Navigating a Challenging Renewal Cycle for Hospitality Property Insurance

June 21, 2023

Are your bags packed for vacation? The summer season brings promising prospects for the hospitality industry.

The American Hotel & Lodging Association (AHLA) predicts a Booking Index Score of 7.8 out of 10 for both business and leisure travel this summer, indicating a “very good” short-term industry outlook. A recent Expedia Group consumer survey revealed that “72% of travelers are planning to travel for leisure more this year to make up for prior years.” Moreover, ABC News reported that the weekend of June 9 in Chicago witnessed record-breaking hotel occupancy, thanks to three Taylor Swift concerts and a healthcare conference.

While this news is certainly positive, the hospitality sector is not without its challenges. Staffing shortages loom large, with more than 100,000 hotel positions currently vacant. Additionally, the Property Insurance market presents rough terrain characterized by soaring rates and limited capacity. Almost every renewal in this climate will prove to be challenging.

How can the hospitality sector effectively tackle upcoming renewals? First, it is crucial to acknowledge the realities of the current market. Second, using creative insurance tools and exploring non-traditional products can offer viable solutions. Third, partnering with an experienced broker specializing in the hospitality sector is paramount. Such a broker adeptly negotiates tailored solutions that align with your financial and operational requirements.  

Reviewing the Market Outlook

In December 2022, Alera Group released its 2023 Property and Casualty Market Outlook. Here’s what we said about the hospitality industry:

“The insurance market for the hospitality and gaming industry remains challenging, with little premium relief in sight. Factors influencing the market:

  • “Labor shortages raise insurers’ concerns about an increase in claims. According to the latest U.S. jobs report, the hospitality sector is down 1.5 million workers, or 9%, from February 2020. Turnover is also an issue as workers leave the industry for easier, better-paying work. Insurers are concerned that staff shortages in key areas such as housekeeping and security will lead to more accidents. They also worry that employers will be forced to rely on overworked current employees and new unskilled laborers, further increasing the likelihood of liability claims.

  • “Insurers are reluctant to assume more risk. Large losses from occurrences such as national disasters and nuclear jury verdicts have left carriers reluctant to take on more exposures. They continue to manage the amount of insurance they will write for one client.

  • “Property prices are on the rise. Three factors are driving the trend: 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.

  • “Property Insurance buyers will experience underwriter scrutiny on building valuations and replacement costs. Clients need to have credible data, methodology and rationale for how they're evaluating their properties.

  • “Use of technology expands cyber exposure. Hotels and casinos already store voluminous amounts of private information on their guests, leaving them vulnerable to cyberattacks. New technologies are continually being deployed to improve the guest experience and operating efficiencies. The hospitality industry’s cyber exposures continue to grow. Hotels and casinos are increasingly valuable targets for cybercriminals. According to a 2022 Ponemon and IBM report, the average cost of a data breach was $2.94 million. 

  • “Growth in online gambling and betting. VIXIO Gambling Compliance projects that the U.S. online gambling and betting market will hit $8.2 billion by 2025. This growing revenue stream also means more vulnerability to cyberattacks. These websites and mobile applications are gateways to customers’ credit cards, bank accounts and other sensitive information.

  • “The challenge of managing reputational risk. Any incident — whether a customer facing a physical assault on the premises by a guest, a claim of food poisoning in the restaurant or a burglary — can trigger a social media barrage that can significantly hurt business. In today's weaponized social media environment, companies need to recognize the impact reputational crises can have and be able to consider these risks and plan to mitigate them just as they would an operational crisis.”

Having reached the midpoint of the year, the market has 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. Expect a challenged property outlook throughout 2023.

New Trend in Hotel Ownership

One new emerging trend is the pause in the ownership cycle. Hotels generally follow an ownership cycle in which ownership changes every 5-10 years, followed by renovation and repositioning. With a decrease in mergers and acquisitions and increased interest rates, this cycle has paused. And while new construction hasn’t slowed yet, CBRE anticipates a reduced supply of new hotels over the next several years.

Alternative Property Insurance Options

To help finance your property coverage, here are three alternative options:

  1. The shared and layered tower approach involves collaborating with multiple carriers for different layers of your Property Insurance, including from non-traditional carriers. This could also include carving out specific buildings onto separate policies, particularly in coastal areas.

  2. Deductible Buy-Down policies have gained popularity due to their ability to meet lender requirements and reduce potential out-of-pocket claim expenses. For example, if your hotel has a Property policy with a $1 million wind-and-named-storm deductible, you can secure a separate insurance policy from another carrier to decrease the deductible to $500,000. While the second policy incurs additional premium, the Deductible Buy-Down policy reduces your exposure if the property carrier refuses to offer a lower property deductible on your program. Moreover, your lender may mandate limits or deductibles lower than your carrier offers.

  3. Parametric Insurance offers another method to finance your risk, although it is less commonly used. This non-traditional option insures against a singular nature-based exposure, such as a wind event. Parametric Insurance responds and pays claims based on the severity of the event, usually relying on an index level defined by the government. For example, a Category 4 storm provides a higher claim payout compared to a Category 3 storm, irrespective of the actual property damage. This insurance product bypasses the conventional claim review process as the insured event triggers the claim payout. 

The Importance of Choosing the Right Broker

Partnering with an experienced insurance broker who comprehends the current market dynamics is crucial when it comes to constructing a creative property and casualty insurance portfolio that aligns with your business goals and satisfies lender requirements. An active broker takes the time to thoroughly understand your operations and business plan before advocating for your interests with insurance carriers.

For remaining 2023 property renewals, expect challenges. However, a knowledgeable broker can guide you through the renewal process and will:

  1. Initiate the renewal cycle early;

  2. Verify insurance-to-value (ITV);

  3. Request replacement-cost coverage;

  4. Assess lender requirements;

  5. Promote your risk management and mitigation strategies;

  6. Conduct modeling to determine the most strategic insurance options.

Accurate valuations are critical to the underwriting application and ensure that replacement cost coverage will rebuild at today’s market price. Expect property valuation increases at your renewal.

Additionally, a broker will present your risk management and mitigation activities to underwriters, aiming to maximize coverage placement with the best policy forms, limits and pricing. 

Insurance modeling plays a crucial role in making informed decisions by identifying the most cost-effective options that fulfill your lender requirements.

To mitigate the impact of Property Insurance premium increases, a proficient broker will explore potential savings within the entire property and casualty portfolio. For example, Workers' Compensation Insurance is currently experiencing a soft market. Through loss-sensitive modeling, you can leverage your loss dollars to restructure this aspect of your program, resulting in cost savings.

With a personalized approach, insurance modeling tools and creative coverage strategies, a skilled broker can build a comprehensive hospitality insurance portfolio that protects your interests and optimizes financial resources.

For a broader look at navigating insurance mar­­­­ket conditions, read Alera Group’s 2023 Property and Casualty Market Outlook and our March 2023 Commercial Property Update.  

With more than 130 offices around the country, Alera Group combines local service with national reach and provides individualized, carefully crafted coverage programs that fit each client’s unique needs. To contact an Alera Group agent or broker, click on the link below.


About the Author 

Andrew Carretto, CPCO, AU

Client Executive

Propel Insurance, an Alera Group Company

Andrew Carretto has 20 years of experience working in the insurance industry, including a decade in carrier underwriting positions. This extensive background provides his clients with a well-rounded broker perspective. Andrew advises his hospitality clients on how to navigate an insurance portfolio that meets the operational needs of the business. This includes insurance modeling for strategic planning, as well as exploring alternative coverage and financing solutions.

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