Hospitality and Gaming: Loss Control, Alternative Insurance Solutions Can Soften Industry Headwinds

April 13, 2022

When CBRE Hotels Research last month revised its industry forecast to project a return to pre-pandemic levels as early as the third quarter of 2022, it was another sign of the cautious optimism currently characterizing much of the hospitality and gaming industry.

In a March 17, 2022, release announcing the revised forecast, CBRE cited stronger-than-expected growth in Q4 2021 as the reason for its improved outlook, which takes into consideration average daily rate (ADR), occupancy and revenue per available room (RevPAR). Initially, CBRE had predicted the industry’s return to pre-pandemic levels wouldn’t occur until Q3 2023.

Yet even while announcing an improved outlook, CBRE also warned of factors likely to dampen profitability.

“Higher room rates will lead to a quicker return to 2019’s nominal ADR levels,” Rachael Rothman, CBRE’s Head of Hotel Research and Data Analytics, said in the release. “But from a profitability perspective, inflation will be a headwind through higher utilities, supplies and labor.”

Rothman could have cited one more factor contributing to the headwind: insurance.

Like most industries, hospitality and gaming continues to face an ongoing hard market for Property and Casualty (P&C) Insurance, with unfavorable conditions for most lines of coverage other than Workers’ Compensation. Cyber Liability Insurance and umbrella/excess coverage are particularly challenging in terms of rates, availability, capacity and underwriting scrutiny. Depending on location, market conditions for Property Insurance are similarly unfavorable across the board, though there’s been slight softening for property in areas less prone to catastrophic weather events — especially for businesses that can demonstrate strong loss ratios.

All in all, though, conditions are challenging enough that another CBRE executive, Director of Research Information Services Robert Mandelbaum, recently declared in an article for Hospitality Net that hotel insurance is a “largely uncontrollable cost.”

Here’s an alternative view, one informed in part by the availability of alternative risk solutions: While you may not be able to fully control your insurance costs, there are ways to contain them — including ways that allow the insured greater control of claims.

We’ll explore alternative risk solutions in a moment. First, let’s take a closer look at those market conditions for insurance covering hospitality and gaming.

P&C Market Outlook

In December 2021, Alera Group published the Property and Casualty 2022 Market Outlook. Here’s what we had to say in the whitepaper’s section on hospitality and gaming:

“The insurance market for the hospitality and gaming industry is challenging — even more so than for many other industries. Factors influencing the market:

  • "A renewed emphasis on loss prevention. Due to heavy losses in the hospitality sector, insurers are highly selective in the hospitality businesses they will write. They will inspect most properties before offering a proposal. Properties need to show a strong commitment to preventing losses and a track record of effective risk control measures.

  • "The jury is still out on COVID-19 claims. Many owners and operators expected their Business Interruption Insurance would cover some of their COVID-19-related losses. Most insurers have denied these claims because there was no property or physical damage, which typically triggers business interruption coverage. So far, most court rulings have supported insurance carriers’ assertion that the virus did not cause any actual physical damage. These rulings have come very early in the process, during the motion-to-dismiss phase. As a result, it is too soon to say what the ultimate outcome will be.

  • "Insurers fear a new round of COVID-19 related claims. Pandemic-related liability claims will likely be a factor in 2022 as claimants — both customers and employees — allege that a company’s lackadaisical approach to safety resulted in them contracting the disease. Claimants will face an uphill battle attempting to establish a business’ liability for their illness, and most insureds will prevail, provided they can show they followed state safety guidelines. For businesses already under pressure, defending even meritless claims constitutes a significant financial threat.

  • "Cyber is a growing exposure. Hotels and casinos store voluminous amounts of private information for their guests. As they increase the use of technology to improve customer experience and facilitate things such as online gambling, the vulnerability to cyberattacks increases. Given the high risk of attack, clients will need solid cybersecurity programs in place to secure Cyber Liability Insurance.

