HUB International 2021 Outlook for Hotel Industry: the Battle for Survival
While Vaccine Remains Best Hope to Restore Travel, Stays and Dining, Aggressive Risk Management Needed to Build Resilience
The operator of one of Manhattan's oldest hotels, the 123-year-old Martinique, filed for Chapter 11 bankruptcy in September. As industry loan defaults mount, it became another lodging industry victim of the COVID-19 pandemic.
Ironically, the Martinique was a forerunner to a trend in the making today - it was used in the 1970s and 1980s by New York City to "warehouse" the growing population of homeless. This sort of use is occurring today as there are growing numbers of vacant and/or abandoned hotels - and homeless.
It's challenging to find positive signposts for the year ahead when stories like the Martinique's exemplify the continuing level of pain ahead for the industry:
Two-thirds of hotel operators can't last another six months at current projected revenue and occupancy levels.
Half of owners say they are in danger of foreclosure. In fact, as of July 2020, $20.6 billion in hotel CMBS (commercial mortgage-backed securities) loans were at least 30 days delinquent, versus just $1.15 billion as of December, 2019.
Unemployment within hospitality and leisure of 38% is almost four times greater than the national average, and more layoffs are expected.
One in six restaurants - or 100,000 units - are now closed permanently or for the long term, with about 3 million workers still furloughed.
While these realities will continue into 2021, shaped by COVID-19, there are ways to manage the risks. In fact, holistic risk management strategies with an emphasis on pandemic and emergency planning will take on huge importance in 2021. Insurance costs and availability haven't been this pressured since the 2001-2004 hard market, where we saw premiums jump and availability shrink. The best way to control insurance costs is to avoid losses in the first place.
It's making the outlook grim for 2021. Here are top issues we see shaping the hospitality industry, and their implications for risk and insurance:
The struggle for survival as financial pressures mount
The hospitality industry's continuing lack of guests is decimating balance sheets. Some organizations were able to anticipate the damage. They added cash to their balance sheets (even if they didn't need it) and pulled down on their credit with loans to be repaid when possible. Hotels were seeing some forbearance from lenders and franchisors; insurance carriers were not enforcing non-payment cancellations or vacancy provisions. But it won't go on forever.
Reduced or vacant properties combined with operators' financial stress will push property insurance, along with commercial umbrella rates, up by 25% to 50% into 2021, and the amount each insurer is willing to write for a particular line is limited. Brokers may need to be counted on to spearhead risk assessments for hotels during this period. Risk assessments are important to ensure any potentially costly issues are identified and corrected, like legionella in the water supply or pipes that could freeze due to lack of maintenance staff for necessary protocols.
The industry's financial straits also pose executive liability issues with coverage being driven up an average of 25% in response. Director and Officer (D&O) and Error and Omission (E&O) exposures are ramping up with the prospect of more bankruptcies and business consolidations and creditor suits in response. The significant number of layoffs also may trigger Employment Practices Liability actions by employees, and by regulators if payroll tax payments have lapsed. Brokers should advise on the adequacy of executive liability coverage for changing circumstances, as well as on practices that improve the risk exposures of executives and boards going forward. The best defense is adequate disclosures, having followed regulations or government recommendations, and having an emergency plan in place and following it - all of which should be reviewed and updated.
As restaurants pivot, adequate protection against risk is concern
With generally less infrastructure, the restaurant industry has the potential to be a lot more nimble than hotels in devising options to survive these circumstances. That was demonstrated in the immediate wake of the pandemic quarantine period. Restaurants pivoted to delivery and take-out, and kept up the services to stay open. Others have reinvented their business models. The trend toward "ghost" kitchens was hot before the pandemic and has accelerated. These can be urban warehouses containing multiple small kitchens leased by a restaurant or a restaurant's subcontractor for delivery only.
Such changes have kept many restaurant doors open - for a while, at least. Chances are that delivery services were easily accommodated by third party services like Grub Hub and Uber Eats, which delivered $10.2 billion in carryout meals in 2018. Those that have proceeded with their own drivers should work with their brokers to offset such risks as food safety, customer privacy and data security. They should also be aware of increases in auto coverage in 2021 that might make third party delivery services more attractive.
Another potential risk restaurant operators face in 2021 is a surge in outsized claims being tracked back to on-the-job contagion, pushing financially stretched health insurers to subrogate them back to workers' compensation carriers. That could trigger double digit rate increases in workers' compensation. Restaurants that have opened to dine-in at any capacity should also conduct risk assessments to audit their coronavirus safety measures, to ensure they meet or exceed Center for Disease Control guidelines. Restaurants should contact their brokers for this type of service and additional resources.
Too many restaurants, however, have not been able to withstand the financial pressures of the pandemic. Chain restaurants alone have closed more than 1,500 locations since it started, including such companies as Chuck E. Cheese and California Pizza Kitchen. Those in such straits should check with their brokers on the best way to manage relevant executive liability issues.
Transfer risk where you can
When a business - and industry - is in crisis mode, moving from reactive to proactive mode may be a challenge, but 2021 may be the time to do it. Risk transfer strategies are available. Some are easier than others to put in place.
One solution is through "gap" insurance products like Insuraguest, which takes on participating hotels' transferred exposures for in-room claims by guests for things like property damage, theft and accidental medical. Not only do hotels get fee sharing income, but it adds to the positive narrative with the primary insurer when another policy pays first on a claim. It has the potential to lower general liability premiums. Other strategies, like the captive insurance option, might be worth considering when the industry is under less financial pressure. Captives allow companies to self-finance their risks, with stop loss coverage assuming the cost of outsized claims. Especially for those with better claims records, the captive strategy can present cost savings and tax advantages over traditional insurance. The captive strategy requires a broker who has experience setting up captives and can provide perspective on the different types and their advantages and disadvantages.
Succeeding through 2021's challenges
The industry that emerges in 2021 and beyond from the disruption of the pandemic will be not just slimmer, but smarter, demonstrating the resiliency it takes to get through to the other side of uncertain times. It will be a time when meeting health and safety concerns will be paramount - for employees as well as for customers and guests. At the same time, the trend toward buying experiences will accelerate post-pandemic and help reinvigorate travel again. The industry's challenge will be to innovate around it all. An environment like this creates opportunities, but also risks. A good broker will help you navigate through them, helping to position your business' story with insurance carriers so your coverage is right-sized and potentially high premium rates better controlled.
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