Hospitality industry

Rough Notes, Apr 2003 by France, Larry G

SPECIALTY LINES MARKETS

Hotels, bars, and restaurants

Property has become the major issue for high rise hotels 10 to 15 stories and higher. The events of 9/11 took care of that, and the threat of a terrorist attack still looms, especially in major cities. The potential loss in the property line due to a terrorist attack on a major hotel would be in the millions, not counting business income, workers compensation and other additional coverages.

The specialty markets are growing at a 40% to 50% rate as Main Street options dry up. This also is draining capacity in some programs; thus, we are seeing a "maintain" attitude on the part of several carriers and markets.

"This year the hospitality industry will continue to feel the consequence of an inconsistent insurance marketplace," states Susan Kearney, program manager of Venture Program's Preferred Hospitality Program. "Specialist brokers have cited to us that securing property and casualty insurance coverages for their customers is becoming increasingly difficult as available supply continues to decrease for this industry."

Kearney says that many insurance carriers have either ceased writing certain classes of business, limited the coverages they are willing to offer, exited the marketplace-either on a voluntary or involuntary basis-or have significantly increased their underwriting qualifications. "Once considered an extremely desirable class of business, hospitality accounts are now difficult to place and, if placed, they are seeing steep price increases."

When you look through the list of markets for the hospitality industry that follows this article, you will see that many markets will not write nightclubs. It is interesting that these responses were made prior to the Chicago and West Warwick, Rhode Island, disasters of recent weeks. It should not surprise anyone that the nightclub business is not attractive to many underwriters. The losses usually are quite severe. The two most recent occurrences will no doubt end up in many months of legal battles including civil action with the "world" being named in suits. If you have an account similar to these, underwriters will be inclined to be extremely cautious in accepting them regardless of their quality.

Another obstacle for the hospitality industry has been the industry's sluggish financial results due to the consequences of 9/11 and the downturn in the economy, says Kearney. "Driven by rate increases and rising premiums, many financially sound insureds have turned to alternative solutions such as self-insurance, large deductibles, and rent-a captive structures to mitigate their insurance risk. Accounts with substandard financials have been left with few alternatives, including insurance via State Funds, assigned-risk pools and smaller deductibles or guaranteed cost options that for larger premium accounts lack significant savings."

Restaurants and hospitality risks such as hotels and bars that share food preparation exposure also are fighting some uphill battles. With the current security threat, food-borne illness is a major concern. Tight restrictions need to be placed on control of food preparation and storage. Underwriters and loss control personnel will pay particular attention to this area.

"The market for the better restaurant risk is softer than some segments of the commercial marketplace right now, but certain types of restaurants are much tougher to place," points out Heidi Strommen, executive vice president of ProHost USA, which specializes in the fine dining restaurant risk. "Risks with dance floors, entertainment, liquor receipts over 40%, or that have been in business for less than three years, have experienced loss problems, or coastal problems, or are of frame construction are all a tougher sell to underwriters. Fast food restaurants and banquet/catering companies are also very difficult to place. There are several carriers competing for the best of the restaurant class although we are still obtaining renewal increases that average around 25%."

The recent passage of the Terrorism Risk Insurance Act will also affect any increase in the cost of insurance for this industry, Kearney says. Many large hotels and restaurants are located in major cities across the United States and have large concentrations of employees. Carriers and reinsurers will continue to focus their efforts on a return to profitability as the adverse effects of the soft market threaten many balance sheets in the industry. Therefore, expect the cost of the terrorism exposure to be directly passed on to the insured. "Overall there continues to be justified concern for future security of existing insurance carriers and their ability to offer quality services to the hospitality industry," Kearney states.

As in many industries, the economy will play a big part in the profitability picture for risk in this class of business. Fuel prices hold down travel. As a result, in some cases hotels now are below breakeven room capacity. Even when people are not traveling, the poor economy curtails the amount of money spent in restaurants, adding to the owners' financial woes. At best, the restaurant business is a difficult one in which to realize a profit. When outside forces beyond their control dictate the bottom line, it becomes almost impossible or, at least, an uphill battle to stay in the black.