What’s the risk landscape look like for your hospitality clients post-pandemic?
Listen as CHES Special Risk president and CEO Gary Hirst shares insights on the hospitality sector post-pandemic. He’ll discuss how different models of food delivery can affect insurance risk, and some risk management techniques to mitigate exposures in this line of business.
Gary will discuss social host liability and whether it’s more expensive due to the inflationary environment. He’ll also outline measures used to determine host liability, how that translates into business practices for the owner, and the importance of informing brokers and insurers about any extra risks in the client’s portfolio.
Audio transcript
Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject matter experts throughout the year.
Pete Tessier:
Hey, everyone. Welcome to another episode of What’s On Dec?, the Canadian Underwriter podcast.
Curt Wyatt:
Brought to you by Taycon Risk, the MGA that specializes in niche markets, hard-to-place or unusual, complex commercial risks. They turn hard risk into smart coverage the old-fashioned way, they underwrite it, taycon.ca
Pete Tessier:
So I’m Pete Tessier with Curt Wyatt, and we’ve got Gary Hirst, the president and CEO of CHES Special Risk. And we’re going to talk a little bit about one of the more difficult classes to insure and underwrite, which is hospitality and all the nuances that go along with it. Curt, coming out of the pandemic it was hard, well, it was hard during the pandemic. Coming out of it, it’s still hard. What do you think we can learn from Gary about this risk class?
Curt Wyatt:
Gary brings up some challenges that clearly the industry faces when it comes to hospitality liability, challenges relating to the changeover in staffing that we see, and it’s an overall good look at where the industry is going and the challenges that, like we said, are real, they’re here, they’re not going away. And this episode dives right into it with a real expert in Gary.
Pete Tessier:
I think one of the nice things is we’re going to get some perspective on some of the things like social liability, host liquor liability, some of the details of underwriting this stuff and how to look at risk a little bit differently because this class has beaten every broker up for a long time now. So rather than us keep on talking, why don’t we drive in, or dive in, and get in with Gary.
So, now we’ve got Gary sitting in with us, and Gary, you as the president and CEO of CHES Special Risk, you’ve been in this industry on the MGA side for some time now. You’ve got a great perspective of a lot of niche classes, but the one we’re going to focus on is hospitality. And this has always been a tough class. It certainly was difficult during the COVID time before, when the hard market really started to hit, and then COVID did it no favours. What are you seeing in the class right now, now that we’re sort of through the pandemic?
Gary Hirst:
Great, Peter, thank you for the intro. We’ve seen quite a lot of the poor old restaurants, bars, hotels and banquet halls go through an enormous amount of financial pain. When you look around the world, various jurisdictions coped with the insurance during COVID in different ways. The Canadian market generally didn’t, from an insurance point of view, pay that many claims as a result of the acts of government in making us all stay at home. And as a result, I think we’re now seeing few of those bars, restaurants, et cetera unfortunately closing down. The various loans that they were given by the government at the time now need to be repaid and now need to be repaid with interest.
And there’s some pretty good dining establishments that are now unfortunately having to fold. I think, though, those that either survived or the ones that have been reborn have come back pretty strongly, actually. And business seems to be back at pre-pandemic levels. The number of people in restaurants certainly that I’ve been to over the last couple of months are really quite high. So I think that the restaurants are back to capacity, they’re back to making money.
I do think that they have problems with staffing and trying to recruit because unfortunately members of staff working in hospitality during lockdown had to go and find other employment. And I think those individuals have been absorbed into other industries, other corporations and the passion to go back into hospitality has been lost or perhaps they’re just a bit more cautious. But I do see the demand for insurance for bars, restaurants, hospitality in general is back up at pre-pandemic levels.
Curt Wyatt:
Gary, it’s Curt here. Outside of forcing people to stay home, what other risk management level techniques have you seen clients put into place now that we’re back, like you say, seeing people in the restaurants and we’re having to retrain a crew of new hospitality front-end and back-end people? Are there certain things that you like to talk to your clients about as far as risk management controls go?
Gary Hirst:
Well, a lot of those, and taking restaurants as an example, have evolved their business model in that they’re not purely in situ dining anymore. The good old Uber Eats delivery or Deliveroo, et cetera, I think was a bit of a lifeline for a lot of those restaurants, thank goodness. And they’ve actually developed that to be a stronger area of their revenue. So that has evolved the types of risks that we’re looking at because then you start to look at auto coverage. If you’ve got an individual that’s now picking up a bag of fish and chips and delivering it to somebody’s house, there is potentially there some sort of contractual arrangement and there is an auto liability risk in the event that the person’s involved in a collision. So you’re looking at that sort of thing.
