Transitioning to self-insurance today may help Florida hospitality protect against catastrophes tomorrow
by STEFAN BURKEY
Florida’s hospitality sector is under pressure in 2024.
- In the Orlando region, Tourist Development Tax (TDT) collections were down in much of what was a soft 2023 for its top industry, with a 7.5% decline expected for the current fiscal year.
- In South Florida, declining average daily rates (ADR) were the 2023 trend (down 5% in Miami), leaving the industry hoping for a return of pricing power in 2024.
- Properties in the Florida Keys were hit even harder by the decline in pricing power, as ADR dropped 11% in 2023; an estimated 2.5% rise is projected this year.
What’s compounding the pain are cost pressures from conditions outside operators’ control. Start with higher building costs in the face of inflation, uncooperative supply chains, and outdated property valuations in one of the nation’s riskiest regions for hurricanes. Especially problematic is the impact on property insurance rates as such catastrophe-related claims that hit insurers with record-breaking losses. Rising costs of their protective reinsurance also have forced them to raise rates.
It’s an environment that has many hotel operators taking a hard look at the benefits of self-insuring their property risk. It can save money and provide coverage as good – or better –as a traditional carrier’s. But it’s not a good solution for every concern. Here’s what’s important to know.
UNDERSTANDING SELF-INSURANCE
Self-insurance is a way to retain risk in-house instead of transferring it to a third party – like an insurer. It’s best used for specific aspects of an insurance portfolio, not its entirety, and requires a strong risk management program to back it up. Lenders are influential in approving the strategy, given its impact on their collateral. It puts hospitality companies in control of property claims and risk management, and it can facilitate their ability to secure other coverage or higher limits.
Self-insurance programs can be structured through:
- Excess policy layers, so savings can be shifted to the primary policy
- Individual policies like property or general liability that may become too expensive or unavailable on their own
- Captive insurance, where the risk is transferred to an alternative risk financing vehicle like a wholly owned insurance company
Hospitality companies should enlist a brokerage familiar with their industry and self-insurance to guide them through the complexities of this solution.
WHAT TO CONSIDER IN GOING THIS ROUTE
Self-insurance isn’t ideal for all hotels, motels, or resorts. Exploring the following questions is key to the decision-making process.
- Will it actually save money? Not always. Know the numbers to make sure.
- Is this a short- or long-term solution? Self-insurance is often better for the short-term for a single coverage that’s too costly or with limits too low. Some may be more comfortable with a long-term view.
- Are your lenders on board? They must approve this solution and specify the amount of risk to be covered. They may prefer the captive approach.
- Is there time to plan this? Structuring a self-insurance program takes time, requiring a lot of advance planning. It’s not a quick fix to get coverage or cut costs.
- Is your technology up to managing this solution? Self-insurance programs are complex, requiring a robust basis for evaluating and managing risks, ensuring compliance, and enabling strong data and analytics capabilities.
- Are your risk management strategies strong? This is essential for making a self-insurance program work and can be evaluated through data and analytics.
- Is your broker up to the challenge? It’s complicated and cumbersome to evaluate a self-insurance program; experienced hospitality brokers will manage the complexities for maximum impact.
Stefan Burkey is the hospitality practice leader for global insurance brokerage HUB International Florida. In this role, he oversees insurance placement solutions for owners, developers, and operators from limited-service hotels to full-scale resorts. Stefan and his team clearly understand the financial needs and exposures associated with the hospitality industry, and their singular focus has generated profound market knowledge and significant buying power for HUB clients throughout Florida and the U.S. He won Risk & Insurance’s 2023 Hospitality Power Broker of the Year.
