Lava is flowing straight for the village of Pahoa on the Big Island of Hawaii, and many residents are fleeing their homes. It’s a dramatic disaster, with losses projected in the millions of dollars, and many folks are about to lose property that’s been in their family for generations. However, as more than 1,000 people flee the area, it’s helpful to remember where the disaster came from originally — and it’s not the volcano.

More than 20 years ago, there was another disruption on Kilauea Volcano on the Big Island of Hawaii. No, it wasn’t an earthquake, or a lava flow, but a government agency that was created out of nowhere, as if it came from the active volcano itself. The agency was called the “Hawaii Property Insurance Association”, and its job was to insure homes in areas that private insurance wouldn’t touch.







In the 1990s, the town of Kalapana was swallowed by lava, and private insurance companies stopped insuring land near the active volcano, called “Lava Zone 1“. Private insurance also pulled out of “Lava Zone 2”, which meant that it was impossible to get insurance anywhere near this high hazard area.

Now, this might sound like a good idea, if you don’t like the idea of waking up in the middle of the night surrounded by lava. If private insurance companies want to stay out of the area, it’s a pretty clear signal that everyone else should stay out of the area too.

However, in 1992, the government created the Hawaii Property Insurance Association, which provided government insurance coverage to Lava Zones 1 and 2. This resulted in a boom in the housing market in this area.

By 2008, there were more than 2,400 HPIA policies in the area, and many more to come. The situation became so dangerous that the Honolulu-Advertiser warned, “Development Soars in Risky Hawaii Lava Zones“.

In economic terms, this created a moral-hazard. While private insurance companies were warning, “Don’t build here, it’s too dangerous!” The public insurance agency said, “Go ahead and build all you want!” And without that warning signal, many people flooded into the area.

As people flee Pahoa from the approaching lava, let’s keep them in our thoughts and charitable wishes — and also remember the real disaster: a government created moral hazard.



