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Hotel Insurance - A Rising Expense With Limited Control
For most U.S. hotel owners and operators, one of the major challenges in 2023 has been the need to control expenses amidst slowing revenue growth. Through September of 2023, the properties in CBRE’s monthly survey of hotel operating statements have seen their total operating revenues increase by 7.4% year-over-year, while total operating expenses1 grew by 10.0% during the same period. The net result was a decline in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of 0.2%.
Figure 1: Indexed Revenue, Expenses, and Insurance 2015 – 2023
*Expenses before interest, income taxes, depreciation, amortization, and capital reserve.
Source: CBRE Hotels Research, Trends® in the Hotel Industry – Same store sample of 2,565 properties that reported insurance expense 2015 through 2022.
On a percentage basis, the department with the greatest expense increase during 2023 has been insurance. Through September of 2023, insurance costs for the hotels in CBRE’s monthly survey sample have risen by 19.5% over 2022. The 11th edition of the Uniform System of Accounts for the Lodging Industry defines insurance as the cost of insuring building, contents, and liability, as well as deductible payments.
Figure 2: Compound Annual Growth by Property Type
* Expenses before interest, income taxes, depreciation, amortization, and capital reserve.
Source: CBRE Hotels Research, Trends® in the Hotel Industry – Same store sample of 2,565 properties that reported insurance expense 2015 through 2022.
To assess trends in U.S. hotel insurance expense, we analyzed the performance of 2,565 hotels that reported insurance payments each year from 2015 through 2022 for our annual Trends® in the Hotel Industry survey. In 2022, these properties averaged 215 rooms in size, with an occupancy of 66.2% and an average daily rate of $195.87. For our 2023 estimates we relied on data from our monthly survey of 2,550 U.S. hotels.
Insurance Costs By Property Type
In 2023, we estimate hotel insurance costs to be 1.7% of total operating revenue. While this makes it a relatively minor expense, the 1.7% mark is greater than the long-run average of 1.2%. As a percentage of total revenue in 2022, insurance expense was greatest at extended-stay hotels (1.9%), and lowest at convention hotels (1.1%). These ratios are more of a function of the amount of revenue, as opposed to the cost of coverage.
The disparities in the cost of coverage can be seen when analyzing 2022 insurance expense on a dollar-per-available room basis (PAR). Using this method, insurance expense is greatest at resort hotels, due to their extensive facilities and services, location in high-risk environments, and multiple recreational offerings. Resort insurance expenses averaged $2,464 PAR in 2022, well above the $939 PAR overall average for the sample. With a smaller footprint and minimal services, limited-service hotels pay the least ($528 PAR) for their insurance coverage.
Figure 3: 2022 Dollars PAR by Property Type
Source: CBRE Hotels Research, Trends® in the Hotel Industry – Same store sample of 2,565 properties that reported insurance expense 2015 through 2022. Factors That Influence Insurance Costs
Hotels are not alone suffering from significant increases in insurance costs during 2022 and 2023, as insurance costs are on the rise for all forms of commercial real estate. Some of the factors that are driving the surge in commercial insurance premiums include:
- The number of losses incurred by buildings and businesses are occurring at a much more frequent rate in recent history. This includes hurricanes in Florida, fires in California and Hawaii, tornadoes in the Midwest, winter freezes in Texas, and convective storms all over the US.
- Concurrently, the cost of fixing damages and replacing buildings has gone up. Since the pandemic, supply chain interruptions and a lack of available labor has driven up the cost of the construction-related goods and services. This is leading to increased building valuation and in turn, increased premiums.
- The insurance business is global in nature and increases in covered incidences outside the U.S. influence domestic prices.
- All these factors have led to increasing reinsurance cost for insurers which directly impacts commercial pricing.
Regional Variation
Because environmental issues have a significant impact on the cost of insurance, it is not surprising that we see variation in the historical changes of insurance costs by geography.
Figure 4: 2022 Dollars PAR by Region
Source: CBRE Hotels Research, Trends® in the Hotel Industry – Same store sample of 2,565 properties that reported insurance expense 2015 through 2022.
From 2015 through 2022, insurance costs for the hotels in our sample increased by a compound annual growth rate (CAGR) of 6.2%. The growth was the greatest for hotels located in the Southeast (7.2%), South Central (6.7%), and Mountain/Pacific (6.2%) regions. These areas are most susceptible to hurricanes, earthquakes, and forest fires. Conversely, insurance costs grew that least for hotels in the Northeast (3.7%) and North Central (5.4%) regions.
Insurance costs also vary significantly by region. Paying the most for insurance in 2022 were hotels located in the Mountain/Pacific region ($1,220 PAR) and properties in the Southeast ($1,156 PAR). Hotels in the North Central region ($479 PAR) paid the least for insurance in 2022.
Controlling Insurance Costs
Unfortunately for U.S. hoteliers, the ability to control insurance costs is limited. On property, hotel owners can make physical “risk improvements” such as flood gates and earthquake seismic shutoff valves. Owners also have the option to buy less insurance, or increase their deductible, to reduce their premiums.
Most insurance experts believe that it is unlikely for hotel insurance costs to drop in the near term. However, given the cyclical nature of the environment and construction costs, it is hoped that the pace of insurance expense growth will slow down and revert to the long-run average.
1 Expenses through EBITDA.
Robert Mandelbaum is Director of Research Information Services for CBRE Hotels Research. To benchmark your property’s insurance expense, please visit pip.cbrehotels.com/benchmarker, or contact websales@cbre.com. Christopher Nassa is Senior Vice President in the Insurance Risk Management Department of CBRE. To discuss your hotel’s insurance, please contact Christopher at chris.nassa@cbre.com, or (203) 523-4564. This article was published in the February 2024 edition of Today’s Hotelier.