We do inspect the facilities to make sure that they do meet various codes, but luckily, the various government departments also inspect restaurants and bars, for instance. That’s why you’ll see the green check mark certificate in the front window. Those government inspectors actually do a great deal as far as risk management is concerned, because obviously we’re looking at cleanliness, we’re looking at storage risk inside a restaurant, you’re looking at fire protections, hydrants, sprinklers in the extraction hoods.
But from an insurance perspective, you’re then looking at the training of the people that work in hospitality and in particular the servers to be able to detect over-serving. Are they aware that there are various limits of serving alcohol to a lot of their customers? And that is something that we’re checking when we’re reviewing a submission. We do also look at social media because again, not everything that a restaurant or a bar does is fully explainable in a written application.
Pete Tessier:
Gary, just to even go back a little bit, I want to kind of focus in on one thing. You talked a little bit about coming through the pandemic and after the delivery model and everything. That’s exploded now with SkipTheDishes, Uber Eats, DoorDash, you name it. How has that affected the risk vector? Because that’s a very different model now of how you’re serving food, custody, like you’ve got an intermediary now involved in the actual serving of the food who is not an employee of the establishment.
Gary Hirst:
Yes, correct. Well, you’re also worried about what happens to the food when it’s delivered to somebody’s house. Does the individual receiving the food leave it on the counter for a day-and-a-half and all of a sudden you get some foodborne illness? And it is all those sorts of factors that you have to take into account when you’re underwriting a hospitality risk. You’re using an intermediary to deliver the food, which in some ways is actually a better risk because you are perhaps able to defer liability exposure to the intermediary. And in some ways it could be argued that that’s actually a protection for the insurer of the restaurant. But at the end of the day, the lawyers do try and get to the deepest pocket, so they’re really very good at making a case for their clients.
Pete Tessier:
Yeah, we won’t go into the lawyers here, but Gary, when it comes to social host liability, what’s happening there and are there more cases where it’s more expensive due to the inflationary environment? What’s the status there?
Gary Hirst:
Inflation is a factor, and Canada in particular I think has been singled out for inflation. And really the reason for that is that we’re stuck at the top of a very, very large continent and I’m told that it gets cold here, although we haven’t seen it yet. But as a result, the growing cycle of food, et cetera, up here is limited to certain months. And as a result, everything has to be imported and there are effects of inflation because of that. The price of petrol has gone up. The price of labour has gone up, et cetera, et cetera. So that is a factor that is usually manifested in the receipts of a restaurant and you are making a price adjustment because of that. We don’t use that as an excuse to increase premiums.
There are other effects going on here. You’ll find a restaurant that is a regular restaurant and now all of a sudden they’ve got hookah pipes there. A lot of hospitality has actually evolved from just being a sit-in dine restaurant to one actually offering an experience. And when you start to have things like a hookah pipe or a dance floor, those areas do need to be looked at and do need to be assessed, because now you’re looking at a different risk than just serving someone a plate of food, someone is now going to these places for other aspects of entertainment which do have an impact on premium.
Curt Wyatt:
That’s really interesting, Gary. I mean, we assume that there’s a standard within the industry as far as host liability goes, and as you add in these extra vectors of what could take place, it changes the liability exposure. Is there a measurable there that you use to determine when, let’s say it’s live music for example, is there ways to measure that in that sense that then the bar owner or the restaurant owner can then try to determine is it worth my while to add in these extra things? And then this way the broker, the retail broker, can sit down with them and actually say, “Look, if you’re going to add a band a week because you think it’s going to bring in some business, know that this is going to be the outcome.” And how does that translate into business practice for the restaurant owner?
Gary Hirst:
Yes, well, we do see quite a lot of those requests coming through. You’ll see, let’s say, a regular restaurant that is just serving food and a bottle of wine, and then they will start to offer Friday and Saturday nights with someone maybe playing a guitar or singing. That sort of thing is quite acceptable for us because it’s just part of the ambiance of the restaurant. There’s really no difference between having piped music in a restaurant and having a live person standing there singing or playing a guitar. But where it does start to impact risk is where maybe 10 o’clock at night, they’re now clearing away the tables and the dance floor and the mirror ball starts twirling and you’ve got a DJ, and that is a completely different risk then. You’re now looking at a nightclub.
And then, of course, there are issues when it comes to serving alcohol. Is it bottle service? If it is bottle service, then the establishment really has no idea how many shots a patron has had. Is there over-serving going on here, which there is probably people drinking far too much. And that causes a huge increase in the exposure for the insurers because how is that individual getting home? Even if they are going home in a taxi, what sort of state did they get home? Did they slip over walking in their front door, et cetera, which then has an impact back on the establishment?
