Annual business trips to Hawaii for top executives at Washington County’s sewer agency may soon come to an end due to a new consultant’s analysis suggesting Arizona as a more suitable location for its insurance subsidiary.
This shift follows an investigation by The Oregonian/OregonLive, which prompted Clean Water Services to seek expert advice on the operational logistics of its insurance enterprise.
The consultancy, Aon, has indicated that if the relocation expenses prove feasible, it could mean reduced travel for officials and substantial financial savings on lavish annual trips that have increased significantly since their inception in 2016.
The scrutiny over the location of the sewer agency’s insurance subsidiary began in March, catalyzed by investigative findings revealing that executives associated with the insurance company had been frequenting five-star resorts for annual meetings and conferences in Hawaii.
The investigation highlighted that seven trips since 2016 had cost at least $165,000, with $41,000 spent to send seven officials to Kauai just last year, according to available records.
In response to growing public concern, the sewer agency’s board of directors instructed Diane Taniguchi-Dennis, the chief executive officer at the time, to develop a strategy to restore public trust.
Following this directive, Taniguchi-Dennis resigned in June, citing a hostile work environment as a reason for her departure.
Historically, agency officials defended the choice of Hawaii as the optimal location for their insurance operations, claiming that attending in-person meetings at the same time as conferences provided cherished educational opportunities and insights into industry best practices.
However, the rationale for maintaining Hawaii as the headquarters was questioned by earlier consultant evaluations that began surfacing through public records requests.
In fact, preliminary assessments conducted in 2014 had suggested either Arizona or Utah as potential homes for the business before ultimately pushing for Hawaii, based on the mistaken assumption that travel expenses would be low.
A subsequent evaluation in 2022 maintained that Hawaii was still the top choice, primarily due to the insurance company’s established presence there, a unique advantage over alternative states.
Officials at Clean Water Services maintained that their choice of Hawaii had initially stemmed from the state’s experience with certain types of insurance coverage, which surpassed that of competitors at the time.
The latest domicile review, however, has presented Arizona as an attractive alternative, citing favorable coverage options, regulatory stability, and competitive operating costs—including the absence of a tax on collected premiums.
In earlier assessments performed over a decade ago, consultants had noted similar advantages in Arizona, leading to questions about the previous decision to stay with Hawaii.
During a board meeting scheduled for July 18, the sewer agency’s board is anticipated to be briefed on Aon’s new findings and the potential process for moving the insurance company to Arizona.
A vital component of this discussion will involve evaluating whether a relocation would be financially wise, especially when considering various startup and administrative expenses associated with establishing operations in Arizona.
Rick Shanley, acting CEO and general manager of Clean Water Services, stated at a recent board meeting that he is working with the team to gauge the costs and expected timeline of such a move.
The inquiry into relocating the insurance subsidiary can be traced back to 2014 when Clean Water Services began probing innovative insurance options to address existing financial risks, including those posed by underground pipelines and costly earthquake coverage.
Consultants were retained to examine the feasibility of establishing a wholly-owned captive insurance company, a self-insurance model rare among public agencies.
Captive insurers can prove advantageous financially as surpluses collected after premiums and claims are managed can be retained by the subsidiary, allowing agencies to maintain control over excess funds that could cover future catastrophic losses.
While initially considering Oregon, a May 2014 feasibility study ruled it out as a viable domicile, citing an underdeveloped market and restrictions against forming captives as limited liability companies.
Instead, the study led by Marsh recommended that Clean Water consider either Arizona or Utah, emphasizing their competitive startup costs, operational stability, and well-established captive systems—Arizona boasted 106 captives whereas Utah had 342, dwarfing Hawaii’s 184 at the time.
Despite Marsh’s recommendations, zoning in on Hawaii commenced when a follow-up study in June 2015 recognized that while Arizona permitted public entity captives, none had been formed in the state.