  • "Pay attention to vacancy exposures. With travel slow to return to pre-pandemic levels, many hotels are struggling to fill rooms. It’s important to be mindful of vacancy provisions in your policy.

  • "Most policies exclude or limit coverage once a building becomes vacant. Vacancy is typically defined as less than 31% of the total square footage being used to conduct customary operations.

  • "Ask about tiered rates. Fewer guests means lower exposures and reduced liability, and that can have a positive impact on insurance rates.

  • "Captives can offer a cost-saving alternative. For clients with good loss histories, captives can be a tool to recoup dollars invested in traditional insurance."

Exerting Control

Demonstrating a sound risk management program and documenting a history of loss control are — along with location outside a zone deemed highly susceptible to catastrophic events — among the surest ways to overcome one of the biggest hurdles to designing a comprehensive insurance program: underwriter reluctance. But obtaining the coverage you need won’t necessarily prevent a common frustration in the hospitality and gaming industry: settlement of a claim the insured would rather contest.

Here’s the problem with insurance carriers calling the shots on claims decisions: While it may be cost-efficient for the carrier to settle some contestable claims, such decisions may be costly to the insured, given that any claim in the policyholder’s recent loss history is likely to result in a rise in premium.

Captive insureds call their own shots. Because they essentially are their own insurance carrier, they decide whether a claim should be settled or contested, based on what’s best for their bottom line.

Captive members also get to decide what to cover and what not to cover — an ability that proved especially useful after pandemic shutdowns. While carriers have denied almost all COVID-19-related business interruption claims and won most of the resulting from such denials, captive insureds “saw their Covid claims paid or were able to use their captive-insurance-company-accumulated wealth to weather the storms,” as the online publication Entrepreneur reported in its February article “5 Trending Captive-Insurance Considerations for 2022.”

Cyber Challenges, Alternative Solutions

Also among Entrepreneur’s captive considerations: “Companies will utilize their captives to cover cybercrime.”

As noted in the Alera Group P&C Market Outlook, the hospitality and gaming industry’s increasing reliance on technology coincides with explosive growth in cyberattacks and a concurrent rise in Cyber Insurance rates. While companies that have been rigorous in implementing prevention and monitoring protocols may not be subjected to the 20%-plus increases their less cyber-savvy counterparts are facing, even they can expect double-digit increases from carriers. At the same time, carriers are lowering limits, meaning policyholders are paying more for cyber coverage but getting less.

In response to these conditions, designers of captive insurance programs have been methodically working on solutions for companies taking a long-term approach to business planning and cybersecurity. In July 2021, James Bullock-Webster — head of technology, media and cyber for New Dawn Risk — told the website Captive International, “In the coming year, we will reach a point where some larger clients no longer see the value in transferring their exposure to the insurance market. They will decide the time has come to self-insure by setting up a new or extending the use of an existing captive.”

Many have already decided, leading Business Insurance to report earlier this year, “Captive domiciles are seeing growing interest from organizations to write cyber liability business in captives amid increasingly tough market conditions, regulators say. As cyber rates have increased, and terms and conditions have become more restrictive, corporate insurance buyers are looking for alternative ways to finance cyber risk.”

For a deeper dive into strategies for navigating P&C market conditions, including those in the hospitality and gaming industry, read Alera Group’s Property and Casualty 2022 Market Outlook. In the Outlook, you’ll also find valuable information on factors driving the current P&C market, along with analysis categorized by industry and lines of coverage.

To obtain the whitepaper, click on the link below.


About the Author

Robin Rider, CPCU, ARM
Commercial Account Executive
Alera Group Las Vegas

Robin Rider has more than 20 years of experience as an insurance broker, with much of that time devoted to providing Property and Casualty solutions for clients in real estate and property management. She excels at building constructive working relationships with insurance company underwriters and at collaborating with fellow Alera Group brokers around the country to design innovative and comprehensive coverage programs, including alternative risk solutions such as captives.

Contact information: