Rising insurance costs in a hardening market

By James K. Asaad, Assistant Vice-President, Commercial Insurance, Arthur J. Gallagher Canada Ltd. Ontario Region

Hoteliers across Canada are facing rising insurance costs, with some rates increasing to three times as high as they were last year. Why is this happening? And how can hoteliers work with insurance companies to mitigate risk and lower the cost of their premiums?

A hardening market means shrinking insurance capacity available to the consumer, this will facilitate insurance companies to either request significant increases in premium regardless of the individual policy holder’s claims performance, and you will find insurance companies pulling out of entire segments at a rapid pace. One of the segments which has been affected by both of these action is the hotel and hospitality segment.

The hardening of the insurance is in full effect, and the hotel space is feeling it, as some insurers back off and use their capacity elsewhere; or they become more selective on and discerning on how they distribute their insurance capacity. All of this translates into higher rates.

The market conditions are changing because insurers are experiencing higher than expected losses according to the 2019 A.M. Best Market Segment Report, which reported a combined ratio for the property and casualty insurance industry have been over 100 — indicating an underwriting loss — since 2016. In 2017, the combined ratio reached 104. The overall performance of the Insurance Industry has caused a hardening of the market which is currently being felt by the consumers and if these losses are to continue, additional rate increased will follow. Securing coverage may become more challenging as capacity begins to dry up.

Commitment to the hotel market

The hotel business and its insurance coverage is considered to be niche, which requires specialized coverage created by insurance companies who have a deep knowledge and demonstrated commitment in providing insurance solutions to the hotel industry.

During a period of multiple years in which insurance companies operated at highly profitable ratios and looked to continue increasing their growth, many of them turned their attention to new industry segments in which to expand their footprint. When this happened we saw numerous new entrants providing insurance to the hotel segment. It can be argued that some of these carriers did not have the expertise to properly underwrite this segment, or the commitment to work with the industry for the long term and through the tougher times. As a result of this, we are now seeing fewer insurance companies focusing on providing insurance for hotels. With the reduced options, we are seeing increased rates from the insurance companies who do have a demonstrated understanding in underwriting this business, with a long term view on the segment and a significant portfolio to support their position in the market.

Arthur J. Gallagher, which is the fourth largest insurance brokerage globally, has a profitable portfolio of hotel clients which are underwritten by the insurance carriers who specialize in the hotel segment. The company offers bespoke coverage created specifically with the operational risk associated with running a hotel, including coverage which can extend to the restaurants and bars within the facility, along with additional coverage for spa operations which are often found on site.

Our portfolio is continuing to perform well within this hardening market, where we have been able to deliver comprehensive coverage, competitive terms and conditions as a result of our firm’s deep routed knowledge within this segment and strong long time working relationships with those aforementioned insurance companies.

And for hotels that qualify, that means our rates are more competitive than those of other companies. We have a longstanding relationship with hotel insurance companies, which means we have a lot of experience underwriting hotels. Arthur J. Gallagher has accumulated a substantial hotel portfolio over the years. We are committed to brokering insurance within the hotel segment and our growing portfolio has provided the leverage that benefits our clients in today’s challenging marketplace.

Over the years, we have developed a loss control philosophy, and we provide complimentary seminars for hoteliers on how to manage operational risk by taking loss control measures. We take operational risk strategies from on the ground risk, to balance sheet risk, advising our clients on such things as how to shift risk through the management of hold-harmless agreements with contractors such as landscapers, snow removal companies and other service providers.

Insurance requirements for hoteliers

Our job as brokers is to first understand the hoteliers business, the strategy and direction which the operation is being driven, identify the business risk which is involved in and then to provide options on how to offload business risk by way of insurance which is available in the market.

As the economic climate relative to business risk has evolved so too has the insurance marketplace where you can now purchase more relevant insurance policies which address emerging risks.

In addition to your traditional property and liability policy, coverage for abuse liability should be considered a crucial component to a hotelier’s insurance program.

A trending issues, is cyber liability. A modern cyber insurance policy addresses a major risk for hotels, and is now found to be a requirement within some franchise agreements. This exposure is quite dire for hoteliers, however many hoteliers feel that this risk is not their own but that of their technology vendors. Which is not necessarily true, in many instances hoteliers can and have been determined to carry liability in an incidence of a breach and in cases where their systems have been hacked and shut down with ransomware, a properly structured cyber policy will respond to the ransomware attack and could pay the ransom on behalf of the hotel which has been requested in order to retrieve control of the system. This relieves a huge financial burden, as the these demands typically request payment to be made in cryptocurrency which would require a hotelier to convert cash into bitcoin for example which as of October 2^nd, 2019 is trading at USD $8,255.90 and then make payment. The policy would take care of that entire process on behalf of the hotel.

In fact, It Is important to understand how certain nuances of privacy law can affect a hotel's operation, such as a guest visiting from the USA whose credit card is compromised. We don't expect hoteliers to understand the details of all the different jurisdictions and typically a properly structured cyber insurance policy will offer access to third party consultants or “breach coaches,” to assist once an incident has occurred. Hoteliers don't need to wait for a claim if they know their security has been breached to access these consultants, they only need to be aware of a cyber security incident which can trigger action from their policy. Of course this is on a case by case basis and consultation with their insurance broker should always be the first step in identifying that their options to utilize their insurance policies are.

How to tackle rising costs

Every insurance transaction should begin with an in-depth discussion between the client and their broker, where the insurance broker is able to develop an understanding of the clients current operations, their short, intermediate and long term plans, identifying the correlating risks and then present the options of available insurance solutions which would allow the client to transfer their risk over to the insurance marketplace. Ultimately this process should culminate with a focused business discussion about which risks the client is willing to keep on their own balance sheet, and which ones they would like to seed onto insurance.

Once your insurance broker has developed a strong understanding of your operations, they should be able to identify the various insurance companies, who have products which are crafted to address your specific operations and have a strong interest in the hotel industry segment. This should also translate into identification and negotiations of the most competitive terms and conditions available within the marketplace on behalf of their client. This is one of the key components in how we have been able to successful negotiate on behalf of our clients during this phase of the hardening market.

If you wish to discuss your Hotels Insurance needs, you can contact James Asaad directly at 416-407-1859 or by email at james_asaad@ajg.com