This article is part of a sponsored series by Risk Insurance Education Alliance.

Most states and U.S. territories permit the establishment of captive insurance companies to insure a variety of commercial risks. However, no state or territory allows them to insure personal auto risks, and before mid-2024, no state or territory allowed them to cover homeowners risks. In mid-2024, Utah’s legislature removed its ban on captives insuring homeowners risks, allowing homeowners associations (HOAs) to form association captives to cover them, subject to the commissioner’s approval (Captive International, 2024).

Was this a good idea? Proponents of the recent change point to ongoing challenges with both the affordability and availability of homeowners insurance, arguing the change is justified on these grounds. An HOA captive can address availability concerns by providing homeowners coverage to its members. However, to offer this coverage, an HOA must raise $500,000 in capital to establish an association captive in Utah (Utah Captive Insurance Association, 2024). The HOA must also cover operating expenses and secure affordable reinsurance—especially for catastrophic losses that could threaten solvency. Consequently, not every HOA can provide this coverage; substantial financial resources are required to create and operate a captive.

Will coverage be more affordable through a captive? Possibly. Through their HOA, members/insureds may be required to adopt certain loss-prevention (e.g., vegetation plantings to deter flooding) and control measures (e.g., installation of heat sensors to alert owners to fires), thereby reducing total claims costs. Many commercial captives improve cash flow by retaining premiums and earning investment income on reserves and capital. The same could be true with HOA captives. Also, if the captive proves profitable, profits can be shared with HOA members, reducing 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. An HOA captive insures homeowners risks that are concentrated in specific geographic areas defined by the type of development (e.g., condominium buildings, townhome communities, neighborhood subdivisions, or planned communities). Regardless of the development type, this geographic concentration increases risk, particularly from natural disasters, severe weather events, and economic downturns. Natural disasters and severe weather events directly damage property. In contrast, economic downturns have an indirect impact: rising unemployment reduces property maintenance. This, in turn, increases exposures and, consequently, insurance losses. During downturns, foreclosures increase, and property values fall. Mortgage balances for some homes may exceed their market values, creating additional moral hazard risks.

A second concern is the volatility of homeowners insurance losses. In areas prone to wildfires, earthquakes, or other catastrophes, losses are difficult to predict. This makes accurate pricing challenging. Even a single pricing error could require a significant HOA assessment to keep the captive solvent. Captives do rely on reinsurance to manage catastrophic risks, 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 exposures, such as Directors and Officers Liability, their scale and scope remain limited compared to most multiline property and casualty insurers.

A third reason relates to differences in regulatory oversight. Rules for licensed primary market insurers generally provide consumers with stronger protections than those for captive insurance buyers, who are viewed as more sophisticated and better able to address issues such as insurer misconduct, unfair practices, or insurer insolvency fallout. Of these issues, captive insolvency can be especially problematic for homeowners because they lack state (or territory) guaranty fund coverage to pay claims; they may lack other financial resources to make needed repairs; the loss diminishes their homeowner’s equity; and if they have a mortgage, their lender will require them to carry coverage, which may be hard to find even if the homeowner does not have a loss.

A captive HOA bankruptcy can leave a homeowner with a mortgage balance and a loss of homeowner’s equity, reducing their net worth. Nonetheless, reduced consumer protections may be the tradeoff some homeowners may be willing to accept to gain access to affordable homeowners insurance through an HOA captive.

Summary

Nineteen months have passed since Utah adopted its recent innovation in captive insurance regulation: allowing HOA captives to write homeowners insurance. Initially touted as an answer to homeowners insurance availability and affordability problems, particularly in areas subject to natural disasters and severe weather events, the promise of this innovation has yet to be realized. To date, no HOA associations have formed captives in Utah to insure homeowners.

For the time being, other states and U.S. territories seem to be taking a “wait and see” approach before allowing HOA captives to domicile within their borders. This seems wise, given concerns about geographic concentrations of risk, homeowners’ coverage loss volatility, and reduced consumer protections, particularly in the context of insolvencies.

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References

Captive International. (2024, March 22). Utah Amends Captive Regulations. Retrieved from Captive International: https://www.captiveinternational.com/utah-amends-captive-regulations

Utah Captive Insurance Association. (2024). Association Captives for Homeowners Associations. Retrieved from Utah Captive Insurance Association: https://drive.google.com/file/d/1u54g5uCi9XdgzelD28i9KoPo-SfJYdje/view

Topics Homeowners