At the time, public entity captives were extraordinarily rare, with only four states accommodating them, and Hawaii was at the forefront with two operational companies.
The agency ultimately targeted Hawaii due to its demonstrated familiarity with public entity captives, along with expertise in dental insurance coverage.
Notably, those evaluating the move initially highlighted Hawaii’s advantage in allowing board meetings to be conducted via phone if regulatory approval was secured, mitigating travel costs associated with in-person meetings.
However, state representatives shared that Hawaii was less likely to grant such allowances unless the firm was inactive, meaning that in-person meetings have always been required.
After discussions, Clean Water Services voted in 2016 to establish its captive insurance company in Hawaii, asserting that the state offered unparalleled flexibility to maximize cost-saving opportunities.
Yet, during the intervening years, the agency chose not to harness the regulatory flexibility that allowed members to attend meetings remotely from Oregon, instead opting to fly the entire board to Hawaii each year, except during the pandemic.
There remains uncertainty regarding whether board members ever accessed the historical consultants’ reports, as the agency could not provide clarity on older evaluations due to staff departures.
Taniguchi-Dennis, who once stated that conjecture relating to personal aspects of her life influencing the Hawaii decision was “offensive and grossly misleading,” indicated that others involved in the creation, like former Risk and Benefits Manager Victoria Nolan, could clarify decision-making processes.
Former General Manager Bill Gaffi, who retired in 2018, noted that discussions of older documents would typically not involve dated background reports—a standard practice given the time elapsed.
Gaffi underscored the proactive approach Clean Water Services took in forming the captive insurance company, viewing it as critical to a forward-thinking culture necessary for success in a changing regulatory landscape.
Various evaluations going forward indicated that the initial selection of Hawaii provided a structural advantage that would continue to skew assessments in its favor.
In February 2022, Clean Water Services commissioned Aon to review the performance and appropriateness of its insurance subsidiary, examining its financial benefits and whether Hawaii still stood as the top domicile.
Results indicated that while general and administrative costs were acceptable when compared with benchmarks, its ratios were higher than comparable companies, signaling growing concern regarding the sustainability of operations in Hawaii.
The study concluded that Hawaii ranked highest when juxtaposed with other states—Arizona, Vermont, Bermuda, and South Carolina—on various critical criteria, including coverage options, regulatory framework, operational costs, and expertise with captive insurers.
Federal and state influences appear to have had a significant impact, as the scoring system in prior assessments had granted Hawaii due credit for its existing presence in the agency; however, that factor was ultimately denounced by Aon’s recent analysis.
The new evaluation reassessed several criteria, adjusting Hawaii’s contact points downwards while elevating Arizona—now boasting eight public entity captives—to a position of strength.
The prior scoring matrix awarded nearly equal standing to Hawaii and Arizona regarding geographic proximity and time zone considerations; a shift emerges from Aon’s latest methodology that demoted Hawaii on both accounts.
Instead, Arizona saw its scores improve significantly, leading to a 13-point advantage overall, underscoring the shifting landscape for captive insurance.
As for employee benefit offerings like dental insurance, the report did not analyze these aspects, particularly as Clean Water Services moved to obtain health benefits for non-unionized employees through the Public Employees Benefits Board this year.
While the consultants highlighted potential short-term savings related to reduced travel expenses, they indicated the necessity of assessing these savings against the upfront costs of relocating the insurance company.
However, there is merit to the idea of reductions in conference duration and availability, as well as a shift away from extravagant venues in Arizona compared to Hawaii’s extensive conferences at luxurious resorts featuring extravagant dining experiences.
The path to relocate the Clean Water Insurance Company to Arizona now raises questions about the future landscape of captive insurance for Washington County’s sewer agency, in a climate already marked by significant scrutiny and calls for accountability.
Amid increasing scrutiny and fallout regarding mismanaged expenditures and lack of transparency, Clean Water Services appears to be at a crucial crossroad in redefining its strategies moving forward.
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