A hospitality risk manager gave a travel tip to his peers at a recent industry trade show: Pack a portable ultraviolet light. The device is similar to those black lights that teenagers blaze in their bedrooms. But besides providing purple-haze mood lighting, UV lights can illuminate a certain otherwise invisible, dried bodily fluid.
When the risk manager stays in someone else's hotel, he explained, he switches off his room's light, flips on the UV and gets CSI. In the case of his hotel room at this particular conference, fluid was splattered everywhere. He promptly contacted the front desk and got himself a new room.
The story demonstrates just how much a good hospitality risk manager knows about his business. It also highlights how nearly all hotel risk management can be mitigation for one overarching exposure-- reputational risk. What would have happened if the risk manager caused a stink at the conference and your reporter published the hotel's name here?
BRANDED FOR LIFE
Reputational risk, or brand management, is not an issue limited to hospitality. If you were to look at surveys of risk managers, it's a top issue, says Doug Gafner, senior director of risk management, Hilton Hotels Corp. of Beverly Hills, Calif.
"Putting aside the hazard risk and looking at those sorts of broader holistic areas," he says, "reputational risk is coming up again and again."
But brand preservation is an enterprise risk management theme that gets to the very nature of a hotel's business.
"It's pretty much embedded across the company because you're a hospitality company, right?" Gafner says. This is your business. Your business is your reputation and making the guest comfortable."
Gafner and other industry risk managers say reputation is involved every time hotel employees come in contact with a guest. That puts hotel operations and customer service at the front end of brand management, according to Mel Bangs, director of risk management at Irving, Texas-based Omni Hotels, and risk supporting in the back end with customer-facing policies and procedures. Employee satisfaction is "huge" as well, she says.
But brand management goes well beyond a smiling concierge and clean, bodily-fluid-free rooms.
"A lot of people have a lot of issues on their plate," says Nancy Green, executive vice president out of Aon Risk Services Inc.'s Chicago office, "but at the end of the day, a lot of it goes to helping the company preserve its reputation and do a good job of managing the brand."
How would a property respond to the dreaded avian flu pandemic? How quickly would a hotel reopen after a major hurricane hit town? How would associates respond if a guest makes a claim? How green are operations? When's the last time a food-borne illness occurred? A mugging? Theft of customer information from the hotel's computer system?
Ask risk managers, and they are sure to add a few more items that could sink their company's good name. For instance, James Iervolino, vice president of risk management at Wyndham Worldwide Corp., names "age-old vicarious liability"--specifically, a death claim, and more specifically, at a franchised location, where corporate sets up brand standards and ensures the owner-operator has proper primary coverage but ultimately has no
control over what happens day to day.
"That's the whole franchise relationship," he says. "You don't have direct control. They're simply paying a franchise fee if they adhere to some minimum standards to fly your flag."
Not that property management makes reputation less of a concern. "Many of the hotel companies are moving away from ownership and becoming more managers of properties," says Robert Hessel, senior managing director for Beecher Carlson out of Atlanta, "and their ability to attain management contracts and to obtain business and clients is really driven by their brand and how that brand translates to revenue and profitability for that third-party owner."
BOTOX ROOM SERVICE IN YOUR CONDO
Other fundamental industrial changes are affecting how hotels protect their brands, as well as manage risk in the traditional sense. High-end hospitality competes for clientele with new features such as "extreme" spas that provide near-medical procedures like botox injections, water parks and day care. Imagine a drowned child on the 11 p.m. news, or a wrinkle-removal-gone-awry lawsuit.
These broadened services can also lead to risk managers re-examining their general liability policy, broadening coverage or, in the case of extreme spas, even taking out new professional liability cover, says Janice Schnabel, managing director and leader of Marsh's global hospitality and gaming practice.
Another huge driver of change is the revolution in how hotels are designed--the trend of "mixed use" that involves remodeling or fresh construction to make room for condos, fractional ownerships, timeshares and other residences. Owners like mixed use because "it makes the economics of the whole project forecast better," says Hessel--meaning lower initial investment and better returns. But the associated reputational and other risks added to their plate can be a big deal for risk managers, as well as their insurers.
