Coastal hazards in tropical islands are likely to increase under the combined effects of sea-level rise, coral reef degradation and the potential intensification of extreme cyclones. In volcanic islands bordered by deep waters, storm surges are primarily driven by atmospheric pressure gradients and the development of a wave setup in the nearshore, which results from wave dissipation. Recent studies on the hydrodynamics of reef lagoon systems have demonstrated that the mean wave-driven circulation can either increase or decrease the wave setup along the shoreline, depending on the system configuration. This study combines the analysis of a unique dataset capturing a paroxysmal event (significant height exceeding 7 m at the breaking point) with phase-averaged numerical modelling to provide further insight on wave setup development in fringing reef environments under extreme conditions. When considering a 2DH modelling approach, the largest wave setup is underestimated by over 40%. Wave setup predictions are partly improved when using fully-coupled 3D runs, due to the representation of the vertical mixing and the horizontal and vertical advections associated with the intense hydrodynamic circulation that takes place in the surfzone.