Hotel Industry Pushes Through as Insurance, Economic Uncertainty Builds

October 3, 2022 by

A busy summer travel season provided a much-needed boost to the hotel industry but rising insurance costs and other economic factors threaten to undermine the sector’s ongoing recovery.

After nearly three years of losses related to COVID-19, hotel industry revenue and occupancy may actually exceed pre-pandemic levels by the end of 2022, according to the American Hotel and Lodging Association (AHLA).

A mid-year AHLA report released in July shows hotel room revenue is on pace to reach $188.4 billion this year, an 11% increase over 2019 and a more than 50% increase over 2020 revenue, which fell to $85.9 billion. Occupancy rates are expected to average 63.4% this year, AHLA said, nearly reaching 2019’s level of 66%.

Casting a shadow over the positive trends, however, is a serious property insurance capacity crisis as standard markets continue to retreat from the space. Supply chain disruptions and high construction costs, plus more frequent and intense natural catastrophes, have increased the frequency and severity of property damage claims.

Property insurance rates have risen consistently for the last several quarters, according to Marsh’s Q2 2022 pricing index, with the most recent increase averaging 6%.

Finding admitted carriers that would write older, frame building hotel or motel properties with exterior entrances, or those without sprinkler systems or other modern upgrades, was already difficult before the market hardened, said Aaron Lowenthal, director of sales, for Amalgamated Insurance Underwriters (AIU), an MGA based in Montvale, N.J.

Now, standard carriers won’t touch these properties, Lowenthal said, forcing more hotel/motel business into the excess and surplus lines market.

“Just about every month you see or hear about another market pulling out because they don’t think it’s profitable anymore,” he said. “Finding capacity, finding companies that are willing to still write these hotels and somehow make money on it is definitely challenging.”

AIU’s hospitality program specializes in property coverage for hard-to-place franchise or non-franchise hotels and motels built before 2000. Lowenthal said that while many of these properties have been rehabilitated or repurposed in recent years, carriers still see the potential for more severe claims with older buildings.

“It’s not a desirable risk,” Lowenthal said, adding,

“Even though our experience has been that as long as these hotels are properly managed and properly updated, we have had a good loss history and haven’t had any major issues or challenges.”

Rocky Bhatka, regional vice president of commercial lines for World Insurance Associates, said the last couple years of uncertainty with COVID travel restrictions caused a further exodus of admitted carriers.

“From the middle to the end of last year, the majority of the standard markets didn’t write hotel business and we had to basically knock on each and every E&S door to find a solution for our clients,” Bhatka said. “E&S carriers have stepped up to the plate and helped us find solutions.”

The retail broker manages about 500 properties nationwide, ranging from smaller mom and pop motels to full-service flagship hotels in major cities. World Insurance places all lines of business, including general liability, commercial property, workers’ compensation, cyber liability, directors & officers, and EPLI.

Property insurance and general liability have been the most difficult to place, Bhatka said. Most carriers don’t want to write exterior entry motel properties and those that do will only provide limited assault and battery coverage or exclude it altogether in high-crime areas. This has been an issue for franchisees that are required by a franchise agreement to have the coverage, he said.

These capacity challenges coupled with significant rate increases are taking a toll on the smaller hotel operators, insurance specialists say.

“For mom-and-pop hotels with two or three properties, insurance cost is a huge thing in their budget. Whatever they were paying in 2019 has doubled,” said Bhatka. “If you’re in a coastal area or Tier 1 wind zone, forget it. You’re easily looking at 35% to 40% rate increases year over year.”

Agents are having to piece together coverage packages at much higher rates for hotel and motel clients, who were once easily able to obtain a businessowner policy (BOPs) with the general liability and property coverage included, said Mac Howey, an insurance agent with Michigan-based Howey and Associates.

“Now, not only has your property insurance doubled, but your GL is two to three times what it was; the umbrella is rated on the higher GL premium so that’s going up astronomically as well,” he said.

Effects of Other Challenges

The ongoing staffing shortage is another concern facing the hotel and insurance industry.

In a June survey by AHLA, 97% of members reported being understaffed. According to a September report from the U.S. Travel Association, 1.2 million leisure and hospitality jobs were still unfilled as of August 2022, far exceeding those of any other industry.

As noted by a Moody’s Economist in a Spring 2022 report, “Labor is such a crucial component of the conversation around performance in the hotel sector, both in terms of the people who keep hotels going by working at the properties as well as business activities that spur stays at hotels.”

AHLA said the industry is not expected to reach pre-pandemic employment levels until at least 2024, despite aggressive efforts by hotel operators to fill vacancies, including offering higher wages and expanded benefits. Carriers are paying close attention to how COVID shutdowns and the staffing shortage is impacting hotel properties, according to insurance specialists.

Admitted and non-admitted companies are reinspecting properties to check if they’ve been properly maintained the last several years and requiring a “laundry list” of items be completed before writing coverage, said Howey.

Those hotel operators who are struggling to find the manpower to address any issues will have a harder time finding coverage, said Bhatka.

“Carriers are making sure that the client has maintenance staff or that somebody is maintaining the property on a regular basis, from electrical panels all the way up to the roof and everything in between,” he said.

Carriers are limiting coverage if proper inspections and loss control protections are not completed, Lowenthal said, which will lead to further market challenges.

“If they are trying to protect themselves and limit the coverage by saying ‘if we can’t get all these protections in place then we won’t be able to stay on this risk,’ that creates problems in the whole market and drives pricing up,” said Lowenthal.

The pandemic has also changed hotel guests’ expectations, said Howard Russell, managing partner for Weinberg Wheeler Hudgins Gunn & Dial in Las Vegas. “Hotels will be asked questions about their health and safety policies as new things come up; we’ve seen a significant number of incidents of gun violence in all walks of life so, again, hotels will be faced with questions about their security protocols.”

The underlying risks haven’t changed as much as the severity of these claims has, Russell said. Complicating hotel industry exposures is an increasing virtual world that allows negative reviews to be shared far and wide, creating the potential for serious reputational damage as well.

“The public is more attuned to looking at health and safety protocols now when they go to a property, and because they are more attuned, they might be more likely to comment or criticize a particular business’s practices,” he said.

Risk Management & New Opportunities

Though it may be challenging because of worker shortages, proper risk management is more important than ever in the hotel segment, specialists said.

AIU, for example, contracts with an inspection company to thoroughly evaluate every aspect of a hotel or motel operation and offer recommendations for making the property safer, Lowenthal said. Agents and their insureds should be on the same page on the importance of acting on risk management recommendations, he noted.

“We are only looking for properties that are properly managed and up to date,” Lowenthal said. “We stay profitable by understanding these properties as best we can and being deliberate about risk management.”

Howey said clients are more receptive to improving their exposures now than they were in the past as they see their premiums continue to go up. Agents must be careful about who they will work with and make sure they work with the right people, he said.

“It’s imperative for the hotels or motels to do their part,” Howey said.

“Oftentimes, there’s pinching the bottom dollar and really trying to maximize their revenue. That’s been a tool that has worked in the past but not in this day and age in this space.”

It isn’t all bad news for the industry. “The pandemic’s effects on travel plans appear to be fading,” according to a Deloitte Summer 2022 Travel Survey, and new opportunities for revenue from business travelers who combine work trips with vacations, referred to as “laptop luggers,” are also emerging, Deloitte said.

Bhatka is optimistic the positive trends will help eventually bring carriers back.

“I think it is going to get better. We have already started to see more and more interest building up in the standard market,” he said. “My prediction would be that despite the hard market, we will see a better environment for our clients in the next one to two years.”