Our highlighted specialty classes this month serve society's primary needs of food, drink, and shelter.
The food services and drinking places industry has more than 600,000 establishments and is one of the largest segments in the country. Even though every town has at least one and insurance agents are regular visitors, this classification is not always well served. Restaurants are complex exposures and the owners, who may be very hospitable and are culinary experts, are often not well informed about the many business risks they face. Experienced insurance agents who work with carriers that specialize in writing restaurant business can provide the coverage needed and also help their customers navigate through some of the difficult areas of underwriting concern, such as controlling liquor liability, eliminating trips and falls, and preventing fires.
The hotel industry is under increasing pressure even as it emerges from the recession. Labor costs are rising just as customers become more and more demanding. Franchisors demand more frequent facility updates in order to remain relevant. However, this costs money. Hotels are under increased scrutiny because of the widespread use of Internet reviews. Insurance company underwriters also use these reviews to identify exposures that the hotel might not have disclosed on the application. Agents who are willing to research and develop contacts in this industry can be well rewarded because of the significant premium these accounts generate.
KNOWLEDGE, EXPERIENCE DRIVE RESTAURANT AND BAR INSURANCE SUCCESS
Understand the risks and deliver solutions
By Dave Willis
Agents and brokers don't need to look far for opportunities to grow their business. Virtually every town has at least one restaurant or bar. Most have a lot more. The U.S. Bureau of Labor Statistics says the "food services and drinking places" segment includes nearly 600,000 prospects. And the number is growing-up more than 20% from a decade earlier. Each one of these represents potential new revenue for producers who understand the business.
The National Restaurant Association's culinary forecast identifies a number of "hot trends" for 2014. Top food trends include locally sourced meats and seafood; locally grown produce; environmental sustainability; healthful kids' meals; and gluten-free cuisine. Top alcohol trends are: micro-distilled/artisan spirits; locally produced beer/wine/spirits; on-site barrel-aged drinks; culinary cocktails (e.g., savory, fresh ingredients), and regional signature cocktails.
Experts in the restaurant and bar insurance business are seeing shifts in their own markets. "We're seeing a number of new places popping up in the Northeast," says Jason Kalinowski, director of commercial binding authority for Quaker Special Risk. "So many people want to get into the business, and many of them are actually doing it."
Among bars, he's seen considerable growth in the availability of craft beers. "It used to be common to see places with four or five beers on tap and a small number of bottles," he says. "Now we're seeing dozens of beers-including seasonals. It's amazing how many specialty brew places there are. They're making their own; you can see the tubs and vats right next to you, and it's unbelievably fresh."
Food options also are changing. "More places are pairing the food with the alcohol," Kalinowski remarks. "It's much more of an exact science now. It seems like you have to be more of an expert these days."
"We're seeing some of the mom and pop operations trying new things," observes Brian Berg, AU, ASLI, senior underwriter at Risk Placement Services. "They're trying to be a little different from the place down the street. So, for example, we're seeing more karaoke bars, which we hadn't seen very much of in years."
Some growth is regional. "In Texas, for instance, you're getting a lot of the smaller cowboy bars," he notes. "In South Beach, there are a lot of different Latin American bars."
Restaurants and bars carry a number of risks and exposures. "Common liability exposures include slips and falls and alcohol service," explains Heidi Strommen, CPL, president of ProHost USA. "Operational risks associated with restaurants are best controlled by experienced, alert management and well-trained employees."
For example, she says, appropriate flooring material-in good repair, hand railings where needed, clearly marked level changes, and prompt clean-up of spilled food and drink-all are key to reducing slip and fall claims.
"Over-serving alcohol to customers and/or serving alcohol to minors is an area where employee education is important," Strommen says. She stresses the importance of holding regular refresher courses to ensure responsible and legal alcohol service.
"Making sure employees go through TIPS training is important," says Kalinowski. "We're seeing it used quite a bit." TIPS (Training for Intervention ProcedureS) is an educational program that supports the responsible service, sale, and consumption of alcohol.
Property risks also exist. "Restaurant fires often start in the kitchen," Strommen notes. "The incidence can be reduced through rigorous cleaning practices and the use of protective devices." These include an exhaust system, an automatic extinguishing system that complies with the UL 300 standard, proper fryer separation, and an adequate number of Type K hand-held fire extinguishers, she says.
Insuring food and beverage risks
According to Strommen, competitors in the insurance marketplace vary by state and region. "Though there are changes all the time in the mix of players, the marketplace remains fairly competitive," she notes.
Kalinowski says some firms that specialized in insuring restaurants, bars and taverns have not done well financially. "Some threw all of the coverages together," he explains, "and because of a poor rate or too much exposure, they ended up losing money and getting out of the business. Now retailers are coming to wholesalers and facing sizable premium increases."
