The Hospitality Industry and Captive Insurance: An Invaluable Combination

From property damage and liability claims to employee injuries and cybersecurity threats, hospitality businesses face a wide range of uncertainties that require comprehensive insurance coverage. In this context, captive insurance has emerged as a valuable solution for the hospitality industry, offering businesses of all shapes and sizes the opportunity to share risks and obtain favorable coverage. By exploring the advantages of captive insurance and its growing relevance in the sector, we aim to shed light on why captive insurance is an excellent defense for the hospitality industry.

Captive insurance has expanded its scope in recent years, now covering additional insurance lines and providing more capacity and lower premium thresholds. This expansion has opened doors for the hospitality industry, allowing businesses in this sector to access group captive solutions specifically designed to address their unique risks. The hospitality industry, encompassing hotels, resorts, restaurants, and event venues, among others, can benefit greatly from utilizing captive insurance due to its flexibility and customization options.

Having the ability to match a company’s risks with its desired coverage allows businesses to optimize their risk profile. This depth of customization enables the hospitality sector to shield itself against potential risks that are not typically covered by standard insurance policies. For example, many businesses in hospitality were adversely impacted by COVID-19. For many, their commercial insurance providers would not cover business interruption or forced closure by governmental authorities. However, many businesses that had captives had their business interruption claims paid. Other common risks might include event cancellation, reputation damage, loss of key employees, cyber and data, etc.

First, captives can provide coverage for losses resulting from business interruptions, such as revenue loss due to natural disasters, supply chain disruptions, or other unforeseen events which are covered in the business interruption policy. Second, losses related to the cancellation, postponement, or disruption of planned events, such as conferences, concerts, or sporting events, can be covered under the event cancellation policy. Third, expenses associated with crisis management, public relations, and brand protection in the event of reputational damage are covered under the reputation damage policy. The financial impact of losing key employees due to death, disability, or resignation, including costs for recruitment, training, and continuity, are all within the loss of key employees plan. Lastly, captives can help mitigate the financial consequences of cyber and data breaches, covering costs related to data recovery, legal fees, notification costs, and potential liability claims in the cyber and data liabilities program.

As a result of this, captive insurance provides the hospitality industry with more stability and control over insurance costs. In the traditional commercial insurance market, premium costs can be highly cyclical, leading to unpredictable fluctuations in expenses. However, by establishing a captive insurance company, businesses can smoothen their insurance costs over the medium term, reducing the impact of market fluctuations. This financial predictability allows businesses to better allocate resources more effectively and plan for the future with greater confidence.

Another compelling aspect of captive insurance is the potential for businesses to benefit directly from favorable claims experience. In commercial insurance arrangements, businesses have minimal incentive to improve their risk management since they do not participate in the profitability and long-term benefits of the insurance program. However, captives flip this paradigm by allowing related companies to benefit from their own good risk management efforts. When claims experience is favorable, insurance companies can generate surpluses, which can be distributed back to the insured businesses as dividends or used to enhance risk mitigation measures.

In closing, captive insurance offers the hospitality industry the advantage of a closer relationship with the insurer. By establishing a captive insurance company, businesses can have more direct involvement in the underwriting and claims processes. This closer relationship fosters better communication, faster claims resolution, and a deeper understanding of the unique risks faced by the industry. With greater collaboration between insured businesses and their captive insurance company, risk mitigation strategies can be refined, leading to enhanced overall risk management within the hospitality sector.