Compounding factors, such as recent weather patterns and inflation, are leading to higher insurance costs and downward pressure on hotel owners across the U.S.
Sam Makani, vice president of strategic operations at Mission Hill Hospitality, a real estate private equity company based in Denver, said in an email interview that the insurance environment is much more cautious and prudent in pricing than it was pre-pandemic.
Recent natural disaster events, such as hurricanes and tropical storms, have led to the increased discretion in pricing, he added.
"We’re seeing that increasing insurance costs are becoming a major topic when reviewing fixed-expense budgeting. We’re continuing to monitor the coastal markets, in particular," he said.
Mission Hill Hospitality's portfolio includes select-service and extended-stay hotels in locations such as Florida, North Carolina, Georgia, South Carolina, Virginia, California and Alabama.
Makani said the scale and geographic diversity of the company's portfolio has helped to create an attractive master property insurance program for insurance carriers.
"While inflation particularly impacted costs in the most recent renewal cycles, property valuations are no longer at the prior peaks we saw earlier this cycle, so the insurance markets should begin to stabilize," he added.
Chris Green, president of Remington Hospitality, said premium increases have been significant for hotels that are in coastal locations and that are continuously battered by storm activity.
“It’s putting extreme downward pressure on hotel performance, because even as [markets are recovering] we’re using up all that recovery with insurance costs, which ultimately creates more pressure on [earnings before interest, taxes, depreciation and amortization] for owners,” he said.
Green said Remington’s hotels in Florida did not sustain any significant damage from Hurricane Idalia at the end of August.
A compounding factor that’s come up with insurance this year and in 2022 is the valuation of hotels, Green added. There were depressed values through the pandemic, and now hotels are not trading any less than they were in 2019.
“Let’s say you had a hotel valued at $35 million and you’re insuring it pre-2019. Post-[pandemic] not only are you getting an insurance increase because of what the experiences have been in the smile [Sunbelt] states, but your valuation of your hotel now goes to $50 million because that’s probably the correct market. Now you have to insure $50 million at a new higher rate, which is creating a compound effect on your insurance,” he said.
Remington has about four firms it uses for insurance programs, most of which have been long-standing relationships.
Mission Hill's properties benefit from portfolio pricing that gives it economies of scale to limit the impact of insurance cost increases on 2024 budgeting.
"Protecting our assets is important, so our focus during budgeting is ensuring that despite rising costs, our portfolio is adequately covered," Makani said.
Certain insurance companies are taking "smaller pieces of the larger pool," resulting in a longer list of carriers that are picking up portions of a portfolio program, he added.
Though there are fewer underwriters, Makani said long-standing relationships with insurers that have historically been in the commercial real estate market and have prior experience with institutional owners have proven to be helpful during the recent renewal period.
Having these solid relationships helps to understand how much coverage Mission Hill's hotels need and how coverage should be adjusted as the portfolio grows and gets exposed to different types of risks based on geography.
"Those sorts of factors are playing into pricing more so than ever, and because of the dramatic rises we're seeing in pricing over the past few years, having a good adviser that you work with across your portfolio is very important," he added.
Michael Diaz, chief operating officer at Driftwood Hospitality Management, said his company has a global broker that it works through to place insurance coverage. But DHM is still heavily involved in the decision-making process, especially in markets such as Florida.
The third-party management company is currently working with 31 insurance carriers.
This pricing climate is one that Diaz said he has only seen maybe two or three times in the past 20-plus years. Insurance carriers now are needing to reduce the amount of capped capacity they will write.
"That creates a natural pressure on pricing as your pool of options dries up. It requires companies to seek additional capacity from sources that are not historically competitive with price," he added.
Diaz said there's a few factors driving insurance costs this year, including the industry adjusting how its looking at replacement cost values on portfolios to better reflect inflation and construction cost increases.
Carriers have pushed "massive increases" in some cases across DHM's portfolio. The percentage increase for its overall portfolio is in the high 40s.
"On the rate side, wind risk is what's driving the bulk of those increases. It is rates across the board [that] are greater increases than we've seen, but the wind piece is really a heavy mitigating factor," Diaz added.
For its properties outside of the wind-risk areas, the rate increases are less than 25%.
Raquel Ortiz, director of financial performance at STR, CoStar's hospitality analytics firm, said in July year-to-date data between 2018 and 2023, total insurance costs across the U.S. were $352.9 million. This figure is up 138.9% since 2018.
Insurance costs increased 21.9% from July 2021 to July 2022, and 28.1% from July 2022 to July 2023, she added.
"On a [per available room basis] insurance costs are up 22% from year to date last year. On a [per occupied room basis] insurance costs are up 13.2% from year to date last year," she said.
In terms of region, Ortiz said the West North Central — including Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota — has experienced the largest increases in insurance costs per available room, up 34.2%.
The Middle Atlantic — including New Jersey, New York and Pennsylvania — was up 26.4%. East South Central — including Alabama, Kentucky, Mississippi and Tennessee — was up 26%.
Andrew Stevens, vice president of acquisitions at DHM, said a majority of the company's business is driven by third-party management.
"We've seen that other groups — that are in the mix of who is going to operate the asset upon acquisition for a third-party owner — have not been able to get insurance in certain markets, where we have been able to by the way we're set up," he said.
Joseph Zaffuta, corporate operations manager at DHM, said the company's insurance program structure is best described as a pie scenario.
"If you were to look at our program as a pie, there are 31 different insurance companies from [all these different global insurance companies] that have their portion of the pie. If a loss happens in a particular location, then all of them share the risk on that location," he said.
DHM's global broker sought out 105 different insurance companies for the renewal process. Many declined participation and many others didn't get accepted due to rates or other coverage aspects.
"That's where the final 31 participants was developed from," he said.
Zaffuta said it's partly a numbers game; the rest is driven by relationships and track record.
"When you have a portfolio that's set up the way we do, there are triggers we have. We used a lot of them in this renewal that take time and analytics to come up with to make certain decisions. ... If you, for example, historically carried a $500 million windstorm sublimit on your portfolio, we really zeroed in on that and said, 'Hey do we need limits that high?'" Diaz added. "In the past, it didn't matter. You could overinsure yourself because those top levels cost nothing. That's not the case anymore. We spent a lot of time analyzing where the risk was, what limits could look like in that. We brought those limits down so we could start to mitigate some of these rate increases."