How to pick the right insurance policy

Insurance and risk management has, and to some extent, continues to be, a reactive purchase or consideration. Following the financial crisis in 2008 there was a marked improvement, probably owing to the need of the industry to look at organic growth rather than acquisition, but the trend still continues. Unfortunately, this means the services provided by real specialists in our field continue to remain a phase 2 or phase 3 consideration, despite the advantages.

Although the purchase of insurance to cover property exposures in respect of lobby, rooms, restaurants and bars and their associated liability risks remains a key concern, increasingly we see how integrated insurance and risk management supports the spectrum of asset considerations. This includes everything from brand, intellectual property, non-damage interruption, IT, employee theft to banking covenants and operating agreements.

And while each of these topics probably deserves their own detailed report, broadly speaking, they fit within one of four risk management levels:

• Strategic –  in respect of both micro and macro objectives
• Operations – day-to-day risks such as fire control, employee and public footfall management
• Project – either new-build or renovation
• Financial – such as growth or consolidation, maximising RevPAR and acquisition/disposal

With each level integrating across the whole it is possible to evaluate the owner/operator risk appetite. This can then be applied, not only to risk transfer by way of insurance but, also, to areas where the stakeholder decides to retain risk. This can be by way of deductibles or in their consideration of emerging insurable risk such as, reputation, intellectual property, crime and, in view of other recent news articles, cyber, which we believe will become an increasingly important cover and an area where specialist hospitality and leisure insurance advisers are going to have to become adept.

Furthermore, this approach will enable a hotel owner/operator to anticipate and hopefully reduce their exposure to unexpected operational occurrences. This would work as the framework will forecast potential events and formalise responses in respect of retained and insured risks. These risks could present in any form, ranging from fire and consequential losses, through to crisis management in the event of instances such as norovirus, something which frequently manifests itself as food poisoning causing unwarranted reputational damage and negative impact to revenues.

Of course, not all risk has such distinctive and negative connotations. Risk is, after all, opportunity and, as such, it is essential that, as risk advisers we ensure we support our clients in the hotel market to proactively realise these opportunities – whether identified in advance or with little notice.

This is an area in which, historically, the insurance and risk management industry has been quite inadequate despite the depth of knowledge available to it. Although there is a huge spectrum of areas where would could provide examples, we would suggest that the following are immediate and probably well understood illustrations:

• Transactional Risks – including Warranty and Indemnity Insurance to support acquisition and disposal activities. We are finding these services are increasingly in demand owing to the greater supply in capital available over the last 18 months or so.
• Debt Covenants – whether in the form of multiple layers of debt or simple loan to asset transactions, financial institutions will always apply covenants where the borrower needs to comply with insurance obligations. We have seen examples where covenants are extremely wide (which can be useful to comply with but highly dependent upon interpretation) but, increasingly, we find covenants are becoming more specific relating, not only to the insured perils and values but also in respect of Joint Insureds, Loss Payees (often to varied percentages) and waiver clauses.
• Contract Risk – especially in respect of franchisee/operator compliance. As with capital providers, all international operators will require certain limits of cover, especially in respect of Public Liability and also other indemnities such as Waivers of Subrogation and Joint Insured status. Although large franchisees are au fait with these requirements they are not often understood by many, including UK brokers. Indeed, many known insurers are not well placed to manage these requirements and, although things are improving, the market is still rather more contracted than most would expect.
• Peer Benchmarks – can provide real time information to identify the insured position of a hotel (such as Business Interruption Indemnity Periods, Liability Limits of Indemnity, etc.), which often proves useful to the owner to assess where their programme rests against the market. However, we find a true value of these benchmarks is ensuring the owner can be sure their debt covenants are complied with, especially, when obligations are wide and open to interpretation.

Clearly this is a huge topic and it would be an injustice to say that we can even scratch the surface in one article but, hopefully, it is a little clearer that specialists in the broking and risk management community understand the UK hotel sector is extremely varied, in terms of ownership and operation through to a diverse range of customer profiles, changing market pressures and buying requirements.

Although any risk and insurance framework must reflect and anticipate these variances the starting position and categories will always cover these levels and, if conducted with thought, will ensure the outcomes are bespoke to a hotels requirements and each would benefit – whether an international chain, franchise or family-run business.

Richard Goodhand has more than 30 years of experience working in the insurance and has spent the last 20 years working closely with hotel clients. This feature first appeared in the September 2015 issue Hotel Owner.