"It's the changing dynamic of our industry that's creating a lot of concern on the part of insurers, andtherefore on our part," says Hilton's Gafner. He adds that insurance companies increasingly seek to exclude anything residential, especially when it comes to coverages like construction defect.
That's leading some risk managers to consider owner-controlled insurance programs when before they would not have tested a wrapup, Gafner says. OCIPs allow property owners to provide insurance for contractors working on the construction or remodeling.
When risk managers can still get coverage for mixed-use properties, they then parse contracts to ensure the proper allocation of indemnity, loss costs and premiums among contractors, residential owners, and the hotel management company or owner, explains Green at Aon.
With property-catastrophe cover, such aggregate exposure management could drive a risk exec to escape to someone else's beach resort--or brush up on their modeling and underwriting skills. With the aggregate limits of an earthquake cover or sublimits for wind, says Hessel, "risk managers are almost becoming underwriters themselves, because they have X amount of wind coverage and they have to decide how many of these properties they can allow to participate in the program without risking unpleasantries if something bad happens."
LESS UNPLEASANT UNPLEASANTRY
Speaking of the dreaded C word, the rate swell in the property catastrophe market blown in by Katrina-Rita-Wilma has settled into a ripple, and perhaps even receded. And that's a good thing for the overall task of brand management.
Capacity hunting last year, says Green, distracted hospitality's risk managers from the rest of the enterprise.
With good reason. The industry got smacked with price peaks of 300 percent to 500 percent for prop-CAT long with other sectors with coastal exposure, says William Teas, executive director, corporate risk management, for Nashville, Tenn.-based Gaylord Entertainment. Risk managers either had to "bite the bullet and pay it," or place their hope in the "grace of God" and go naked last season.
This season's a different story. Most of those on the sell side spoken with for this piece see 2007 renewals with double-digit decreases in catastrophe cover. Others foresee rates holding steady or slightly decreasing. Risk managers tell of the latter or even double-digit increases.
One thing most people seem to agree on, however, is that insurers are in a much better position in 2007--thanks to historic underwriting profit and a grace of God hurricane season in 2006. The capacity's flowing again.
"I don't know any of the top 10 insurance companies that do large property business that didn't budget to write more in '07," says Al Tobin, national property leader with Aon Risk Services in New York.
For any risk manager still seeing rate increases in this market, Tobin simply advises: "Tell him to call me."
Still, with opportunity come challenges. Terms and conditions are still more like a straight jacket than a bathrobe. Higher retentions, sublimits and percentage deductibles for wind are the norm.
"I'm not sure how much of that is voluntary as opposed to being forced on them, particularly for wind and critical quake," says Integro's property practice leader, Gary Marchitello.
But better renewals can be had nevertheless. For Tobin, the key is for risk managers to deliver data to underwriters--details such as building type, roof type, year of construction, age of roof and other variables for each location.
"To get a good deal in today's marketplace, you need your secondary characteristics," he says.
Les Rock, chief underwriting officer and president of Ironshore, a Bermuda-based specialty carrier that's one of the few new markets entering the prop-CAT business, relates how a gaming risk executive recently wowed him with details of his emergency rapid response team and other business-interruption mitigation measures.
Schnabel at Marsh says even timeliness benefits risk managers. She says brokers need at least a month and a half to work on renewals.
"Gone are the days that these carriers can come back on the day of renewal and say, 'Here it is,' " she says.
For more risk managers, Schnabel says, post-2005 renewals have also became a matter of revolutionizing how they present their portfolio by bifurcating placement into CAT-exposed and non-CAT-exposed areas.
Other managers, such as Iervolino at Wyndham, have instead integrated their global portfolio. He's quick to say how he saved multimillions over last year's premium and boasts perhaps the lowest deductibles in the segment. His secret, he says, is to renew before hurricane and reinsurance treaty seasons, and to maintain excellent personal relationships with his London and Lexington underwriters.
Still, all these maneuverings and opportunities in 2007 might evaporate if CATs bear their claws in 2007. "All bets are off," says Iervolino.
CAT rates are now priced appropriately, says Rock. But they'd still jump and rival 2006 heights if awfulness happens along the coasts or the faults.
"They won't go any higher (than that)," he says, though. "Clients simply can't afford it."
MATTHEW BRODSKY is associate editor of Risk & Insurance®.
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July 1, 2007
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