Hospitality Industry Decline and the Effect on the Insurance Market

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By David DeMoss

The COVID-19 pandemic has taught us more lessons than we could’ve ever anticipated but one fact is for sure: the hospitality and insurance industries are stuck in a whirlwind of complex obstacles to normalcy. The hospitality industry in its many forms has seen a small trend of increasing occupancy since state and local governments have attempted to open businesses back up responsibly; however, the rate at which these trends are moving is not nearly as fast as lodging needs them to move in order to keep doors open in the long term. 

In an effort to minimize costs, hospitality owners are trying to amend their insurance policies and coverages – accepting higher deductibles in return for lower rates. Even with all the efforts hotel management is taking to reduce costs, the grim reality of “normalcy” isn’t expected to return until 2022 at the earliest. To read more about how COVID-19 is affecting the hospitality and insurance industry, see below for an article written by Andrea Wells.

The hotel industry was one of the first industries affected when COVID-19 forced the travel industry into standstill, and many predict it will also be one of the last industries to recover. Even as travel has ticked up slightly since the beginning days of the pandemic, the hotel industry remains on the brink.

According to a recent report by the American Hotel and Lodging Association ( AHLA), nearly one-third of hotels have less than half of their typical, pre-crisis staff working full time, and some are considering additional lay-offs.

The AHLA conducted the survey of hotel industry owners, operators, and employees from September 14-16, with more than 1,000 respondents. Key findings include the following:

68% have less than half of their typical, pre-crisis staff working full time currently.

Half of hotel owners said that they are in danger of foreclosure by their commercial real estate debt lenders due to COVID-19.

Without further governmental assistance, 74% of respondents said they would be forced into further layoffs.

More than two-thirds of hotels (67%) report that they will only be able to last six more months at current projected revenue and occupancy levels absent any further relief.

Despite small gains in employment in May and June driven largely by restaurants and bars reopening, the leisure and hospitality sector is still down 4.3 million jobs since February, according to the “Industries at a Glance: Leisure and Hospitality” report by the U.S. Bureau of Labor Statistics at the end of July.

The AHLA survey revealed that only 37% of hotels have been able to bring back at least half of their full-time employees, while 36% have been unable to bring back any furloughed or laid off staff.

A study by McKinsey & Co., “Hospitality and COVID-19: How long until ‘no vacancy’ for US hotels?,” suggests that the hotel industry’s recovery to pre-COVID-19 levels could take until 2023 — or longer.

“Hotels face the prospect of a long recovery,” the report concluded. “Over the coming months and years, properties’ circumstances will vary based on a number of factors, including chain scale, location, and demand profile.”

The insurance industry is trying to figure out how it can best serve this uncertain world of hospitality.

“Our industry demands a lot of attention in multiple areas unlike years ago when coverage and price where the main issues to think about,” John Welty, president of SUITELIFE Underwriting Managers, a division of Ryan Specialty Group, told Insurance Journal. “Whether you are in the high-end space of hospitality, the middle space, or the economy space, each are impacted greatly in today’s world.”

Like other areas of the property/casualty insurance market, the hotel sector has been experiencing an uptick in rates due to catastrophe losses and social inflation trends in recent years. That is leading hotels to seek rate relief through higher self-insured retentions.

“We’re seeing a lot of the insureds ask for increased deductibles, either wind and hail deductibles sometimes taking those from 2% to 3%, to 4% or 5%, or increasing their other peril deductible for fire, from say $2,500, $5,000, or $10,000 to $25,000, trying to keep their rates lower and mitigate their losses on their own,” said Chris McGovern, senior vice president, National Specialty Programs, at AllRisks.

Some insurance carriers are exiting the market or restricting underwriting criteria, Welty added.

“In our experience, many carriers are no longer writing hospitality, or they are extremely restrictive,” according to Welty. “We are seeing many carriers pull back by being more restrictive on writing new opportunities as well as a few which have stopped writing hospitality accounts due to the pandemic.”

Welty says this has been compounded by ongoing wildfires on the West Coast.

Rates are rising in most lines of coverage. “The hospitality industry is seeing double-digit rate increases in property, general liability and umbrella,” he said.

Welty added that the excess umbrella market is very limited offering lower limits with increased prices. The hospitality directors and officers liability market, and employment professional liability market, are also seeing limited capacity with double-digit or higher rate increases.

Welty says some hotels might find assistance from returned premiums.

“If a policy is auditable, some carriers are waiting until the audit to provide a return premium while other carriers are doing midterm audits to provide some relief,” Welty said. If policies are written as non-auditable, as in surplus lines, carriers have taken many different stances from an account by account basis or on their entire portfolio, he added.

“A best practice for a hotel to take is to be in regular and consistent communication with their broker/agent or carrier,” Welty said. “Every carrier and even every branch within a carrier can be different.”

In response to COVID, Welty has seen carriers add a communicable disease exclusion to general liability policies. While pandemic insurance has always been available in the marketplace, the cost has been expensive, he said. “With the COIVD-19 pandemic, we have seen costs continue to increase with substantial deductibles being applied.”

In the coming months, Welty advises hotel insurance specialists to focus on the post-COVID hotel customer experience.

“Brokers need to think about the post-pandemic ‘guest experience.’ What does that look like and how does insurance play a role in this new normal?”

That means extra attention should be given to how agents communicate with their partners. Communication with their carriers, insureds and prospects is critical, he said.

Welty added that he has been encouraging brokers and their hotel clients to review the vacancy provision of property policy and decide if a vacancy permit endorsement is necessary during this time.

The good news for hotels is that travel seems to be picking up, albeit slowly. Welty said travel activity has picked up more so in the VRBO (Vacation Rentals by Owner) sector. Travelers are still leery traveling to hotels, especially when some geographical areas of the U.S. continue restrictions on opening local restaurants and bars. “Travel seems to be better in those states which are more open than others.” Going forward, travelers will need assurances that the hotel is clean, sanitized and practicing social distancing, he added. “We have seen an uptick in ‘contactless hotels’ where technology is used rather than a front desk clerk to check you in to the hotel.” But pre-COVID traveling days aren’t likely to return for some time. “We feel that the hotel industry will be slow to get back to pre-COVID with many hotels predicting that 2022 should be back [to] normalcy.”

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