Economic conditions affect premiums, claims

After two years of falling premiums, property insurance is expected to go back up in 2009, in part due to the current down economy.

Richard Clark, managing director of Arthur J. Gallagher, said premiums could rise 10 percent to 15 percent in Q1 of 2009.

"The insurance market, by its nature, goes in cycles," Clark said. "The events that create this vary, but the results are the same, when you have an event like 9/11 or Katrina, those tend to result in rapid changes. ... So [the current economic] events come on top of carriers having falling premiums and profits, instead of zero investment earnings they have negative earnings."

Clark stressed that all predictions of future premiums are subject to change depending on future developments. Insurance carriers could get financially downgraded when year-end earnings are announced, or a major insurance carrier could go down—both having negative effects on the industry.

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"Generally it's because of credit issues and capital issues of insurers themselves," said Frederick Masters, shareholder and head of the real estate group in Philadelphia for Buchanan Ingersoll & Rooney PC. "They've lost a great deal in connection with investments they've made with credit swaps and various other type of risk investments that they've made. They've lost a great deal of capital insuring [collateralized debt obligations] because they've come due. There have been a lot of defaults and that's kind of what happened to [American International Group]. They wrote policies of insurance on credit obligations, made investments on hedge funds and real estate that lost money ... they can look to the premiums and go to make up in the loss in capital."

Aside from the direct financial issues of hotel insurance in a down economy, there are other latent problems. According to Philip Glick, SVP at ECBM Insurance Brokers and Consultants, there is a rise in workers' compensation claims, and "slip and trips" during tough times.

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"The hotel business is impacted negatively, so that means you'll be laying off employees," Glick said. "When you lay people off, workers' comp claims increase dramatically."

As layoffs come, employees work more overtime and have to do more jobs, which leads to more injuries and, as a result, more liability claims. The first workers laid off often are maintenance workers, which then leads to "an uptick in liability claims" from guests, according to Glick.