For some restaurants and bars, Berg says, coverages are tightening up. "Underwriting is becoming a premium, and carriers are looking more closely at accounts and deciding whether or not to write them," he says. "In some regions, it's hard to find a good market at a good price."
He points out that some accounts are facing sizable rate increases. "People are shopping accounts every year," Berg coments. "While that might bring a short-term benefit, when they are making frequent changes and they have a claim, there is no build-up with the carrier and they won't make the exceptions. And that could cost the insured in the long run."
More carriers seem to be requiring their own supplemental applications. "For new businesses, for example, they want to see résumés of the owners," says Kalinowski. "I'd never seen that question until about a year ago. They want to see what experience the owner might have in the business."
In many cases, state laws drive market issues. "I work with a lot of markets that will not in a million years write liquor in Pennsylvania," Kalinowski says. "In other states, it's not a problem."
Berg concurs. "Various regions have certain issues with liquor-related legal liability laws," he says. "There's a big difference between states with dram shop laws and those without."
Kalinowski points out that liquor liability claims usually are severe. "You don't get small liquor liability claims," he says. "You may get a small slip and fall, but when it comes to liquor, there's a good chance it's going to be a larger claim and it's going to hit the liquor limits."
According to Geoff Pratt, program director at NSM Insurance Group, the market for liquor liability has gotten more difficult. "Some package carriers are opting to offer renewals without liquor," he explains. "Other carriers are simply no longer offering the product."
Such shifts have led to an increase in calls about his firm's new monoline liquor liability product. "When we get these calls, there's sometimes a case of 'sticker shock,' often because the package with liquor or the prior monoline liquor product was not priced where it should have been," Pratt says.
Assault and battery coverage is another issue that is challenging for some insureds. "Some markets, as long as the sale of alcohol is under 40% or 50% of revenue, will offer assault and battery coverage," Kalinowski says. "They view it more as a restaurant than a bar, and the exposure is not as great." Establishments with a higher percentage of alcohol sales may find exclusions or lower limits-and often a higher price.
Berg says response to higher prices tends to differ by region. "For example, in Texas and surrounding areas, bars and restaurants don't seem to have issues with higher assault and battery premiums."
Seizing opportunities
There are a number of ways agents and brokers can build a presence in the restaurant and bar market. "Keep track of new establishments opening in your area so you can get in on the ground floor," Strommen says. "Fast-casual is a growing segment of the restaurant business and represents a good niche for agents to target.
"Understand your customer base," she adds. "Join the state restaurant association and network with members. Get up to speed on issues affecting restaurants and bars so you can speak intelligently with your clients and prospective clients."
Berg agrees. "Completely understand what coverages are needed," he says. "Offer the best coverage and terms you can, and let the client or prospect decide what to take and not take."
He also encourages agents to make sure that prospects starting out in the restaurant or bar business understand the true cost of operating a business. "There are a number of expenses beyond what they may think about-everything from insurance to laundry to cleaning and more," he explains. "You see certain applications where you just know the restaurant isn't set up to succeed." Addressing these issues up front makes for stronger accounts going forward.
Kalinowski stresses the value of relationships. "Second-generation agents are especially successful because they have a long history with their clients," he remarks. "Relationships pay extra benefits over time because successful owners often open additional and/or larger operations."
Good relationships carry other perks as well. "Restaurant owners know each other," says Strommen. "Be sure to always ask your satisfied clients to recommend you to their friends."
Serving insureds
A hands-on approach can help retail agents and brokers better serve their restaurant and bar customers. "Taking loss control seriously is particularly important in the food industry," Berg asserts. "There's a potential for large claims, and no restaurant is perfect."
He points out that health inspectors visiting an establishment "nearly always find something wrong. Paying attention to possible exposures can make a big difference in the quality of the risk."
Strommen recommends engaging clients in strategic planning discussions. "Ask about any upcoming changes to the restaurant or bar that may affect their insurance rates and/or their eligibility," she says. "For example, do they plan on adding a dance floor, live entertainment or delivery? Are they planning to offer drink specials or stay open later? Are they looking to remodel or open a new location? Emphasize your role as a business advisor."
Use knowledge and experience to help clients reduce their risks. "Experienced agents and brokers learn from what they've seen go wrong," says Kalinowski. "They've conducted due diligence following losses and understand causes, whether it was poor training, being open too late, kitchen fires or something else."
Berg agrees on the important role agents and brokers can play in supporting good loss ratios. "The better the conversations and relationships between the business owner, the retail agent and the wholesaler, the better things will be for the client," he says. "Focus on things like facilities, operations, training, premium audits and more. Hold these discussions on a regular basis-maybe quarterly-and not just before renewal time."
He also encourages agents to make sure owners are actively involved in claims handling if situations occur. "This will help them better understand how to reduce losses going forward," he says.
