If approved, the increase would be the health insurer's lowest since 1998 for businesses with fewer than 100 workers on its Preferred Provider Plan.

Small businesses on the CompMed plan -- introduced last year -- also would see an average 4.9 percent increase while those on Health Plan Hawaii Plus would see a 4.5 percent hike on average.

The new rates would begin on July 1 and affect 11,000 small businesses that employ 141,000 people, said HMSA, the state's largest health insurance provider with nearly 700,000 members.

For a family, the proposed monthly dues would be $981.30 on the Preferred Provider Plan, $893.88 for Health Plan Hawaii Plus and $929.70 for CompMed. The rates include medical, drug, dental and vision benefits.

HMSA said lower-than-expected increases in medical costs contributed to its asking for a lower rate. Last year, HMSA rates increased by an average of 7.8 percent for small business.

"The cost of health care did not rise as steeply as we thought it would," said Steve Van Ribbink, chief financial officer of HMSA.

The insurer also said it plans to use 100 percent of it annual investment income from reserves to keep rates low over the next 12 months. By state law, health insurance plans are required to use 80 percent of their annual investment income from reserves to offset dues.

HMSA also said a $40 million investment to upgrade its claims processing system and information management capabilities will be funded entirely by HMSA's reserves. The project, which began in the fourth quarter of 2004, will take three to four years to complete.