Hoteliers make case for storm coverage in Caribbean

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When Royston Hopkins returned from London last month to his Spice Island Beach Resort in Grenada, it was with an uneasy sense of deja vu.

Hurricane Emily had swept over the island just days before, causing moderate to severe damage to resorts, homes and businesses in Grenadas northern sectors. Only 10 months earlier, he had returned from a European vacation only days after Hurricane Ivan had destroyed both his four-star resort and his home.

I missed both storms -- but they didnt miss me, he told TravelWeekly.com by phone from his office in the still-closed Spice Island resort. This storm, fortunately, did very little damage to the southern part of the island, (where his resort is located) though its still a little traumatic.

Hopkins and his experience in storm-torn Grenada have become something of a regional legend among the Caribbean islands hundreds of independent hotel and resort operators, but not because his well-known resort was involved in two hurricanes less than a year apart. Rather, it is because hes among a shrinking number of hotel operators who managed to find, afford -- and collect on -- storm insurance coverage.

His settlements from Ivan helped finance a $12 million reinvestment in his beachside resort, setting him apart from the large number of resort operators who are underinsured by responsible business standards.

Opening eyes

What Grenada has done is to open the eyes of everyone about the need for insurance, said Berthia Parle, general manager of the Bay Gardens Hotel in St. Lucia and president of the Caribbean Hotel Association (CHA).

Parles organization has hammered together an international deal that many see as a possible cure for the growing insurance woes that have left many Caribbean operators unable to rebuild if they have been hit by hurricanes. Those who ducked recent bullets fear that their businesses will be wiped out if they find themselves in the path of the next storm.

The CHA stepped in because property insurance problems have reached crisis levels in this part of the world.

Parle, like many others in the trade, has seen coverage grow increasingly difficult to obtain at any price over the past few seasons as shifting storm patterns in the Caribbean have brought troubles to areas that rarely had been touched in years past. Before Ivan devastated 90% of the homes and businesses in Grenada, the island hadnt seen serious hurricane damage in nearly 50 years.

In a region of the world where travel and tourism are the engines of economic stability, the availability and cost of insurance have become topics of ever more anxious discussions. As hurricane seasons seem to be growing more unpredictable with climate change, the stakes are getting higher.

Even under the best conditions, replacing your product is nearly impossible with insurance settlements because labor costs here are so very high. said Hopkins. It is very expensive. And even though we had insurance that some saw as adequate, it is very hard to know what adequate might be.

Even we are not in winners row, so to speak, he said. If we were fortunate, it is because I have always been very conscious of having myself covered in all areas -- liability, property and consequential business loss and interruption. Otherwise, everything you have worked for could disappear in a single day.

Hopkins had the foresight to include business consequential loss that allowed him to temporarily retain many of his employees -- 80% of whom lost their homes to Ivan, he said -- and to keep his top management and security staff for a full year while the hotel was closed.

The fact that Grenada had long avoided serious storm damage encouraged some operators to ignore needed upgrades of their policies, he said. And even insurance brokers and carriers themselves had been lulled into believing that the islands past good fortune would continue into the future.

Some insurance companies used to offer a yearly rebate on premiums if you would move your boat to Grenada during the storm season, said Richard Doumeng, owner of the Bolongo Bay Beach Club in the U.S. Virgin Islands. Id say 75% of the boats that were damaged by Ivan were not in their home port.

Hurricane alley

Ivan and other recent storms, he said, offered a costly lesson in the capricious nature of storms. The resulting uncertainty has transformed the entire Caribbean into a high-risk zone as far as insurance carriers are concerned. As a consequence, hotel and resort owners have experienced a decline in insurance availability coupled with rate hikes and a growing reliance on self-insurance.

Insurance executives, resort owners and others agree that hurricane insurance -- primarily wind damage and sea surge coverage -- has become increasingly hard to get. When it can be had at all, it has become prohibitively expensive as more and more storms leave the Caribbean with the stigma of hurricane alley.

Hotel executives say higher costs are inevitably passed along to travelers as operators try to protect their bottom line, though competitive pressure often keeps full increases from being passed directly to consumers.

You dont see surcharges for insurance costs as you do with higher utility costs, said Parle. But these are part of the cost of doing business.

In addition to rising rates, a growing number of assets, ranging from docks and cabanas to landscaping, awnings and other nonstructural items, are being excluded from coverage altogether. In fact, the sheer number of new exclusions has discouraged many operators from insuring their properties at all.

Unfortunately, said Joe Murray, an insurance consultant to the CHA based in Puerto Rico, resort operators go bare in certain places as far as windstorm coverage goes. We have tremendous, beautiful boutique hotels throughout the Caribbean, held by generation after generation of families who may have $15 million invested in their property. And they are rolling the dice.

In fact, it is safe to say that underinsuring has become a widespread business strategy among small and midsize Caribbean operators. Avoiding the escalating costs of damage insurance enables them to resist increasing their room rates at a time when theyre facing a competitive squeeze from international hotel chains.

The chains have a competitive advantage because they often have access to low-cost umbrella coverage that dilutes their risk within a broad portfolio of less risky properties around the world.

I have a friend who manages a large-chain hotel on St. Thomas, who is paying one-tenth of what we are facing for windstorm coverage, said Doumeng, whose family has owned the Bolongo Bay for half a century. And that is after weve adopted the strict Miami/Dade County rules for construction to withstand hurricanes. We still have the high rates. And so we dont have windstorm coverage.

