IBC: What effects has the COVID-19 pandemic had on the hotel industry in Canada?
Karim Chandani: There are huge cost pressures on our hotel clients right now. When COVID-19 first struck and business and leisure travel basically halted, the wage subsidy did help to some degree, and beyond that, the banks supported businesses with six-month loan payment deferrals. But a lot of that support is now coming to an end. As a result, the pandemic has forced hoteliers to look at the financial picture of their hotels in much more detail than they’ve ever had to before. Every dollar saved makes a huge difference.
IBC: Meanwhile, insurance costs are going up when hotel revenues are down. What impact is this having?
KC: We have hotels with lower revenues and lower profitability than ever before, and at the same time, the insurance rates have absolutely skyrocketed. At a minimum, insureds are looking at rate increases of 30% to 100%, and they can’t just reduce their coverage because they need to insure their property at full value.
The reason for these price increases is that there are just not enough insurance companies in Canada today that have the capacity to insure these hotel properties to their full value. For brokers, that means we have to work a lot harder for our clients because we might have to bring multiple insurance companies onto a policy. Traditionally, it may have been one insurance company that took the entire risk of a hotel, but now we sometimes need four or five companies – if not more – to cover the risk on one hotel.
IBC: What strategies can brokers implement to help larger hotel clients through this hard insurance market?
KC: It’s a lot of work, and there’s a lot more rate pressure involved, but there are lots of different strategies that we’re starting to incorporate, especially for the larger hotel groups. For insureds with multiple hotels, we’re putting strategies in place to help ownership groups form their own hospitality-focused captive insurance companies.
I truly believe this is going to be the wave of the future. Rather than suffering through 30% to 100% premium increases, insureds could actually get something closer to a 50% reduction in premium if they use a captive. These captives are the only way to get sustained, long-term rate guarantees. There’s really no indication of any kind that rates are coming down; everything indicates that insurance rates will continue to go up over the next three years at a minimum.
IBC: Can these captive insurance programs expand beyond hotels?
KC: Absolutely. For example, I could create a captive insurance company with five hotels, and then I could invite other risks into that captive, such as a restaurant group or some apartment building owners. If it’s run successfully, you can actually create a side business within the captive, and there are also some incredible tax advantages.
One thing that’s important to note is that in Canada, there’s only one province that allows captives to be formed, which is British Columbia.
IBC: So, you see captive insurance as the future for hospitality clients?
KC: Nobody is really talking about the benefits of captive insurance, but I truly believe this is going to be the only way to stickhandle around a situation where hotel owners are going to have to take on a bit more risk. Captive solutions enable insureds to transfer that risk from an insurance company to themselves while also profiting from the savings.
The problem is, not enough people understand captive insurance, and not enough companies or brokers have access to it. There’s only a handful of brokers, with HUB International being a leader in this space, that can actually offer this. That’s why we’ll work with other brokers to help them form a captive. Ultimately, our job is to do the right thing for our clients, to keep the hospitality industry strong and vibrant, and to create the best overall playing field that we can.