Why the Hospitality Industry Is Turning to CAT Modeling

The effects of the COVID-19 pandemic have been tangible: In 2020 alone, more than 110,000 restaurants and bars closed temporarily or permanently.¹ And in the year-long period from March 2020 to March 2021, more than 10% of all restaurants in the U.S. closed for good.²

Two years into the pandemic, and hospitality businesses are still feeling labor shortages. Business travel remains substantially below 2019 levels, and supply chain issues have hurt hotels, restaurants and resorts alike. And the increasing reliance on technology has increased cyber risk.

What has made hospitality business owners and executives’ lives even more stressful has been the increased rate and intensity of natural disasters and changing weather patterns, not to mention the threat of civil disturbance and cybercrime possibly shutting their businesses.

With all those risks, catastrophe (CAT) modeling is becoming a crucial tool for hospitality operations. CAT modeling can help determine risk management, cost reduction strategies and the optimal type and amount of insurance.

How CAT modeling works

Catastrophe modeling takes historical data and sophisticated event prediction programs to determine the likelihood of a certain event (such as a hurricane, flood, terrorism or cybercrime) occurring in a given geography or industry. The process can also estimate the economic impact of a given event.

Because of their predictive power, CAT models aid decision making. That helps hospitality businesses minimize losses from weather disasters, natural disasters like earthquakes and other significant loss events, such as warfare, terrorism, insurrection, crime and cyber breaches. They can be used to analyze aspects of different lines of business, ranging from property and casualty to product liability.

How hospitality businesses can benefit

With CAT modeling, hospitality businesses can look at their property exposures and assess where losses are likely to occur. CAT modeling is most cost-effective for hospitality operations with multiple locations, ideally 10 or more. That’s because hospitality properties that have high traffic in multiple locations will have significant casualty exposure.

Carriers engage CAT modeling in their underwriting, but when a hospitality enterprise does its own CAT modeling, the business controls the data inputted and will often include information that an underwriter can’t access. As a result, a hospitality business’ CAT modeling efforts often have greater accuracy and provide for greater efficiency.

Controlling data is key

Being able to see and control the data is key. Instead of being dependent on a carrier, underwriter or reinsurer, CAT modeling makes hospitality business owners and executives better informed on the type of coverage and limits needed, allowing them to make better decisions.

When CAT modeling provides data to back up decision making, it gives hospitality businesses the opportunity to support new initiatives in risk management. For example, there may be areas optimal for self-insuring or call for different strategies than buying additional insurance or limits.

And as CAT modeling opens up these new insurance opportunities, hospitality owners can funnel savings from insurance into generating revenues.

Contact HUB International’s real estate experts for more information on CAT modeling for your hospitality properties and business.

¹ Fortune, “More than 110,000 eating and drinking establishments closed in 2020,” January 26, 2021.
² Nation’s Restaurant News, “Datassential: More than 10% of U.S. restaurants have closed permanently,” March 29, 2021.