A CHA plan

All the problems associated with commercial property insurance for Caribbean hotel owners -- high rates, lack of availability and slow payouts for storm losses -- may be about to change, however, if the CHAs new program gets backing from operators when it is launched next month.

The association has struck a deal with Cooper Gay, a London-based, independent specialty broker, to create what amounts to a buyer group composed of independent hoteliers throughout the region.

Cooper Gay, which operates in 30 countries, is already the largest insurance and reinsurance broker in the Caribbean. The CHA said it hopes the program will enable members to replace what many describe as an antiquated, provincial system that has left hoteliers with few options, high prices, and a dangerous level of exposure.

Jeremy Goodman, CEO of Cooper Gay North America in New York, said his company has been working on a solution with the CHA for the past eight months.

Because the Caribbean is a difficult place to get insurance -- and beachfront hotels in particular have had trouble getting insurance or are paying prices that are very high -- we have come up with a structure that allows them to pool their resources and use that leverage to obtain greater coverage at more competitive rates, Goodman said.

Youre essentially taking advantage of bulk-purchasing power, pulling a number of hotels together, he said. For example, Marriott is a big, international hotel company, and they have leverage in the marketplace. The CHA is trying to create a program that enables the small and not-so-small independents to get a similar type of leverage.

For Hopkins, himself a former president of the CHA, the opportunities are attractive. I would say insurance rates in Grenada have risen some 40% since Ivan, he said, and I expect them to go up another 4% to 5% as a result of Emily. That will leave more people underinsured.

The increasing frequency of devastating storms in the Caribbean has been well documented by weather officials. The National Oceanic and Atmospheric Administration noted recently that above-average hurricane activity in the Caribbean has occurred in all but two of the last ten years. It is predicting that storm activity this year will be 70% above normal.

Those reports prompted the Organization of American States last month to issue warnings that it expects severe economic consequences in the region as a result of the growing frequency and severity of storms in the Caribbean.

Peter Odle, general manager of the Mango Bay Hotel and Beach Club in Barbados, said that although the regional aspect of storm risk is rising, location still plays a part in obtaining insurance.

At the moment, we do not have an issue with availability, but where storms have hit, that is clearly not the case, Odle said. In Barbados, we have not had really serious damage since 1995, so insurance remains available and affordable.

But Odle said he knows that can change quickly, and he views the new insurance program from the CHA as potential relief for operators beset by the regions insurance problems.

They (CHA) have tried this before, but there were problems because of the approach, he said. They have had an interest in trying to put together an insurance program for years, but always have had a problem with the implementation part of it. Thats because local insurance companies usually have a vested interest with hotels.

Odle was alluding to a sort of good ol boy tradition that has long marked insurance programs for hoteliers in the Caribbean. That tradition has contributed to the problem.

In the Caribbean, the local bank is often an investor in the local hotels, he said, and you as an operator are forced to get involved in a way that your lender wants you to get involved. It may not be the most professional situation, but operators may be compelled to use a certain company because it is owned by the brother of the banker. Its been an issue.

At times it has also left hoteliers covered by insurance companies that have insufficient reserves to handle major storm damages. In some cases, reinsurance has been ceded to companies that do not cover losses in a timely way or dont pay certain claims at all. Murray, who was instrumental in crafting the CHAs new insurance program with Cooper Gay, admitted that introducing reform without threatening these longstanding relationships was a balancing act.

In Grenada, problems with collecting from, or reaching settlements with, reinsurers have delayed rebuilding, which has in turn left the tourism economy to suffer.

Goodman said the new program would offer a higher-quality, more-stable insurance product by moving reinsurance coverage to respected international carriers.

We will use a number of major reinsurance companies to cover that risk, he said, and by allowing the independent hoteliers to use their own broker agents, we will provide them with options as an alternative to the coverage they have now. We as brokers will be able to give them an indication of price so that they can window shop, if you will, to see if they like what they see.

He said that pooling risk in a pan-Caribbean offering would result in broader access to higher-quality insurance throughout the region, which would potentially benefit not only those who have had direct insurance claims, but those who have so far avoided being pummeled by the whims of weather.

Doumeng said he was encouraged by that, especially since insurance carriers have begun to lump the entire region into a single, high-risk area -- a trend that he says has been exacerbated by news coverage.

Weathermen are like baseball players, he quipped. They can have a .300 batting average and still have a job the next day. When they lump the Caribbean together as a single region, they dont stop to tell you that the distance between Bermuda and Trinidad is farther than New York City and Miami. It makes a difference in perception all around.

Improved building standards

What role perception might play as Cooper Gay and local brokers shop for better insurance for Caribbean hoteliers through the CHA is yet to be determined. But he predicted that more sophisticated coverage, backed by international reinsurance, would inevitably have benefits -- not the least of which are improved building standards.

After we were hit in 1995 and again 10 months later, we rebuilt with poured concrete and with the higher standards you see in Florida now, Doumeng said. My heart goes out to places like Grenada when you read that their jail, which was made of wood, was destroyed or that the hospital was destroyed because it was made of wood.

Adequate insurance can help finance higher construction standards when rebuilding after future storm damage, Doumeng said, and that, in turn, can bring more economic stability to the region and improve the business of travel suppliers.

Hopkins recalled that when he settled his past claims, I had to give in on one or two points, but my coverage allowed me to step back and look at this as an opportunity to reinvest and to upgrade my hotel. Many people did not have such adequate insurance, and were not able to do that.

As a result, he said, When we reopen on Dec. 15, we will have moved up to a five-star property, and that means we will have made the best of a bad situation.

To contact reporter Dan Luzadder, send e-mail to [email protected].

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