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Coping with Higher Insurance Costs

The hospitality industry, already reeling financially from a fallout in business and leisure travel, is now dealing with another blow: the highest insurance costs in five years. To help combat soaring rates, hotel owners are opting for policies with higher deductibles and implementing loss-prevention programs.

“No other operating costs have risen as much (as insurance). And this occurred at a time when hotels are experiencing significant decreases in revenue and occupancy,” says Bob Murphy, director of the hospitality and lodging practice at Chicago-based insurance broker Aon Corp.

Murphy, who works with hotels to find the most reasonable insurance policies and rates, says that in some extreme cases premiums for property insurance renewals have increased 300%. More typically, however, average U.S. hotel insurance costs — which take into account property and general liability premiums and claims paid out — have risen by more than 50% in the past couple of years. In 2002, for example, costs rose 33.1% and this year the cost is expected to jump another 42.7%, according to a recent report by PKF Consulting in Atlanta (please see chart).

Historically, hotel insurance costs have comprised less than 1% of overall sales. Not anymore. That figure crept up to 1.1% of total revenue in 2002, and is expected to hit 1.6% this year. That figure as a percentage of sales may seem negligible, but any rise in the cost of operations is critical. Owners have been forced to make cuts in labor and supplies because hotel revenues have been falling. “Insurance is now a line item that can't be ignored,” says Robert Mandelbaum, director of research at PKF's hospitality group.

Although there are many variables when it comes to property and general liability policy rates — such as where the hotel is located, whether it's a full-service or limited-service property, and how many claims have been filed against it — a typical hotel pays much higher premiums now than three years ago. In 2002, for example, an average 200-room full-service hotel that is part of large portfolio probably paid about $85,000 for property and liability premiums, compared with $50,000 or less in 1999, says Rich Clark, managing director with Itasca, Ill.-based insurance broker Arthur J. Gallagher.

Hotel Insurance Costs Bite Into Revenue'
Cost Per Available Room** Change from Prior Year Percent of Total Revenue
2003* $561 42.7% 1.6%
2002 $393 33.1% 1.1%
2001 $295 18.9% 0.8%
2000 $248 12.5% 0.6%
1999 $221 -1.3% 0.6%
1998 $224 -10.9% 0.6%
**Estimated amount in dollars of insurance costs per room annually.
Source: The Hospitality Research Group of PKF Consulting

What's causing insurance rates to soar? For starters, insurance rates may have been artificially low, say industry experts. Insurance rates dropped dramatically in the '90s as companies tried to gain market share. The reduced rates were offset by stock market gains. But when the stock market tanked in 2000, insurance companies were forced to raise rates to make up for their losses, explains Clark. Then, after the tragic events of Sept. 11, property insurance “shot through the roof,” he adds.

Insurance companies also started looking at individual hotels in a different light. Trophy properties in major U.S. cities, for example, are now considered terrorist threats and subject to higher rates, says Murphy of Aon Corp.

To help curb rising insurance costs, hotels are switching to policies with higher deductibles and emphasizing safety to reduce claims. Mark Rafuse, CFO of Atlanta-based Noble Investment Group, says his company is willing to pay higher deductibles and aggressively tries to prevent losses at its 20 properties. It even hired an outside insurance expert to walk through each hotel, identify areas of risk, and suggest improvements.

Lodgian Inc., which owns and operates 97 hotels under multiple brand names, raised its casualty insurance deductible — which includes general liability, workers' compensation, and automobile liability — from $100,000 to $250,000 and started a massive loss-prevention program after witnessing insurance costs jump 30% in 2001, says President and CEO Tom Parrington. “You have to do something or it eats you up alive,” says Dan Ellis, Lodgian's senior vice president and general counsel.

Atlanta-based Lodgian now provides non-slip safety shoes to kitchen employees and instituted an online safety program. Hotel employees participate in monthly cyber meetings to discuss safety and security measures for both guests and employees. By focusing on risk management, Lodgian's insurance costs increased by only 15% in 2002 and will remain relatively flat this year — a major coup for the company, says Ellis.

“This has been a wake-up call to everyone in the lodging industry,” says Murphy. “Those who have been proactive will see significant dividends over the long run.”

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