The hospitality industry has entered a new chapter.
For those who weathered the recent near collapse of the sector, the American Hotel & Lodging Association entered 2023 with optimism that hotel room demand would surpass pre-pandemic levels and occupancy rates would continue trending upward. This confidence continued in May, when the AHLA forecasted a strong summer travel season for both business and leisure travel.
At the same time, hotels and motels across the country are grappling with worker shortages and inflationary pressures. These hospitality establishments are also facing a challenging insurance renewal cycle.
“Markets are dropping like flies in the hotel and motel world,” explained Joseph Indig, vice president of sales and marketing at Amalgamated Insurance Underwriters (AIU). “Just about every time I talk to a client, they’re telling me, ‘Oh, another market just left the marketplace.’ Standard markets are leaving. E&S markets are leaving. Markets and programs are just disappearing day by day.”
Difficult Property Outlook
According to the latest numbers from Marsh, property insurance pricing in the U.S. increased by 19% during the second quarter of 2023, compared to 17% in the first quarter, marking the 23rd consecutive quarter in which prices rose. Marsh said the main drivers of Q2 property price hikes in the U.S. are the cost of reinsurance and capital, strong capacity demand, limit- ed new insurers, and ongoing losses.
In June, Alera Group report- ed that the hospitality sector market had shown signs of stability across most coverage lines — except for property insurance. “Hospitality property insurance buyers will experience a convergence of increased premiums, deductibles and valuations,” Alera wrote on its website. “Expect a challenged property outlook throughout 2023.”
Alera attributes the challenging trend in the hospitality property insurance market to three factors — “weather-related catastrophes in 2022, record inflation and the high costs of rebuilding. Properties in catastrophe-prone locations will see the greatest pricing increases and decreases in availability.”
AIU’s Indig said its in-house underwriters look closely at how well-managed hotels and motels are. They investigate through online reviews, photos posted on the internet, and maybe even a phone call to the establishment’s front desk, “just to make sure that things are up to the standards of us and our carriers,” Indig said. Loss history is also a key component in determining coverage.
“As the market’s gotten harder, they’ve gotten tighter on their guidelines as far as loss history,” he said.
AIU isn’t the only company stiffening its approach. As standard market capacity shrinks, more and more locations that may have been “great fits” for standard carriers are coming over to the E&S side, Indig said, adding that the few that are left are getting a lot more submissions than they used to.
“The E&S carriers are getting a lot more locations that … a year, or for sure two years ago, would have been great standard plays,” Indig noted. “But due to, let’s say frame construction that’s built pre- 2000 or other factors that just make them less desirable … those are coming towards the E&S marketplace as well now.”
When it comes to renewals, Amy Vitarelli, senior vice president and hospitality insurance practice leader at Heffernan Insurance Brokers, said rate and premium increases and avoiding surplus lines are best-case scenarios for her policyholders. Heffernan has a national footprint and works with franchises and boutique hotels.
“It’s really hard some days — or most days — because all I feel like I do is just give my clients bad news,” Vitarelli said. “Or even terrible news. I feel like they got through this really challenging time, and business is better and, in some cases, thriving. But then, now here I come with all the challenges that are happening on the insurance program.”
Even outside of the hospitality niche, weather disasters like wildfires and hurricanes are forcing rate increases and coverage changes. As mentioned previously, underwriting guidelines are changing too — affecting older hotel buildings with wood frames and without sprinklers.
“And the standard marketplace just says, ‘Nope,'” Vitarelli explained. “And this one in particular I’m thinking of is not in a wildfire zone. It’s actually near a major airport.” Vitarelli said, later adding that “their property premiums have quadrupled over the last couple years. And they’ve been pushed, basically, into the surplus lines marketplace.”
Package policies formerly paired property and liability coverage together. Now, they must be placed separately, Vitarelli said.
Rocky Bhakta, placement leader at World Insurance Associates, said hotels — especially motels — have presented “one of the toughest” challenges since the market hardened a couple of years ago.
That trend’s continuing to go up, he said, sharing that standard carrier markets have been extremely strict on hotels lately. They don’t want to write risks in buildings without sprinklers or exterior corridors and entry, he said, adding that they want “crème de la crème-type” risks: newer construction, full sprinkler systems, fire resistant, interior corridor and franchised with good loss and risk controls.
Coastal properties and expanding wildfire zones present renewal challenges, as well.
Indig said common risks that are especially hard to find coverage for in the hospitality space are frame construction buildings, structures more than 15 years old, and hotels and motels with exterior corridors. Other risk profile concerns include locations that allow smoking or house in-room kitchenettes.
He added that recently, standard markets have become more cautious with red flags on locations with high total insured value that may have received passes in the past. “That’s been shrinking,” Indig said. “And a lot more of those have been needing to move to the E&S marketplace.”
Liability Insurance Hurdles
Social inflation and high-dollar liability claims are pushing claims into umbrella and excess liability layers more often, Vitarelli said. This is turning formerly inexpensive umbrella coverage into a pricier purchase. For those not required to carry a certain amount, Vitarelli is seeing clients bring down their overall liability limits to save money.
Bhakta said he’s seeing tightening in both property and liability coverages. “Insurance carriers are very, very skeptical when it comes to exterior entry (and) exterior corridor,” he said. “They don’t want to write (those locations) and if they’re writing, they’re excluding assault and battery, abuse and molestation, and human trafficking coverage from the general liability. Which is very critical for a hotel owner.”
Over the past decade, hotels increasingly have been hit with human trafficking lawsuits, according to the Human Trafficking Legal Center. In its report, Federal Human Trafficking Civil Litigation: 2020 Data Update, the HTLC showed that from 2003 to 2020, 105 cases were filed by plaintiffs alleging sex trafficking. “During that period, 49 of those civil cases were filed against hotels on a third-party beneficiary theory. In 2020, plaintiffs filed 27 civil sex trafficking cases; 11 of those cases were filed against hotels on a third-party beneficiary theory. In one instance, a plaintiff filed multiple, nearly identical cases against hotels in 2020,” the HTLC reported.
Loss Control and Risk Management
Smart program managers and MGAs understand the importance of loss control. Indig believes agents writing hotel and motel policies in both the standard and E&S markets need to focus on that, as well. Continuous client education is key. If all agents advised insureds how to keep their properties up to par and limit loss, it would “fully, potentially bring capacity back to the marketplace as carriers get more comfortable as locations are getting better,” Indig said.
Still, he doesn’t think that will happen anytime soon.
“At this point, I don’t see any light at the end of the tunnel,” Indig said. “And that goes, really, across the property market. No one sees that yet.”
Bhakta encouraged agents and brokers to remain patient and open to new relationships. Those resistant to change and learning new markets will lose business, he said.
While insureds should be prepped for rate increases and less coverage, Indig said walking insureds through risk profile management is just as important as securing good prices and coverage. This can better position them to receive decent renewals — even in today’s marketplace.
“Talk to your clients early,” Vitarelli said. “Talk to your underwriters early. Know what is coming from the carrier.” Relay that information to clients and formulate a strategy if nonrenewal is likely or possible. “At the end of the day, our job is to bring as many options (as possible) to our clients, and then help them in the decision-making process of what all these options mean.”