The hotel investment landscape is facing a notable disruption centered around the escalating costs of insurance, a factor gaining prominence in underwriting models. Following the financial upheaval witnessed during the pandemic years, the United States hotel sector, particularly areas known for high leisure demand, is experiencing a resurgence. Revenue Per Available Room (RevPAR) has shown encouraging trajectories, marking a 1.8 percent increase from the previous year and is expected to grow by 2 percent by the end of next year. This growth can largely be attributed to a resurgence in both international visitors and group business travel. However, these seemingly optimistic prospects are marred by rising insurance costs, which threaten to undermine profitability and impose unforeseen challenges on stakeholders.
Insurance Evolution in Hotel Underwriting
Transition from Routine to Critical Factor
Insurance, once a routine consideration in financials, has assumed a pivotal role in the underwriting of hotel investments, significantly influenced by the reality of climate volatility and insurance capacity contraction. One of the most pronounced changes in recent years is a considerable surge in property insurance premiums, which have escalated by 5 to 15 percent over the past year. High-risk regions, like Florida’s coastal areas and specific locales in California, have experienced even sharper premium hikes, occasionally reaching 25 to 50 percent. These dramatic increases jeopardize the viability of deals, compelling investors and underwriters to re-evaluate their strategies. Ryan Bosch and Kimberly Gore, industry experts, emphasize the destabilizing disruption insurance has introduced to underwriting norms.
Geographical Impact and Risk Factors
The unpredictability and risk associated with insurance dynamics are further exacerbated by regional disparities and varied risk factors. Although premium increases are experienced nationwide, regions susceptible to frequent exposure, such as coastal locales, bear the brunt of these hikes more intensely. Properties situated within these zones face stringent conditions and increased challenges when evaluating whether to file insurance claims. California, a state often beset by catastrophic events like wildfires, exemplifies a high-risk area where carriers show reluctance to offer builder’s risk coverage without stringent terms. Consequently, multiple carriers are often needed to assemble adequate coverage, complicating pricing and timing for property owners and investors alike.
The Complexities of Insuring Specialized Hotel Features
Challenges in High-Exposure Areas
High-exposure regions, notably Florida, present distinct challenges, with the state-run insurer Citizens sometimes refusing to cover historic buildings, thereby forcing hotel owners to rely on surplus lines insurance carriers. These alternatives come with higher premiums due to the increased exposure and are notorious for more complex dispute resolution processes. A protracted list of geographical hotspots is emerging, affecting how insurance companies adjust their strategies. Hotspots like the Carolinas, Gulf regions, Texas, and areas of the Midwest, including Oklahoma and Illinois, have seen insurance company strategies reshaped due to convective storms, further complicating the underwriting landscape for hotels, which face uncertain protection against these risks.
Specialized Features’ Impact on Premiums
Specific asset features and amenities in hotels can further complicate insurance considerations, impacting overall rates. Facilities such as expansive pools or water parks pose particular insurability issues, prompting demands for additional coverage. Similarly, spa services offering medical treatments like Botox necessitate higher premiums, often mandating specialized coverage. Insurers are also increasingly tightening terms around policies relating to liquor liability, human trafficking, and children’s programs. These evolving requirements highlight the industry’s shift towards greater scrutiny and stricter underwriting practices, affecting participation from carriers and prompting lenders to reconsider their positions even in less volatile markets.
Broader Implications on Hotel Profitability
Shifts in Underwriting Models
As insurance costs continue to rise, a notable consequence is the shift in underwriting models, impacting both lender sentiments and overall hotel profitability. Conservative debt sizing has become imperative, with investors exercising caution by increasing reserves and extending closing timelines to navigate the convoluted risk environment. This trend underscores the pervasive influence of insurance on the financial structure of hotel deals, ultimately altering how stakeholders approach profitability and risk management. The heightened emphasis on fiscal vigilance is reshaping underwriting norms and necessitating a recalibrated focus on sustainable investment practices.
Strategic Adaptations by Investors
The uncertainties and risks tied to insurance dynamics are intensified by regional differences and diverse risk factors. While premium hikes occur nationwide, areas prone to frequent disasters, like coastal regions, experience these increases more severely. Properties in these high-risk zones face tougher conditions and more challenges in deciding whether to make insurance claims. Take California, for instance—a state frequently plagued by catastrophic events such as wildfires. Here, obtaining builder’s risk coverage becomes problematic, as insurance companies show hesitation and impose strict requirements. Therefore, to secure sufficient coverage, property owners and investors often need to engage multiple carriers. This necessity adds complexity to both the pricing and timing of securing insurance, making it a cumbersome task. Understanding the implications of such regional disparities and risk variations is crucial for navigating the insurance landscape effectively, particularly in high-risk areas where the stakes are significantly greater for property owners.
