In many respects, the U.S. lodging industry is back to normal after the upheavals caused by the pandemic and the subsequent aftershocks experienced by the economy.
For example, Reuters reported that two major chains—Marriott and Hilton—are looking for revenue per available room to increase no more than 5 percent this year after jumps of nearly 15 percent and 12 percent respectively, in 2023.
Even with the rebound effect now in hospitality’s rear-view mirror, consumer demand remains healthy. There’s nothing wrong with normal, yet the industry must temper positivity with caution due to forces largely outside its control that continue to stir up operational headwinds.
It’s not just lingering inflation that’s a concern, but the unpredictability of interest rates and, of course, the problematic labor market. There’s still stiff competition for skilled workers and labor costs are unrelenting, with wages, salaries and compensation expected to reach $123 billion this year.
And those properties in catastrophe-prone areas, which seem to have expanded under the influence of climate change, also need to be concerned as related claims are saddling insurers with record-breaking losses. Those losses and carriers’ rising reinsurance costs are causing property insurance rates to skyrocket by as much as 200 percent in some of the hardest hit regions like Florida.
Dealing with the cost impacts of this environment is a major challenge. One solution hotel operators might consider is self-insurance—a money-saver that also provides coverage that’s as good, if not better, than what they might get through traditional markets. Here’s what’s important to know in considering this method of protecting against risk.
The Ins and Outs of Self-Insurance
Self-insurance, which is a way to retain risk in-house instead of transferring it to a third party, isn’t an ideal solution for every organization. For it to be beneficial, the organization should have the necessary financial resources to cover losses, with aggregate stop-loss coverage against catastrophic claims.
This option is typically a solution for particular aspects of a company’s insurance portfolio, not all of it. It also requires a strong—and proven—risk management program, ideally with a fairly clean claims record. Since it has an impact on their collateral in this instance—the hotel’s property—lenders have an important role to play in approving self-insurance as a risk strategy.
Ultimately, organizations opting for this solution gain enhanced control over their property claims and risk management, and also find other coverage or higher limits easier to secure.
A self-insurance program can be complex to put into place, so it’s helpful to partner with a brokerage familiar with the industry and the solution. One of three options will be recommended in structuring the program:
- Through excess policy layers, allowing savings to be shifted to the primary property policy.
- Through individual policies—like property or general liability—should coverage be too expensive or unavailable through standard or excess market.
- Through captive insurance, where the risk is transferred to an alternative risk financing vehicle like a wholly owned insurance company.
Some Questions to Evaluate
Since self-insurance isn’t ideal for every organization, it’s important to take the time to explore the following questions before adopting the strategy.
1. Will self-insurance actually save money?
It doesn’t always. It’s key to do a thorough financial evaluation to make sure.
2. Is this a short- or long-term solution?
Self-insurance is often better for the short-term for a single coverage that’s too costly or with limits that are too low. Organizations that take a longer-term perspective should consult with their brokers for other possible solutions.
3. Are your lenders on board?
Lenders must approve this solution and specify the amount of risk to be covered. They may prefer a less risky approach to self-insurance, like the captive insurance option.
4. Is there time to plan this?
Structuring a self-insurance program takes time, requiring considerable advance planning. It’s not a quick fix to get coverage or cut costs.
5. Can your technology adequately manage this solution?
Self-insurance programs are complex, requiring a robust basis for evaluating and managing risks, ensuring compliance and enabling strong data and analytics capabilities.
6. Are your risk management strategies sound and strong?
This is essential for making a self-insurance program work. Your data and analytics are key to this evaluation.
7. Can your broker do the job?
It’s complicated and cumbersome to evaluate a self-insurance program. Experienced hospitality brokers will manage the complexities for maximum impact.
Kimberly Gore is the national practice leader of HUB International’s Hospitality Specialty Practice.