Finally, says Strommen, make sure restaurants and bars are properly covered for all of their exposures. "For instance, make sure to offer restaurant-specific coverages like foodborne contamination and food spoilage," she says. "Stay current on new exposures and coverages in the industry.
"Also, try to offer a new coverage option at each renewal, so you are not only selling price but addressing the whole range of exposures." Possibilities she suggests include employment practices liability, cyber liability, D&O and additional crime coverages.
FINDING OPPORTUNITIES FOR GROWTH-AND FUN-IN THE HOTEL BUSINESS
Partner with an experienced intermediary and build a profitable book
By Dave Willis
As the economy continues to rebound, hotels are enjoying an increase in business. At the same time, hotel owners and operators face numerous challenges. Some affect all types of hotels; others impact certain segments.
"The industry seems to be getting very competitive, with many players in the franchise and non-franchise space," explains Dennis Saldana, CIC, commercial lines underwriting manager at Society Insurance. "With the ease of online booking and search capabilities, the days of showing up at a hotel while you're traveling and seeing if they have a room are over. It's a tough market, and many hotels are filling their rooms at lower percentages than before."
Nicholas Pineda, president of Northwin Insurance Agency, the hospitality division of Capacity Coverage Companies, says hotels are dealing with "a rise in labor costs, increased health insurance costs and, most important, higher customer demands. Franchisors are competing for market share, particularly in the focused service segment, which is above the economy segment and below full-service and resorts."
Increased customer demands lead to higher demands on franchisors. "For example, Hilton brands require that franchisors change all of their assets-mostly their furniture and fixtures-every four to six years," he explains. "Today, they all need to have flat-screen TVs. It's mandatory that they replace carpets every four years."
Focused service brands-those that compete for today's late twenties to mid-thirties business traveler-are becoming trendier. "For example, Hilton has completely redone its model for the Hampton Inns brand," Pineda comments. "If you go into one of those properties now, it has a much more contemporary and fresh look."
According to Dusty Rowland, president and CEO of Fulcrum Insurance Programs, "The higher up you look in the hotel segments, the more complex things get when it comes to guest profiling and guest engagement. For example, the upscale and luxury segments are trying to balance the new demands of the Generation Y guest, while still maintaining the traditional appointments and services that baby boomers have grown accustomed to."
Social media and online guest rating programs are tops on the list of challenges for those higher-end segments. "One study found 73% of Gen Y guests leave after one poor experience, and this kind of information is only a few clicks away and changes every day," he explains. "Guest profiling is a key challenge that, done properly, will let the best hotels track and store individual guest preferences." They can use this information to tailor the guest experience, which will help drive revenue through increased spending on ancillary services, referrals and repeat business."
Rowland points out that Gen Y and younger generations are more demanding and have an instant gratification mentality that is changing how hotels communicate with guests. "Hotels need an active social media strategy, along with constant monitoring of the key satisfaction programs," he asserts.
"In addition," he says, "hotels in all segments are faced with how to tackle corporate responsibility and must have a commitment to sustainabilitythat helps reduce waste and power consumption while increasing profits and guest satisfaction." TripAdvisor has developed a "GreenLeaders" program that identifies hotels committed to green practices; highest rated hotels in the program are driving new business with their commitment to sustainability.
Insuring hotels
Rowland says the insurance marketplace for hotels is relatively stable. "I don't foresee much change in capacity and price over the next 24 months," he comments. "Social media and guest profiling challenges I referenced are creating new risk management issues that hotel owners and managers need to address. Buying a cyber liability policy is one way hotels are transferring that risk. We are seeing a growing demand for this coverage.
"Green building certification programs like LEED are driving changes in how hotels and resorts are buying both liability and property coverages," Rowland adds. "Green replacement/upgrade and green reputation coverage are a few of the newer offerings for hotels engaged in sustainability and certification programs."
He says agents and brokers also should have a good understanding of how amenities like beach and water activities can affect price and availability. "In addition, bedbugs and third-party discrimination are two important exposures hotel owners and operators should be addressing," he notes.
Saldana says the hotel insurance business is competitive. But he offers a caveat: "While many insurers are targeting hotels and motels, some are starting to mandate coverage limitations on hotel policies. Whether it's actual cash value valuation, a roof exclusion, or some other targeted limitation, carriers are getting smarter and savvier about this class of business. They understand that weather patterns consistently expose hotels to property issues and are paying attention to building updates and conditions. And they're underwriting accordingly."
Property conditions-and roofs in particular-are a significant issue. "Hotels often run on very tight budgets, and property maintenance is one of the first things pushed down on the 'to do' list," says Saldana. "Roof replacement has been a big issue. Over the past several years, summer storms have become an annual occurrence. With snow and ice in the winter and hail and wind in the summer, roof life gets reduced even further. Maintenance and timely repairs are important."
