This article is part of a series sponsored by the Risk Insurance Education Alliance.
Most states and U.S. territories allow captive insurance companies to cover a variety of business risks. However, no state or territory allows them to underwrite personal auto risk, and no state or territory will allow them to underwrite homeowner risk until mid-2024. In mid-2024, the Utah Legislature lifted the ban on captives providing insurance for homeowners risks, allowing homeowners associations (HOAs) to form association captives to insure homeowners risks, subject to Commissioner approval (Captive International, 2024).
Is this a good idea? Supporters of this recent change point to ongoing challenges with the affordability and availability of homeowners insurance and argue that the change is justified on those grounds. HOA captives can address availability issues by offering homeowners insurance to their members. However, to provide this coverage, the HOA must raise $500,000 in capital to establish a captive insurance association in Utah (Utah Captive Insurance Association, 2024). HOAs must also cover operating expenses and ensure affordable reinsurance, especially for catastrophic losses that could threaten solvency. Therefore, not every HOA can offer this coverage; creating and operating a captive requires significant financial resources.
Is it more affordable to insure through self-insurance? Maybe. Through an HOA, members/insureds may be required to take certain loss prevention (e.g., planting vegetation to prevent flooding) and control measures (e.g., installing thermal sensors to alert owners of fires), thereby reducing overall claim costs. Many commercial captive insurance companies improve cash flow by retaining premiums and earning investment income on reserves and capital. The same goes for HOA captives. Additionally, if self-insurance proves profitable, the profits can be shared with HOA members, thereby lowering their net insurance costs.
Given this information, why have other states and territories been slow to adopt Utah’s approach? One concern may be risk concentration. HOA captive insurance provides coverage for homeowner risks that are concentrated in a specific geographic area defined by the type of development (for example, an apartment building, townhouse community, neighborhood subdivision, or planned community). Regardless of the type of development, this geographic concentration increases risks, particularly the risk of natural disasters, severe weather events and economic downturns. Natural disasters and severe weather events directly damage property. In contrast, a recession has an indirect effect: rising unemployment leads to less property maintenance. This in turn increases risk exposure and thus insured losses. During an economic downturn, foreclosures increase and property values decrease. Some homes may have mortgage balances that exceed their market value, creating additional moral hazard.
The second concern is the volatility of homeowners insurance losses. In areas prone to wildfires, earthquakes or other disasters, losses are difficult to predict. This makes accurate pricing challenging. Even a pricing error may require a major HOA appraisal to remain captive solvent. Captives do rely on reinsurance to manage catastrophic risk, but HOA captives, unlike more diversified captives or multiline insurers, have limited ability to spread risk across different product lines. While HOA captives may cover other HOA-related risks, such as directors and officers liability, they are still limited in size and scope compared to most multi-line property and casualty insurance companies.
The third reason relates to regulatory differences. Rules for licensed primary market insurers generally provide stronger protections for consumers than captive insurance purchasers, who are considered more sophisticated and better able to address issues such as insurer misconduct, unfair practices, or the consequences of an insurer’s insolvency. Among these issues, self-insured insolvencies are particularly problematic for homeowners because they lack state (or territory) guarantee funds to pay claims; they may lack other financial resources to make necessary repairs; losses reduce their homeowner equity; if they have a mortgage, lenders will require them to carry insurance liability, and it may be difficult to find insurance even if the homeowner does not have a loss.
A captive HOA bankruptcy can leave homeowners with a mortgage balance and a loss of homeowner equity, thereby reducing their equity. Still, the reduction in consumer protections may be a trade-off that some homeowners may be willing to accept in order to obtain affordable homeowners insurance through HOA self-insurance.
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Nineteen months have passed since Utah adopted the latest innovation in captive insurance regulation: allowing HOA captives to purchase homeowners insurance. Initially hailed as the answer to homeowner insurance availability and affordability issues, especially in areas hit by natural disasters and severe weather events, the promise of this innovation has yet to be realized. To date, no HOA association has formed a self-insurance agency in Utah to provide homeowners insurance.
Currently, other states and U.S. territories appear to be taking a “wait and see” approach before allowing HOA captives to settle within their borders. This seems sensible given concerns about geographic concentration of risk, volatility in homeowners insurance losses, and reduced consumer protections, particularly in the event of bankruptcy.
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Captive International. (March 22, 2024). Utah changes captive statutes. Excerpted from Captive International:
Utah Captive Insurance Association. (2024). Homeowners Association Captive Association. Retrieved from Utah Captive Insurance Association:
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