Recent weather patterns and inflation are causing a rise in insurance costs and putting pressure on hotel owners across the United States. Insurance companies have become more cautious and prudent in their pricing post-pandemic, especially after natural disasters such as hurricanes and tropical storms. As a result, hotels in coastal locations are experiencing significant premium increases, which are impacting their performance and putting pressure on owners’ earnings.
Sam Makani, Vice President of Strategic Operations at Mission Hill Hospitality, highlights that insurance costs are becoming a major concern when it comes to fixed-expense budgeting. Mission Hill Hospitality, which owns select-service and extended-stay hotels in various states, has managed to create an attractive master property insurance program by leveraging the scale and geographic diversity of their portfolio.
Similarly, Chris Green, President of Remington Hospitality, notes that hotels in coastal areas are facing downward pressure due to rising insurance costs. He explains that the valuation of hotels is also contributing to the compound effect on insurance. Hotels that were undervalued during the pandemic are now being insured at higher rates based on their actual market value, leading to additional financial strain.
Both Mission Hill Hospitality and Remington Hospitality have long-standing relationships with insurance carriers, which have proved beneficial during the recent renewal period. These relationships allow them to better understand their coverage needs and make adjustments as their portfolios expand and face different risks based on location.
Michael Diaz, Chief Operating Officer at Driftwood Hospitality Management, says that insurance costs have increased significantly this year, prompting insurance carriers to reduce the amount of coverage they provide. Diaz also points out that carriers have pushed for higher replacement cost values on portfolios to account for inflation and construction cost increases.
According to Raquel Ortiz, Director of Financial Performance at STR, insurance costs in the U.S. have increased by 138.9% since 2018. On a per available room basis, insurance costs have risen by 22% compared to last year. The West North Central and Middle Atlantic regions have experienced the largest increases in insurance costs per available room.
Driftwood Hospitality Management works with 31 insurance carriers and has seen a higher level of difficulty in securing coverage in certain markets. They have implemented a pie scenario in their insurance program, where multiple insurance companies share the risk on specific locations in case of a loss.
In order to manage the rising insurance costs, hotel owners are analyzing their risk exposures and making adjustments to their insurance coverage. They are seeking to mitigate rate increases by reducing coverage limits and working with insurance advisers to find the most cost-effective solutions.
Overall, the compounding factors of recent weather patterns, inflation, and valuation adjustments are leading to higher insurance costs for hotel owners in the U.S. This trend is putting pressure on their financial performance and requiring them to review their budgeting strategies and risk management approaches to protect their assets effectively.