: Property and casualty. They’re beginning by writing automobile, homeowners and hurricane insurance, which of course is very important to us in Hawaii.

To what extent has Hawaii felt the impact of property insurers’ reinsurance struggles and pullbacks because of the hurricanes?

Schmidt: We’ve had some impact, but our market has been fairly strong. We’ve been fortunate in that we’ve had a number of new companies come into the market. Dong Bu is one. We issued a certificate of authority to Automobile Club of Southern California’s insurance company recently, as well as to ICAD, which is a dedicated hurricane insurance catastrophe insurer. That has helped, but naturally premiums are going up. I have made it absolutely clear to hurricane writers in Hawaii that they have to use Hawaii experience, not the Gulf experience, for the primary cover. But we take into account the fact that they have to pay more for reinsurance.

How do independent agents and brokers in your state help you?

Schmidt: They’re very important to my job, because they see both the happenings in the companies as well as the concerns that consumers have in dealing with consumers. I frequently speak at their luncheons and show up for their officer installations. Any time they give me a call, I’m there.

Has the issue of brokerage compensation and disclosure come up in Hawaii? If so, what has been done about it?

Schmidt: It has. And particularly because of the concerns across the nation regarding that, I launched an inquiry of my own into how it’s impacting Hawaii. We’re well along into that inquiry. We haven’t found any significant problems such as those that have occurred in other states. But we are proceeding with that, and we’re going to try to make sure that the agents understand clearly what’s OK and what’s not OK.

Can you tell us more about your initiative regarding education for risk management?

Schmidt: Education is very important, to help consumers understand insurance, to help others in society and to train people to be the next leaders in the industry. A number of executives have told me that there’s a lack of trained folks coming [into the industry] at this point. So I’ve been working with the University of Hawaii to set up a graduate degree program in insurance and risk management in its College of Business.

The university already has an undergraduate class, which is good. But I think it would be even better on many different levels to have education at the graduate level.

That, again, will enable us to work on our relationships with countries around the Pacific Rim because there’s also tremendous demand by developing economies to get good training in insurance regulation. More and more, other countries are recognizing the importance of insurance and of a good insurance market to maintain their developing economy. They want to make sure they’ve got good markets and well-
regulated markets. We [hope] to be able to set up MBA executive programs to bring regulators and executives from around the Pacific Rim to the University of Hawaii to learn more about insurance.

I’m also talking with the World Bank about providing some training on IAIS’ (International Association of Insurance Supervisors) four principles. Last year, I was chair of the Insurance Regulatory Cooperation Working Group for NAIC, which oversaw an intern program. We had an intern from SIRC (The State Insurance Regulators Consortium) at the Hawaii Department. We had six interns from India, [as well as from] insurance divisions across the United States. We had two from Vietnam, one from Taiwan, three from Brazil and about five from the China Insurance Regulatory Commission.

There’s a tremendous interest and demand, and I believe there’s a real interest on our part to provide good regulating principles to all the countries around the world because it really is a global industry these days.

Do you envision this program involving industry or government funding?

Schmidt: Absolutely. I’ve talked to executives from the insurance companies in Hawaii, and they’re all very supportive. They recognize the need. The normal way to set up this kind of program is to go and get donations and grants. It may take five to 10 years, and I’m a little too impatient for that. I think because the University of Hawaii is a public university, we can provide it with some public funding to help get [the program] off the ground and get it started. Then, as the program gets going, I have every confidence it will have no problem whatsoever supporting itself.

That really ties into your role in international relations with the countries in the Pacific Rim and everything else you’re trying to do.

Schmidt: Yes, it fits very well.

What other issues through the National Association of Insurance Commissioners have you been involved in?

Schmidt: I have been involved with the International Committee, as I stated, as well as with the Workers’ Comp Task Force. We’re involved in a number of IS (international standards) issues to provide more efficient processing of paperwork and research. I usually have three or four staff members come here [to NCOIL], and we really try to cover as many of the meetings as we can.

Workers’ compensation pre-rates recently were reduced in your state. How you rate the condition of the comp market these days?

Schmidt: The pre-rate reduction is a good sign. We had an 18 percent reduction in the workers’ comp premium this past year. It is primarily due to the good job that employers have been doing in instituting workplace safety programs. Also, the Department of Labor in our state decided that rather than having an adversarial relationship with employers, it would work with them. Instead of issuing fines to an employer if there is a violation of OSHA (Occupational Health and Safety Administration) regulations, the Department of Labor is allowing the employer to give the Department a call saying, “We’d like to have you come out and see if we have any problems.” The Department of Labor will go out, see if there are any problems, point them out and allow the employer to correct the violations without penalty. By working together, that actually benefits everyone because you have safer workplaces.

So that has helped some of the rates?

Schmidt: That has helped in particular because we’ve had much lower utilization. We anticipate that that was a correct evaluation of the premium level and that we will have only a minor change this year.

In terms of legislation this year, I understand the legislature took some action, or inaction if you will, on health insurance rates.

Schmidt: Hawaii is unique; it’s the only state in the nation that actually requires all employers to provide employees with health insurance. We have an exemption from ERISA (Employee Retirement Income Security Act). We also have a very concentrated market, where we have one health insurer that has 65 percent of the market. That’s the Blue Cross/Blue Shield plan. Kaiser has about 22 percent [market share], and then we have about three other insurers that each only have 3 percent or so.

We did have prior approval rate regulation for health insurance rates. As a result of that, we were able to attract a new health insurer to our market, which was good. It’s something I’m always working on to help provide more competition.

But this year, that rate regulation law was due to sunset and the legislature had to act to remove the sunset for the regulation to continue. There was particularly some opposition on the House side. There was considerable debate, and actually at the end of the day, there was agreement to continue it. But because of some errors in the effective date for the bill and some other things, the bill did not get enacted. So, rate regulations sunsetted, and we no longer have authority; the market will determine the rates in health insurance.

Normally, I do not have any problem at all with that — except when you don’t have a competitive market. With the government requiring the purchase, I think the government has some responsibility to have some oversight.

Does that lifting of the rate regulation affect the individual as well as group?

Schmidt: Yes.

So you’ve got less to do in terms of regulation, but I imagine you’re going to get more phone calls.

Schmidt: That’s right. I’ll still get the phone calls.

Topics USA Carriers Legislation Workers' Compensation Education Hurricane China Market Training Development Hawaii Universities