Pineda has seen pullbacks in some standard markets that just a few years ago had competed feverishly for hotel business. "Not only are underwriting guidelines stricter than they were before," he observes, "but carriers are adhering to them now. We're seeing a shift of some business that was in the standard market into the excess and surplus arena."
He says this shift is most prevalent in the economy segment, such as Super 8s and Motel 6. "Carriers seem to be less interested in these properties," he says. "Revenues are lower for these properties, but their costs are rising, so underwriters may worry that balance sheet issues may, for example, lead to maintenance gaps. Many of these properties are older and sometimes run down."
Serving clients
Pineda encourages agents and brokers to talk with clients not just about insurance, but also about how the business operates. "For example, if the hotel has a Web page, review it together," he explains. "Sometimes hotels post things that sound cool but may not represent the situation accurately. For instance, a property may advertise a happy hour with two-for-one drinks targeted primarily to hotel guests, but underwriters could misinterpret that."
It's also important to review the hotel's TripAdvisor.com page with the owner or manager. "One of the first things hotel underwriters do is go to the site and look at the reviews," Pineda notes. "There are sometimes red flags in these reviews-on everything from service issues to maintenance problems-that are hurting a lot of hotels."
He also suggests discussing the hotel's financials. "A lot of carriers use Dun & Bradstreet reports as a marker of financial strength," he explains. "A client or prospect without a D&B file should open one and report the bills paid on a regular basis. A good Dun & Bradstreet financial score can help hotels get access to more markets."
Saldana says agents can help hotel owners by focusing on maintenance and updates of the property and major mechanicals. "Showing how poor property maintenance can lead to shutdowns, lost business and higher insurance costs will be very important to busy hotel owners," he explains.
"Such expertise and knowledge can help with new owners, too," Saldana adds. "Smaller hotels turn over quite a bit. New owners often don't know much about the updates done prior to the purchase-or the importance of it."
He says agents also can help with property issues related to franchise requirements. "Many independent franchisees have contractual requirements to update buildings and signs with new logos or looks," he explains. "Agents and brokers should make sure policies cover the added costs of meeting current franchise requirements."
Growth opportunities
According to Pineda, the biggest demand right now is in the economy lodging segment. "If you can partner up with a wholesaler or carrier who has capacity for this class and you have the experience to place this business, that's going to be your best bet to grow your book of business. Hotels that were paying $8,000 to $10,000 may be looking at a $20,000 or $25,000 premium."
Rowland recommends that agents and brokers pursue segments that offer the most potential in their area of influence. "I suggest going after larger, more complex accounts, if they are available," he says. "That's a good place to work if you can gain the knowledge to differentiate your firm in that marketplace. Plus, premiums are far greater than for other segments, and buyers tend to value service and coverage more."
Regardless of which segment they target, retail agents need to explain clearly how insurance works. "For example," says Pineda, "an owner may not understand why a hotel that's worth $3 million is covered for $5 million. Sit down and educate him on business valuation and replacement cost. Also help them with loss control and evaluation of their risk."
He adds, "Do your research. Find a wholesaler or underwriter that understands and specializes in the class of business and that is willing to work with you. They can actually help guide you through all the nuances of the hotel market."
According to Rowland, the upscale and luxury segments offer great potential for book growth-and fun! "I mean, who doesn't like visiting a nice hotel or experiencing all the great amenities of a luxury resort?" he says. "The big opportunity for agents and brokers lies in differentiation through knowledge of the class. The best insurance buyers in this class want their insurance providers to understand their business." He says they're loyal to these kinds of agents and brokers thanks to the high degree of trust this knowledge generates.
"As in most complex insurance transactions," Rowland adds, "the agent or broker must know who the best providers are and build strong relationships with providers that best match their needs. Be aware of the various hotel segments and which providers work in each. Keep a list of the best providers, the segments they work in, their minimum premiums and what annual volume commitments they might have."
He says carriers that distribute products directly through retail agents and brokers sometimes are less consistent than those that reach retailers through specialty wholesalers and program administrators. "Frequent corporate-level changes tend to trickle down to generalist underwriters who then must try and determine how to deploy the new direction," he explains. "Program specialists who live and breathe the class all day long typically are better at helping agents and brokers gain valuable industry knowledge, which makes them more effective at selling to hotels and resorts."
Saldana points out that independently owned franchise and non-franchise hotel business is very entrepreneurial in nature and hotel owners are involved in all aspects of the operation. "They have a deep understanding of their business, and most are very savvy when it comes to value and price," he explains. "As agents and carriers, we must bring to the table risk management solutions and coverages in a competitive package that will provide them a tangible business value."
He also notes that it's a close-knit industry. "Owners seem to seek each other out and talk," Saldana says. "We see a lot of hotel and motel referral business. Word seems to get around when a customer has a good experience."
The author
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.
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