While owners are saving on insurance, claims matter

Editor’s note: This is a two-part series on the current state of property insurance rates for hotel owners. In part one, Hotel Investment Today spoke to insurance brokers. In part two, we talk to hotel owners and asset managers.

NATIONAL REPORT — When Hotel Investment Today last spoke to Ray Martz in 2023 about rising insurance premiums for hotel owners, he invoked the phrase “double, half.”

“Double the premiums and half the coverage,” said Martz, co-president and CFO of Bethesda, Maryland-based Pebblebrook Hotel Trust.

While it’s a little bit early because the REIT’s insurance renewal isn’t until June, Martz said Pebblebrook is “gearing up” for the process (he heads to Lloyds of London in a few weeks). He admits he’s hearing good things about the state of the market right now.

Ray Martz

“Because the premiums have come up so much the last couple of years, you have more competition in the market,” Martz said. “So, they helped bring down the prices… Now, it’s a different story if you have a loss.”

This is especially pertinent for Martz and Pebblebrook because the REIT has losses from its LaPlaya resort in Naples, Florida, which both Hurricane Helene and Hurricane Irma hit over two weeks last fall. Still, Martz said the additional competition in the market should give Pebblebrook more flexibility.

“We’re expecting a lot less pressure on the insurance side this year than we have over the last couple,” he said.

Right now, the REIT has about $500 million in coverage. Insurance coverage for portfolio owners like Pebblebrook is put together as a “grid” or a “quilt” of coverage over different loss grids that are in $25 million segments (under $25 million, $25-50 million, etc.). The REIT currently has about 50 to 60 companies in its insurance grid.

Since Pebblebrook had smaller losses for the last two hurricanes to hit the LaPlaya resort (Martz said the rest of the portfolio hadn’t had any recent claims), it’s a matter of figuring out which insurers will work with them in different areas.

“What’s going to happen is the insurers that are willing to take more risk down (in the smaller grids of coverage), that’s where the movement will go,” he said. “The folks that are above, call it $50 million, because now they’ve had several years with no losses whatsoever, that part of the market will likely come down… We’re trying to play a game of, okay, how much do we take here? How much risk do we take?”

Martz said it also involves working with companies like Moody’s for risk assessment about the storm likelihood for the next year, depending on various factors. Then, it’s a matter of figuring out how much risk the REIT wants to take in certain areas to help mitigate the insurance cost.

We have to be careful if you start adjusting deductibles because once you adjust your deductible, and especially on any sort of losses, you’ve now set a new standard and then it’s much harder once you increase that percentage up in some of these losses to go backward.

Ray Martz

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“You can decide to take higher deductibles, and you can also say at different levels, we’ll take some of the risk,” he said. “We may take bigger risks at different levels. Because really what we’re most concerned with is a massive loss, that $500 million loss… That $25-$50 million garden-variety loss, we’re okay taking a little more risk. That’s not a big deal.”

But just choosing a higher deductible can be a slippery slope, Martz said.

“We have to be careful if you start adjusting deductibles because once you adjust your deductible, and especially on any sort of losses, you’ve now set a new standard and then it’s much harder once you increase that percentage up in some of these losses to go backward,” he said. “Whenever we make any changes, we’re not thinking about just this year’s renewal. We’re thinking about two, three or four years down the road. What precedent does it set for us?”

Because of the claims on the resort, it also forces Pebblebrook to ask more questions, even on the property level.

“We’re asking: What can we do to fortify the asset? Are we going to be forced to take on more risk?,” he said. “Our insurance costs have… about doubled since the pandemic. We can’t continue going this way because that’s just paying too much of our cash flow for insurance.”

Martz said the finances are tricky, especially for a public company like Pebblebrook, because the insurance cost shows up on a P&L. Still, insurance losses don’t necessarily show up in the same place.

“That insurance expense hits your income statement… But if you have a loss… on the capital side from a storm, that’s a capital issue. It doesn’t appear on your P&L. So… you may be willing to take more of those capital hits or those risks there in the benefit of your income statement and your earnings because that has a big hit.”

When thinking about different options for Pebblebrook on how to control insurance costs, Martz said he likes a cafeteria approach. That requires a lot more work, creativity, and dialogue with insurance brokers and companies.

“The other side is we try to have relationships with our carriers,” he said. “A couple of years ago, when the market was going really high, we could have decided to go more domestic than our London exposure, but a lot of these London carriers supported us in good and bad time. So, we decided to stick with them.” 

Operators matter

Amanda Chivers, managing principal for Atlanta-based Crown Hospitality Consulting, an asset manager that works primarily with private equity and family office owners as their representatives, said owners are seeing an increase in deductibles and often learning lessons about what’s covered and what’s not.

Amanda Chivers

“We work with a lot of insurance consultants to make sure that we understand the terms and conditions and what’s covered and what’s not covered in the agreement,” she said. “For example, landscaping. We found out the hard way that one of our properties was not covered. If you have a hurricane event that blows up your palm trees, those are not covered...  So, you find additional insurance coverage to cover those gaps.”

Those insurance challenges for owners can also come into play when they are acquiring assets, Chivers said.

You’re having challenges in acquiring assets if you’ve had a claim and then you factor in to your discussions the management company and their insurance coverages and whether or not they’ve had a claim because you may have to keep the asset on their coverage.

Amanda Chivers

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“You’re having challenges in acquiring assets if you’ve had a claim and then you factor in to your discussions the management company and their insurance coverages and whether or not they’ve had a claim because you may have to keep the asset on their coverage,” she said. “That might even force you to change operators for that asset because if you can’t bring it in-house under your coverage, you need to keep the management company in place and keep it on their coverage.”

Chivers said it’s a bifurcated insurance market for owners, depending on their size and resources.

“I work with a lot of private equity owners and they have capital resources. They can hire consultants to give them in-depth coverage and explain what their policy covers and doesn’t cover. In the event of a claim, they fight those insurance agencies,” she said. “Compare that to the regular, ordinary owner-operator. They don’t have those means to hire that consultant and pay higher premiums to get the coverage that they need.”