The restaurant and bar industry continues to serve up new ways to deliver their goods and services following the turbulent times experienced throughout the COVID-19 pandemic. While the most troublesome times have subsided, restaurants continue to reinvent their business landscape to meet consumer demands, industry insurance experts say.
“It has been really gratifying to see so many of our restaurant clients return to pre-pandemic levels, and even above that, in terms of their sales and more activity in opening new locations,” said Heidi A. Strommen, senior vice president, Primary Hospitality Programs, at Distinguished Programs. “It was a really good year for restaurants and for those of us that serve the industry.”
Strommen says while the industry lost thousands of restaurants during the pandemic those that survived, and subsequently thrived, are the ones that understand the need to innovate. “They had to innovate during the pandemic,” she said. And they continue to innovate.
The temporary “pivots” developed during the pandemic — expanded delivery services, outdoor dining options, to-go alcohol offerings, and investments in technology — remain and now serve as the industry’s “new normal,” according to a new report by the National Restaurant Association.
New risks and exposures have emerged as restaurants innovated to stay afloat. Some 60% of full-service restaurants say delivery is a larger share of sales than 2019, the report noted. More than nine in 10 operators who set up outdoor dining and nine in 10 who started selling alcohol-to-go plan to keep doing so if it’s permitted.
The restaurants that thought they could just keep doing business as they were doing prior to the pandemic are the ones that did not do so well, Strommen says.
“The ones that realized that, even if they’d never done takeout before, figured out a way to do it,” she said. Even higher end restaurants that started offering takeout during the pandemic have continued that service today as demand for it continues, she added.
The National Restaurant Association report showed that 66% of adults say they’re more likely to order food for takeout than they were before the pandemic. Restaurants, even fine dining establishments, realized that takeout is a stabilizing revenue stream, Strommen added. Some higher end restaurants innovated their menus with a more casual dining experience as well during the pandemic, and those options remain permanently, she said.
From a risk management perspective, many of the new food and service delivery models, such as alcohol-to-go, haven’t been a big concern.
“Obviously there’s some additional exposure if they’ve taken on things like liquor to go, but so far that hasn’t created too many pain points,” said Christian Enwright, area president for Risk Placement Services (RPS). “Those new exposures haven’t been overly disruptive” to the insurance market, he said.
Paul Broussard, a risk advisor at Cavignac Insurance Brokers in San Diego, California, agreed.
“Liquor liability has stayed relatively flat. Rates are increasing but not as much as some of the other coverages out there,” he said.
There are some states with more stringent dram shop laws — laws that hold a business liable for over-serving a customer too much alcohol, or selling alcohol to minors.
Some insurance companies will stay away from several states, including South Carolina, Alabama, and others. But adding alcohol-to-go hasn’t been a huge factor, he added.
“It might be a consideration from a rating standpoint, but I don’t think underwriting companies are declining the quote because of that being in their operations,” he said.
What has been disruptive to some restaurant insurance portfolios is property coverage, especially when it comes to restaurants in catastrophe-prone states and regions. But that is not unique to restaurants.
“We are having to pretty much mass market everything,” said Amy Vitarelli, senior vice president at Heffernan Insurance Brokers, who described today’s hard market as “way worse” than after 9/11 for insuring her restaurant clients located near the San Franscisco Bay area, or the Napa and Sonoma wine country. Property insurance is as hard as it’s ever been, she said.
“We can do the general liability, the workers’ comp, but we can’t do the property, and in some cases, we have to place the property with California’s FAIR Plan,” she said. There is capacity for property through the surplus lines markets, she added. But it’s not affordable.
“It’s more affordable in the FAIR Plan, even if that coverage is more restrictive.” When she compares the more limited FAIR Plan coverage against broader coverage available through surplus lines markets the cost difference makes it a tough buy, she added. “The cost savings is so dramatic, it’s so expensive to go with the broader coverage, that my clients will say, ‘I’ll take the more limited coverage because the cost is just outrageous.'”
Growing But Challenged
While the restaurant sector is growing, that growth is not always profitable. Staffing shortages and elevated costs remain top challenges for the restaurant sector this year.
“As a result, restaurant operators will still need to factor an elevated cost environment into their 2023 business model, and that will continue to squeeze margins,” according to the National Restaurant Association.
The restaurant and food service industry sales are projected to rise in 2023 to $997 billion in sales, up from $898 billion in forecasted sales at the beginning of 2022, and is projected to grow by 500,000 jobs, for total industry employment of 15.5 million by the end of the year.
Since rising food costs and higher menus prices are driving the increase in sales, that growth figure is distorted.
“If anything, profit margins are probably somewhat diminished despite the fact that menu pricing has gone up,” Strommen said.
