Why Captive Solutions Might Grow Your Hospitality Book, and Revenue Too

By Chris Kramer | April 23, 2010

Compare the estimated $30 billion in after tax profits that the U.S. property and casualty marketplace will likely book for 2009 to the year end results of the hospitality industry, whose lodging (occupancy near 56 percent), restaurants and entertainment segments are experiencing some of their worst performance in decades. However, the hospitality industry will have at least one bright spot — commercial insurance premiums for insuring hospitality risks have come down significantly since the soft market began six years ago.

While the insurance agent or broker may be able to offer competitive premiums to soften the blow of the adverse effects of a struggling economic recovery to hospitality industry clients in 2010, the revenue that is generated from the premium may be lower than what was generated last year. Indeed, hard market prognosticators may assume that with $450 billion in capacity, a general turn in the market may not happen until late 2011.

Agency producers and their owners, faced with perhaps another year or two of a hypercompetitive marketplace and loss of revenue, need to take action to preserve their businesses. One proven strategy is to differentiate their business by niche or specialty, such as a focus on various segments of the hospitality industry or a specialized service like a captive insurance strategy.

Benefits of a Captive Program

A captive insurance program offers several strategic benefits for both the client and the agency. For the client, there may be the opportunity to maintain reduced insurance costs while deriving income from underwriting profits and investment income from the captive (in addition to tax benefits if constructed properly). The producer, on the other hand, successfully increases his or her value to the client by offering a tailored risk retention strategy, thus earning some insulation from competitive forces and furthering a partnership that promotes loyalty from the client.

Captives are no longer a hard market tool, nor are they only reserved for conglomerates that hold large self insured retentions or deductibles. Proof of the increasing popularity of captives can be seen in the surge of new captives which formed in 2009 despite an ongoing soft market. Vermont, Kentucky, Utah and South Carolina all reported significant increases in new captives. Washington, DC, a domicile that has some of the most advanced protected cell captive statutes in the country, saw an increase of fourteen new captives, as well as a captive in the hospitality industry that provides terrorism insurance, including nuclear, biological, chemical and radiological coverage its twenty U.S. hotels.

Hospitality Captive Approach

How would an agency use a captive approach with its hospitality clients? An agency needs to recognize that hospitality owners have concerns with retaining risk that they cannot transfer to the insurance market and that owners are looking for legitimate ways to preserve their firms’ assets or to use the captive as a profit center.

For example, a recent risk report for the hospitality industry listed several concerns that make the transfer of risk to a traditional insurer either very expensive or undesirable. These concerns not only include natural catastrophe risks such as earthquakes, tsunamis, hurricanes but also include risks like food-borne illnesses, losses of reputation and intellectual property. All of these concerns may lead to loss or interruption of income.

Another increasing concern within the hospitality industry, especially lodging operations, is credit card theft. According to Trustwave, a leading provider of security and consultative services, hackers targeted hotel networks more often than any other network in 2009, aiming to acquire credit and debit card information. In fact, stolen receipts from just three hotels in San Antonio recently represented data for 17,000 guests. Losses like the incident in San Antonio may be insured to a degree, but the loss of reputation may not be, which is where a captive may help.

The agent or broker who can diversify his or her product and service value proposition to hospitality clients by offering a captive strategy in concert with traditional insurance services makes a smart move, especially if the agent or broker is proactive. This diversification not only demonstrates to the client (or prospect) that the agent is client focused, but the agency may also gain a reputation within the industry as innovative and solution oriented, thus accomplishing its differentiating strategy.

Acquiring the skill sets and experience that is required by an agency to build out and offer a captive solution to hospitality clients takes time and capital. However, by developing a relationship or joint venture with a captive consultant or manager may shorten time allotted for the learning curve. With the increasing popularity of protected cell companies, some insurance companies and captive managers may be able to offer their captive structure or the hospitality owner may choose to build his or her own. Both ways to set up and form a captive have become easier. Costs may vary, but the soft market has also brought down fees and expenses associated with captives.

Ultimately, the successful agent using a captive solution with his clients may increase his book of business, as well as revenue, in any market. Fees generated from the use of captives help to augment commission from the placement of “wrap around” insurance coverage that the captive may not offer. Many agencies recognize that fee-based income from the use of a captive strategy, while not generally tied to the insurance cycle, may increase client loyalty and retention rates.

Kramer is director of marketing at ULLICO Casualty Group, a Washington, D.C.-based group offering alternative risk solutions including group and agency captive solutions.

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