_ Idea Exchange Captive Edge

Hospitality Risks:A Game for CaptivesWhy a Captive Solution Might Grow Your Hospitality Book, and Revenue Too

By Chris Kramer

Compare the estimated $30 billionin after tax profits that the u.s.property/casualty marketplace willlikely book for 2009 to the year

end results of the hospitality industry, whoselodging (occupancy near 56 percent), restau-rants and entertainment segments are expe'riencing some of their worst performance indecades. However, the hospitality industry

strategic benefits for both the client and theagency. For the client, there may be theopportunity to maintain reduced insurancecosts while deriving income from undcrwrir-ing profits and investment income from thecaptive (in addition to tax benefits if con,structed properly). The producer, on theother hand, successfully increases his or hervalue to the client by offering a tailored risk

Hospitality owners have concerns with retaining riskthat they cannot transfer to the insurance marketand owners are looking for legitimate ways topreserve their firms' assets or to use the captive asa profit center.

will have at least one bright spot - commer-cial insurance premiums for insuring hospi-tality risks have come down significantlysince the soft market began six years ago

While the insurance agent or broker maybe able to offer competitive premiums tosoften the blow of a struggling economicrecovery to hospitality industry clients in2010, the revenue that is generated from thepremium may be lower than what was gener,ated last year. Indeed, hard market prognos,ticators may assume that with $450 billion incapacity, a general turn in the market maynot happen until late 2011.

Agency producers and their owners, facedwith perhaps another year or two of a hyper,competitive marketplace and loss of revenue,need to take action to preserve their busi-nesses. One proven strategy is to differenti-ate their business by niche or specialty, suchas a focus on various segments of the hospi-tality industry or a specialized service like acaptive insurance strategy.

Benefits of a captive ProgramA captive insurance program offers several

N6 I INSURANCE JOURNAL-NATIONALREGION AprilS, 2010

retention strategy, thus earning some insula,tion from competitive forces and furtheringa partnership that promotes loyalty from theclient.

Captives are no longer a hardmarket tool, nor are they onlyreserved for conglomerates thathold large self insured reten-tions or dcductibles. Proof ofthe increasing popularity ofcaptives can be seen in thesurge of new captives whichformed in 2009 despite an ongo-ing soft market. Vermont,Kentucky, Utah and SouthCarolina all reported Significantincreases in new captives.Washington, IrC; a domicilethat has some of the mostadvanced protected cell captivestatutes in the country, saw an increase of 14new captives, as well as a captive in the hos--pitality industry that provides terrorisminsurance, including nuclear, biological,chemical and radiological coverage its 20U.S. hotels.

Kramer

Hospitality Captive ApproachHow would an agency use a captive

approach with its hospitality clients? Anagency needs to recognize that hospitalityowners have concerns with retaining riskthat they cannot transfer to the insurancemarket and owners are looking for legtti-mate ways to preserve their firms' assets orto use the captive as a profit center.

For example, a recent risk report for thehospitality industry listed several concernsthat make the transfer of risk to a traditionalinsurer either very expensive or undesirable.These concerns not only include naturalcatastrophe risks such as earthquakes,tsunamis and hurricanes, but also includerisks like food-borne illnesses, losses of repu'tation and intellectual property. All of theseconcerns may lead to loss or interruption ofincome.

Another increasing concern within thehospitality industry, especially lodging oper,ations, is credit card theft. According to

Trustwave, a provider of security and consul,tative services, hackers targeted hotel net,works more often than any other network in2009, aiming to acquire credit and debit cardinformation. In fact, stolen receipts from just

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_ Idea Exchange captive Edge

Hospitality Risks, continued from page N6three hotels in San Antonio recently repre-sented data for 17,000guests. Losses like theincident in San Antonio may be insured to adegree, but the loss of reputation may not be,which is where a captive may help.

The agent or broker who can diversify hisor her product and service value propositionto hospitality clients by offering a captivestrategy in concert with traditional insur-ance services makes a smart move, especiallyif the agent or broker is proactive This diver-sification not on Iy demonstrates to the client(or prospect) that the agent is client focused,but the agency may also gain a reputationwithin the industry as innovative and solu-tion-oriented, thus accompbshing its differ-entiating strategy.

Acquiring the skill sets and experiencethat is required by an agency to build outand offer a captive solution to hospitalityclients takes time and capital. However, bydeveloping a relationship or joint venturewith a captive consultant or manager mayshorten time allotted for the learning curve.

With the increasingpopularity of protect-ed cell companies,some insurance com-panies and captivemanagers may be ableto offer their captivestructure or the hcspi-tality owner maychoose to build his orher own. Both ways toset up and form a cap-tive have become easi-er. Costs may vary, butthe soft market hasalso brought down fees and expenses associ-ated with captives.

Ultimately, the successful agent using acaptive solution with his clients may increasehis book of business, as well as revenue, inany market. Fees generated from the use ofcaptives help to augment commission fromthe placement of "wrap around" insurancecoverage that the captive may not offer. Many

-agencies recognize that fee-based incomefrom the use of a captive strategy, while notgenerally tied to the insurance cycle, mayincrease client loyalty and retention rates. III

Kramer is director of marketing at UlLICO Casualty

Group, a Washington. D.C.-based group offering alternative

risk solutions including group and agency captive solutions.

Ernail: ckramer@ullico.com.