Rising costs for restaurants in California have led some of Vitarelli’s clients to move their operations entirely. “I see clients moving, like physically moving from one state to another,” she said.
For example, one large restaurant client with multiple locations in downtown San Francisco, moved to Arizona, she said. Insurance costs were considerably less there. “He (restaurant owner) literally thought I was lying to him when I gave him his budget for insurance in Arizona compared to San Francisco,” she said.
Overall, Vitarelli sees property/casualty rates for most accounts with good loss history beginning to level off in the restaurant/bar space. Workers’ compis a bright spot, she added. “That’s the one area where we’re seeing actual rates go down and securing savings for our clients.”
With rising food and labor costs, it’s important that agents and brokers continue to work with clients to adjust the rating basis of their policies to an exposure base that is not as impacted by inflation such as location count, transaction count, or number of employees, Kristi Whistle, managing director, Marsh, told Insurance Journal. “As risk profiles are forever changed in some ways, we continue to partner with our clients to ensure proper coverage is in place,” she said.
“For example, delivery is certainly a high-risk factor, but the bulk of restaurant brands are relying on third party delivery aggregators and thus transferring that risk,” Whistle noted.
Most of the work that needs to be done to help clients is not necessarily around insurance products put in place, but on the pre-loss side to ensure guests and employees are kept safe. “There are several factors to consider in making these types of changes but for many it is worth evaluating and can result in pricing stability in their workers’ compensation and general liability programs,” Whistle said.
Insureds with good claims histories will see less pressure on rates this year. But in order to keep claims down, restaurants should make sure their safety efforts are top priority, said Cindy Smail, a senior vice president with Marsh Advisory.
Smail says one interesting trend worth noting over the past couple of years has been a rise in the percentage of incurred losses stemming from restaurant workers under the age of 19. “One could speculate as to the cause of this, but it’s apparent that restaurants would be well served to focus on safety training younger workers,” Smail said.
She said safety efforts including hazard recognition and awareness, safe workplace design, and effective training and coaching are important for workers of all ages, but may be even more important with less seasoned employees new to working in restaurants.
Vitarelli says, overall, claims for her book of restaurants have trended up since the start of the pandemic. “It feels like claims are just up in general,” she said. Yes, catastrophe-related property claims have risen but the normal restaurant claims — the slips and falls, the customer or employee injury, or the food-related illness — those seem to be up as well, she said. “And then, add in things like vandalism and it definitely feels like claims are up a little. ”
Another trend impacting Vitarelli’s restaurant clients’ perception of the P/C market is poor performance on claims. “I’m having to explain to all my clients that the response times of carriers has deteriorated on claims handling,” she said. “Especially as we’re going through their renewal and they’re like, ‘Well, you know, so-and-so hasn’t been so great on claims.’ And I say … ‘it’s literally every major carrier right now. We have claims open with all the major carriers and none of them are doing a great job right now,'” she said.
“We are having to hunt them down, call them, email them, and bug the adjusters to get back to our clients,” she said. That hasn’t always been the case, and some clients have been so displeased they want to switch carriers. But Vitarelli advises that is not a good reason to move in this environment.
Keeping Pace with Changing Business Models
The willingness of restauranteurs to innovate and change their business model to survive tough times, and thrive, is not going away as concerns over the pandemic diminish, Vitarelli says. Business models continue to change and so will the risks.
“People are definitely looking at the behaviors of their customers and trying to address what they think people want now, as we live with COVID,” she said.
Vitarelli points to a new client who is building a space to accommodate small groups, such as a group of 12 to 15 so that they’re not in the open in a big restaurant. “Those are the conversations that I’m having with clients, even those with existing locations.” They are looking at the behaviors of their customers and making changes to their business models, she added.
The most important thing for agents to do in a changing risk environment is to be a consultant for clients, advises RPS’s Enwright.
“I think the agents should stay focused on being consultative with their insureds and make sure that the focus stays on the coverage, not necessarily price,” he said. “When you’re dealing with the sub-limits and exclusions, it’s really important to try to provide as much coverage as we can.”
Agents must keep up with how restaurants are using technology today as well, Strommen said.
More than four in 10 restaurant operators plan to ramp up investments in equipment or technology to increase productivity in both the front and back of the house this year, according to the National Restaurant Association.
“Technology is growing and becoming more important to every restaurant operation but there are still far too many restaurants that do not buy even basic cyber coverage,” Strommen said. “That worries me and it’s the responsibility of all of us to help educate the restaurant owners on the importance of cyber. Retail brokers have the face-to-face interaction with restaurant owners to really help them understand that the exposure is significant.”
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