Global Perspective
Insurance: It’s Not A Matter Of If, But How Much

Mike Malley - New York

Insurance premiums have increased more than 73 per cent in some markets during the past year, and in some areas, the increase was so exorbitant hotel owners and developers could no longer afford insurance. So, the question isn't a matter of if your premium was going to increase in this post-9/11 environment, but by how much?

As usual, the answers are much more complicated. As an industry, we are caught between two competing forces: securing and affording adequate insurance coverage while at the same time getting bank approval for a loan, which will only occur if you have the required insurance coverage.

That's why the Terrorism Risk Protection Act, or what has become known as the Terrorism Insurance Bill, has garnered so much attention. Many hope the aforementioned dilemma for owners will be resolved.

But in its current form, the bill, which was passed by the House of Representatives and the Senate last month, will only partially resolve the problem. If your problem as a developer or owner is that you were denied or excluded from coverage, the bill offers relief. Insurance companies will have to offer you terrorism insurance. It says nothing about what they can charge for it, nor should it. Contrary to what an American Hotel & Lodging Assn. Governmental Affairs advisory, the bill doesn't help in creating affordable terrorism coverage.

The bill makes the government the insurer of last resort for terrorist damages for the next three years. If there's a claim, insurance companies pay a deductible of 7 to 15 per cent of the premiums they collect from their customers. Beyond that, the government pays 90 per cent of the claim, and the insurers pick up the last 10 per cent. The government only steps in for claims of more than $5 million.

Who it helps are developers in areas that insurers consider as high-risk for another terrorist event. As a developer, you have two concerns. First, if your property is in a perceived target area, such as a large urban destination, can you secure adequate liability coverage? Second, and perhaps more relative to the industry as a whole, is that lenders require terrorism insurance as part of the loan-approval process. But what's a developer to do if he or she can't afford the insurance premium? Keep in mind the bill says nothing about premiums. The publicised delays of projects by Hyatt Hotels Corp. and hotel magnate Steve Wynn would lead one to think it's solely the high cost of paying increased new premiums. It is and isn't.

As the industry decries the rising premiums, don't be led astray into believing this bill is going to prevent higher premiums being passed on to you.

Dusty Rowland, executive vice president of National Specialty Underwriters, said that from an aggregate point of view, the bill will be somewhat helpful for hotel owners.

National Specialty Underwriters offers insurance programmes to Hilton Hotels Corp. franchisees as well as their LSHotels limited-service hotel programme. Rowland said the bill is a step in the right direction if a hotel loan is tied to getting insurance.

But that's about it. If you can afford the insurance premium, you can't be denied the coverage. All this bill does for insurers is give them federal support if there's another attack. The bill covers only international terrorist attacks, not animal rights attacks or similar events. Insurers can issue an assessment on all premiums.

As it stands, there's a $10-billion threshold the insurance industry has to pay before the government pays additional funds. It's estimated the World Trade Center insurance-claim cost is as much as $50 billion. The insurance companies can and would issue assessments on their premiums. Why? The insurers would have to pay back the federal government as if they're paying back a loan. The assessment would be akin to how the airline industry has a security tax assessed on all tickets to pay for the additional security. As Janice Abraham, president and CEO of United Educators Insurance said, "Consider the $10 billion like a deductible."

(Courtesy: Hotel and Motel Management)