What hotels need to know about layered insurance

Insurance can be a hotel’s largest non-capital expenditure after payroll and taxes. (Getty / E+ / ridvan_celik)

As the lodging industry continues to claw its way out of the business ravages of 2020, it’s increasingly difficult and expensive to insure all the risks the industry faces. That’s a real problem when insurance is a hotel’s largest noncapital expenditure after payroll and taxes.
It partly stems from the state of the insurance market—the hardest of the last 20-plus years. Recent notably large losses (think natural disasters and active shooter judgments) has left carriers reluctant to take on more exposures. Those losses have pressured their capacity (or money available) to cover large risks. A growing number of insurers have bowed out of hospitality entirely—and many of those that remain are finding it easier to just say “no” than to renew policies, even at 50 percent increases in premiums.
Particularly affected are hotels operating in rural areas, in high-protection-class fire zones or those that are vulnerable to catastrophic risks like wind, hail or flood. That operators need to be smarter than ever in their handling of risk is a given. They also need to be prepared well before renewal with a positive story to present to carriers. How the pandemic was handled successfully, including health and safety protocols, is key. A clean loss history is paramount.

Getting Creative

But here’s something else they need to know: The insurance market has been soft for so long and carrier capacity so great and cheap that many insurance brokers are stymied at how to proceed. They are banging their heads against the wall trying to build a single-carrier mouse trap. But they really need to get creative in how they go about catching them.
The times call for creative, multicarrier solutions. One strategy that’s not new but is likely unfamiliar to many brokers is “layering.” It’s been used by larger hotel companies for years that have larger risks that single carriers won’t typically cover. But brokers without experience in the process or an expansive network of insurers and reinsurers might struggle to get it done. 
Layering is one multicarrier way to work around the insurance industry’s diminished capacity. Take excess liability insurance policies, which protect against losses that are beyond the limits of the primary liability coverage. Especially today, a single insurer isn’t likely to cover the larger risk exposures in their entirety, even for smaller accounts with lower limits. The broker must find different insurers and reinsurers to cover multiple layers of the risk. Combined, they create a “tower” of coverage, the primary coverage at the base, topped by each layer.
Distributing the risk across a group of insurers facilitates adequate coverage. Plus, the way it works, the higher the layer in the coverage toward, the less exposure the insurer has. That makes it easier to find carriers to participate—and also can reduce cost of coverage.

Claims Management

When it comes to claims management and terms, it’s the primary carrier that takes the lead. The primary also generally is charged with managing claims and insurers covering the layers follow its contract conditions for conditions, exclusions and policy definitions.
Another multicarrier option to get policies written in challenging markets is through quota shares. These are single policies with multiple insurers, who share premiums and losses according to a fixed percentage. Insurers may be interested in participating because while the profitability may be lower, it’s a great way to free the capacity needed to write new policies.
Layered insurance—and quota shares—can be complex to put together and manage and are strategies many brokers may not be able to tackle easily. But these days, operators of any size in the hotel industry need to be able to count on a broker who’s creative and has access to a variety of insurance and risk management solutions to get coverage at all—let alone cost effectively.
Kevin Eggleston is managing director for hospitality and real estate for Hub International.