Hotel insurers mitigating losses of climate-related events with record rate hikes and limited coverage

This past year set a record for the number of natural disasters in the United States, with 25 events costing more than $1 million each, resulting in 482 deaths and a total cost of $81 billion in property damages, according to data from the National Oceanic and Atmospheric Administration (NOAA).  And over the past five years, 99 natural disasters and severe weather events have resulted in nearly 2,000 deaths and totaled more than $842 billion, NOAA reported.

The most costly events this past year in terms of lives lost and property damage involved:

  • A heatwave and drought across the South and Midwest ($10.5 billion and 244 deaths)
  • Devastating firestorms in Hawaii ($5.6 billion and 100 deaths)
  • Hailstorms and severe weather across Colorado and Midwestern and Southern states in May and June that produced more than 130 tornadoes ($22 billion and 18 deaths)
  • Flooding in the Northeast in July ($2.2 billion and 10 deaths)
  • Hurricane Idalia in western Florida ($3.5 billion and five deaths).

While insurers are still calculating the impact of claim payouts for this past year’s Climate-related events, insurance rates increased across the board in 2023 due to previous years’ disasters and are likely to continue rising in 2024, according to Mark Anelli, senior risk advisor and Regional vice president at Morris & Garritano, an independent, California-based insurance agency. He says that re-insurance carriers have taken the biggest hits from natural disasters and passed their losses on to insurance carriers, which, in turn, passed them on to customers as rate increases.

Hotels and other commercial property types, as well as homeowners, are experiencing unprecedented rate increases, especially in California and other areas at high risk for wildfires like the Pacific Northwest and coastal areas of Florida and Texas, Anelli adds, noting that one hotel in Florida saw its insurance premium increase 300 per cent last year. 

Additionally, Southern California-based Alan Reay, president at the hotel brokerage and consulting firm Atlas Hospitality Group, notes that insurance costs in fire prone areas of California, such as the Napa Valley and Sonoma County, jumped 200 – 300 per cent.

“Outside of just rates, we are seeing a lack of capacity or a shortening of capacity in some markets,” Arnelli continues, explaining that some insurance companies are leaving higher-risk markets and there is less appetite due to increased litigation. Others are excluding certain Climate-rated events, he adds, noting that hurricanes, earthquakes, and tornados are common events that face exclusions, but he is now also seeing wildfire exclusions or limitations, along with significant increases in deductibles.  

“Many insurance companies have pulled out of California entirely, and those that remain are being very selective on which properties to insure, with much higher rates and deductibles,” adds Reay, noting that State Farm is the most notable insurer that left the state and Farmers Insurance is now sending hotels and other clients non-renewal notices.

Less competition

With less competition among insurers in these markets, there are fewer choices of insurance providers. Anelli continues, noting, for example, that since many standard carriers are unwilling to provide coverage in California, hotels there are being forced to piecemeal together coverage with multiple carriers, which can be done but at a higher cost and usually with sacrifices in coverage.

Some states do offer insurance coverage for certain catastrophic events, such as a wind fund insurance pool in Florida and earthquake insurance in California, but in high-risk markets there may be little or no protection against property damage from many Climate-related events, like wildfires in California.

However, Arnelli notes that there are precautions that hoteliers and other property owners can take to prevent or limit their losses if the worst happens. This varies by location and property situation. In California, for example, precautions include managing brush control, maintaining proper roof eaves and installing ember proof vents and other protection devices, such as sprinklers, and take fire protection/safety measures, such having water hoses onsite and removing debris or materials that can fuel a fire.

Mitigating the risk

Orlando-based Mark Knott, vice president and lead of the Hospitality Sector at the real estate consulting firm of Project Management Advisors, Inc., also notes that hotel design and construction methods can help to mitigate risks and rising insurance costs. “A lot of these methods come down to a simple question: are you considering and actively engaging with the climate and environment of the surrounding area?” he says. 

“Planning to accommodate environmental factors from ‘Day One’ can ultimately save hundreds of thousands on operational and insurance costs,” Knott stresses. For example, he notes that in Florida, it's important to avoid building with some synthetic stucco, as insurance companies now view this building system as vulnerable to climate factors. such as moisture, mold, wind speed, storm surge, and other events, Knott explains.  In Colorado, a localized climate concern for buildings is snow load, which is a critical metric for roof design and construction, he adds.

Additionally, Knott says that every hotel is uniquely positioned and has a variety of local environmental drivers and related regulations that impact insurance premiums and overall operational costs. “Designing to these environmental factors, as well as brand standards and local code requirements, will help to maximize savings in the long run,” he adds.

Therefore, he advises that working with experienced project managers, architects, and other industry professionals in the project’s location to assess and manage risk factors from the beginning will have the most positive impact on a hotel/s bottom line over the long term.