SPECIALTY LINES MARKETS

The hospitality market

Hard-hit hotel/motel business requires special care

By Dave Willis

Hardly a day goes by that business travelers—at least those enrolled in hotel loyalty programs—don’t receive an e-mail that offers some special incentive or deal. Hotels and motel chains are fighting for travelers, from lower-end Red Roof Inn’s “Red Hot Deals” to InterContinental Hotels Group’s “Hit it Big” double points offer, to the “stay two nights, get a weekend free” promotions of other chains.

The reason is simple: Occupancy rates are down. Way down. “Hotels are up against some tough economic conditions,” says Jim O’Neill, director of business development at program manager New Empire Group. “Travel always gets hardest hit in a downturn. A lot of hotels we see are running at 50% to 60% occupancy. When you start calculating revenue per room at these hotels, it’s down—sometimes to as low as $6,000 or $7,000 a year per room.”

Earlier this year, USA Today identified an interesting shift in business travel habits. “At a time when many companies have slashed budgets…business travelers are returning from trips the same day they go rather than spending several nights—and hundreds of extra dollars—on the road,” the article said.

Ruth Knopf, hospitality business sector manager for Westfield Insur­ance, cites another trend: “Instead of using hotels and inns for meetings or entertainment, they are doing a lot more video conferencing or phone conferencing,” she says. “Everybody is looking at their budget.”

In a quest to bolster the bottom line, hotels and motels are turning every leaf—finding ways to boost revenue and cut costs. Insurance expenses are often targeted.

The hospitality insurance industry appears happy to lend a hand. “The insurance market is extremely competi­tive,” O’Neill notes. “The market is soft. Although carriers have pulled out of the market in certain regions, just as quickly, someone else has jumped in to take their place—with equally aggressive pricing.”

Meeting needs

While shopping for insurance makes sense in many cases, it’s wise not to throw out the baby with the bath water. “Going for just the lowest price isn’t always an advantage,” says Druann Stone, divisional senior vice president at specialty provider Great American. “The advice I give agents is, ‘If you’re selling price, have the insureds put the savings in the bank because, when the market turns, there could be some very unpleasant surprises from a pricing standpoint—whether or not there’s a loss.’”

Agents need to present apples-to-apples comparisons, too. “A lower-priced carrier could be offering less coverage than one with a slightly higher price,” Stone adds. “It’s important that insureds make decisions based on coverages they need and want, so there’s no surprise when a loss occurs and it’s not covered.’”

Given the occupancy drop, business income is an easy target. “In some cases, insureds may want to retain the business income number they had when they were fully booked,” Stone explains. In other situations, the temptation exists to reduce the number by too much, in an effort to cut premium. Neither approach is right. “Make sure the business income number reflects the business as it is today. If an increase in coverage is needed as the policy year progresses, it can be adjusted,” she says.

The same holds true for property values. “There’s a tendency for agents and insureds to start undervaluing things,” says O’Neill. “You could save a lot by saying a building that was worth $4 million is now worth $3 million. But is it?” Overvaluing may cost more up front; undervaluing could cost more money down the road, when a loss occurs.

Another fallout of reduced hotel income is a temptation to cut back on certain operational expenses. “Lack of revenue often leads to an increase in maintenance issues,” says O’Neill. “Security is another area that’s sometimes impacted.” Unfortunately, in a down economy, the need for security is often heightened, particu­larly in certain neighborhoods where crime is on the rise, he adds.

“Security issues are of concern in industrial or office parks,” he explains. “These are largely vacant at night—nobody’s around except the hotel patrons. It’s important for agents to be aware of exactly where the hotel is, what the surrounding environment is like and what security does or doesn’t exist.”

Sweating details

It’s important for agents to be up front with such info, too. More and more, underwriters are using tech­nology—including online mapping software—to find out about risks. “We use Google maps and ‘street view’ all the time,” O’Neill says. “We’ll get an application that says a property is not a coastal risk and check and find that it’s two blocks from the ocean.”

Hotel and third-party review Web sites are often used to complement on-site inspections. “When we get a report back of mirrors on the ceiling, we know it’s probably not the kind of franchise operation we’re interested in,” he explains. “Or if we see reviews that talk about bedbugs or items in disrepair, that points to maintenance and management issues.”

Sometimes risks aren’t readily apparent. “If the hotel has a fitness facility, for instance, there’s the issue of free weights versus dumbbells,” says O’Neill. “Most markets will write properties with dumbbells, but not free weights. If a guest drops dumbbells, they might break their toe. The risk of injury is a lot less than with barbells.”

A facility’s airport shuttle represents another exposure—and not from speeding to the departures drop-off. “The problem we see is people tripping over their luggage, getting in and out of the van,” he notes. “Shuttles are perennial losers to most carriers.” The result, he adds, is that many hotels have opted to outsource such services.

Tapping markets

Agents can help hospitality risks by knowing market alternatives. “They should be aware that risk purchasing groups exist to offer umbrellas on these hotels,” O’Neill says. “These can be less expensive than the standard market. When insureds become members of a group, they’re entitled to volume pricing. To be successful in this market, agents need to know how to access such programs.”

Success often involves a good part­nership with markets that know the business and bring special resources and focus to the table. “Agents we deal with are professionals,” says Stone. “We try to align ourselves with agents who understand coverages and the needs of their insureds. Still, many agents don’t have as much experience. As underwriters, we help them understand available coverages and issues, so they can present the best options to their clients and prospects.”

“We’re focused on providing a market for well-run hotels,” notes O’Neill. “We understand what makes for a good risk, and we work with agents to provide the best coverage for these properties at the very best price. Undervalued, low-occupancy hotels aren’t going to fit into our program. We’re focused on quality versus quantity.”

Knopf’s firm, Westfield Insurance, has been able tap its own experience in the hospitality arena—the company operates an inn, a golf course and an extensive in-house dining operation—to bolster its insurance specialty. “Along with being experts in insurance, we’re in the hospitality field, so we can leverage that experience to give insureds exactly what they need,” says Knopf. “We run the same type of businesses we insure, and at a standard that’s recognized nationwide.”

Looking forward

Some glimmers of hope are beginning to appear for hospitality businesses. For instance, Marriott reports first quarter 2010 North American corporate room nights up 16% over a year earlier. And higher room rates are on the horizon, it adds.

Whether rates will increase is speculation. “To get people back in the door, they’re running specials and offering more robust packages,” notes Knopf. “One concern is this may have a long-term negative effect. Will people expect these promotions to stay? If they remain, profit margins will be thinner. If they end, will that affect retention and occupancy? Once you give something, it’s hard to pull it back.”

Either way, insurance needs remain. O’Neill’s advice to agents: “Get out in the market, know your markets, and cover them the best you can. Don’t get caught up in the commodity aspect of the business. And be prepared to work. This is a very labor-intensive niche.”

Adds Stone, “Stay the course. Everyone is trying to maintain and retain their business. In this environ­ment, make sure you’re with a carrier that will be there next year.”

The author
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.