The insurance industry is in a capacity crisis forcing smaller hospitality organizations to search far and wide for hospitality industry insurance to cover nearly every risk. That includes employing strategies like layered insurance coverage, something typically only used by larger owners and operators.
“Layering” is an alternative means to write policies for excess liability and property insurance (which encompasses catastrophic coverage).
Pummeled by the COVID-19 economic downturn, insuring the hospitality industry has become particularly difficult. Hospitality businesses are facing 2021 insurance renewals likely to be 25% to 40% above 2020 levels.
Meanwhile, large claims have pressured insurers’ capacity, or the amount of coverage they can underwrite, based on their surplus capital to cover potential losses. This disproportionally affects smaller hospitality operations, which often did not face major difficulties in finding coverage for their comparatively smaller risks.
The capacity crisis stems from four-plus years of worsening perils like fires, hurricanes and floods. Settlements like the $800 million paid by MGM Resorts’ to victims and families of the 2017 Las Vegas mass shooting1 have squeezed capacity further, as approximately $700 million of the settlement was covered by excess liability insurance. With such settlements, carriers are hard-pressed to find the capacity to insure against such enormous awards.
Layering Insurance Coverage: A workaround to fix diminished capacity
How does layering coverage work, exactly? Take excess liability insurance policies, which protect against losses above the limits of the primary layer of coverage and where layering is a common strategy for organizations with larger risk postures.
To cover the risk exposure, different insurers and reinsurers offer multiple layers of coverage, creating a “tower” of coverage — the primary coverage at the base topped by several excess layers. The further up the layer, the less exposure the insurer has, often reducing the cost of coverage accordingly.
As with any complex insurance structure, layered programs come with their own complications:
- When market conditions make it too onerous for a single carrier to cover a layer, insurers may need to share layers.
- Managing claims is generally the province of the primary carrier. Once the primary layer is completed, carriers of subsequent layers will follow the contract that covers conditions, exclusions, policy definitions and the like.
- It may be necessary to separate claims administration from funding services to get enough layers of coverage.
For hospitality owners and operators, there are other options to layered coverage. For instance, there’s quota shares, single policies with multiple insurers. Participating insurers and reinsurers share premiums and losses according to a fixed percentage. In a quota share policy, the primary insurer takes less profit through this arrangement but can free up capacity to underwrite new policies.
Large policyholders — including large hospitality concerns — routinely employ layered coverage and similar strategies. But the capacity shrinkage has meant smaller owners and operators should ask their broker about the opportunity with layered coverage.