So these sorts of things do have a big impact. The premiums do go up, and really the restaurant owner or the bar owner does need to start to look at the economics of the extra cash coming into the establishment compared to the increase in the premium that an insurer would want. Likewise, has the owner of the establishment actually told their broker that they’re now doing this? And unfortunately, we find that on a number of occasions, extra activities are being done and the insurers are not being, or we’re not being told about it, which then causes a bit of a tough conversation when it comes to looking at claims.
Curt Wyatt:
That’s very interesting because we talk about social inflation. And we talk about that over the years now with a hard market, we’ve watched these premiums creep up and up and well ahead of economic inflation even in the last year, let’s say. So by the sounds of it, what you’re defining as these activities which take place within these businesses is what’s sort of driving that social inflation. And more than just saying the claims are more, it’s the exposure is greater. And then how do we as an industry keep up with the premium to offset that new exposure when, like we talked about earlier, we’re coming out of a pandemic and a lot of these organizations or restaurants and hospitality groups are trying to just survive?
Gary Hirst:
Yes. No, it is tough. And we do take, I think, a really mature view of submissions because we do try and encourage entrepreneurs. Like for instance, there are a lot of the standard market insurers that won’t insure an establishment or a business unless they’ve been in business three years. Now with pandemic, you have a lot of businesses that have closed down and you’ve got those same entrepreneurs have now established a new corp. It is a new incorporation. And those individuals are being turned down by standard market insurers because they haven’t been in business for three years.
Our view is we’re underwriting the entrepreneur, we’re not underwriting the bits of paper that are the incorporation. So we do, I think, assist any new startups, and that’s not just restaurants and bars, that is the building and construction trade. There’s been a lot of closures there because again, those individuals weren’t allowed to go to work and work on site. So I think we’re doing our bit to encourage the economy to get back up and running again.
But one of the other things that does affect the premiums in hospitality is the claims inflation. Now, the claims inflation really has a certain amount to do with the economic inflation, but it is just people are claiming more money now. Salaries have gone up. So if you are hurt or injured as a result of being in an establishment, you’re now claiming more money. And it’s similar to the pressures that the auto industry have on auto liability. Medical expenses are going up. The cost of medical has gone up, et cetera, et cetera. So you’re really always one step behind when you’re an insurer because something’s going to happen in 12 months time, which is just going to be more expensive than it is at today’s date, and that has an impact. And if we’re still going to be able to offer the coverage, you need more money for it.
Pete Tessier:
So Gary, I have a few more questions, but I think it’s a nice way to wrap. Thanks so much for jumping on What’s On Dec? with us and talking a little bit about this difficult class. And I hope people who’ve listened to this will have a better understanding about the ways they should be thinking about underwriting, some of the issues that underwriters have to consider when they’re looking at business and maybe how to advise their clients. So Gary, thanks again for jumping on with us.
Gary Hirst:
Thank you. Nice to see you.
Pete Tessier:
Curt, lots of interesting stuff from Gary. And I think one of the things I always take away when it comes to information flowing is that when you’re working with hospitality risks, you’ve got to find a way to be detailed about what you’re submitting into a carrier such as a CHES, because they’re looking at a lot of different things when it comes to details, particularly what’s the past experience of the people founding an establishment when it is a new venture?
Curt Wyatt:
And I thought also, Pete, what’s interesting is the bigger look at food delivery and how that’s affected the underwriting landscape. We all took for granted during the pandemic that you could pick up the phone, get something delivered, but does the consumer really think about the fact that there’s a change in insurance risk here, that there’s now handling by a third party? There’s variables that come into play that I don’t, even myself being in industry, I didn’t really quite at any time consider this as a potential exposure to what underwriters are having to face and it’s not going away.
Pete Tessier:
Yeah, I think one of the other issues that you have to really be conscious of is a thorough understanding of what the business is doing. Gary brought in some really interesting aspects about events that could happen when things change in the timeline of an establishment and maybe something closes at 9:00 and a different thing opens or happens at 10:30, is a different patron, who’s coming in for that. And those are little details that make a huge difference in underwriting. And we know this class has been challenged for way too long, and to help your clients or to help anyone who’s an entrepreneur in this class, you’ve got to guide them through some of the nuances of things. They’ve got a ton of ideas, but not all ideas are necessarily great for insurance.
Curt Wyatt:
That’s it, Pete and hey, here we go again. As we’ve said in the past, “The value of a good broker, the value of communicating with your client on a regular basis, not just at renewal, plays into how we can help this sector that is under pressure.” There’s pressures. We’re reading the articles with respect to cost and inflation, with recovering from the pandemic and such that this is an important time and great to bring this information forward to the industry and everyone.
Outro: Thanks for listening to What’s On Dec?, the Canadian Underwriter podcast.
