The nature of uncertainty – hotel risk manager’s musings in a post-COVID world

The nature of uncertainty – hotel risk manager’s musings in a post-COVID world | Insurance Business America

Risk Management News

The nature of uncertainty – hotel risk manager’s musings in a post-COVID world

“I would say to put proper expectations because insurance cannot solve everything”

Risk Management News

By
Kenneth Araullo

In a way, it’s easier to count those who were not affected by the pandemic than those who were. However, in terms of restrictions and other barriers that made travelling nearly impossible during that period, its impact on the hospitality sector cannot be understated. Across the world, once-prosperous and luxurious destinations were suddenly on the brink of extinction due to poor guest turnout and the fact that many staff had to be laid off as a result.

Now, with most restrictions lifted and a semblance of normalcy is returning around the world, there have been many taking a step back to see just how much things have changed. Marriott International’s own risk management division felt the impact of this black swan event, and for its APAC director, Sharon Xu (pictured), there are important lessons to be gleaned from the pandemic.

“Just based on what I have – personal experience throughout COVID – I feel that as it is behind us, I think that companies now really need to focus on the more significant risks as compared to whatever kind of risk or exposure that risk managers were focusing on. I think that the biggest lesson that COVID has taught us is defining risk based on what are the insurable and non-insurable exposures. Maybe some companies, they never did these analyses before, and COVID is a communicable disease – under most policies, it is not covered, or covered only under a few policies that are broad enough,” Xu said in conversation with Insurance Business’ Corporate Risk channel.

Catching up with Xu after nearly eight months, she noted that as everyone is now familiar with the risk exposure, there is also the realization that something like COVID is not an uninsurable risk as the industry moves forward. However, she stressed that it’s still up to a risk manager to see just how far these exposures will take them, and that staying abreast of marketplace developments can keep an organization afloat amid another global crisis.

“I think that is where we can benefit from our partnership with brokers, because they give us different guidance and insight into the market,” she said. “However, ultimately, it is the risk manager who is making the decision. I think that brokers are important partners that bring us external insight and advice; we then utilize this advice by evaluating our organization’s risk. Combining them all together, we decide on what we think is the best for the company.”

Xu also said that while insurer and broker output is invaluable, ultimately, the decisions will rest in the hands of a skilled risk manager.

“It’s also not fair for them to make these decisions on our behalf. To really define the responsibilities between the broker, insurer, risk manager, it’s all really important. Everyone should know clearly what their responsibility is and what is being expected from them. For us risk managers, that’s to mobilize the different resources together, with insurers and brokers doing their own contributions to the program. Risk managers need to stay on top so that they can make the best decisions for the benefit of the company,” she said.

High-quality risks

Separating insurables and non-insurables is one thing; managing the resulting risks to make it more attractive and profitable for insurers is another beast entirely. Xu said that it’s all about high-quality risks in this post-COVID environment, and that companies should take note that if they want their policies to work for them, they should take steps to ensure that the risks they are presenting represent something valuable for the industry.

“When you have to trigger your policy, you’ll trigger it. However, we’re trying to focus far ahead from it; before a claim occurs, and what can we do better to prevent the incident,” she said. “Speaking from a hotel standpoint, it’s about enhancing hygiene, the quality of the food, packaging it, selecting the vendors, and even dealing with guest complaints – you can never know at what point in time in which something wrong happens.”

In short, for Xu, it’s all about keeping insurers happy, and that comes down to work on the part of the risk managers. She coined it “risk registration,” and it’s something that draws a clear line over what is insurable and what isn’t.

“It makes us more familiar with the risk profile of our organization, and I think insurers will be a lot happy with it, too, because they are seeing the actionable work that has been done by the company,” Xu said. “Most insurers would be happy to see the proactiveness in their insured. When they know their insured is being resilient in loss prevention, in their post-incident loss mitigation, making sure that the necessary steps are taken to rectify the claim, and making sure that things are done in the right way moving forward… I think that is what the market wants to see, and it powers a healthy cycle,” she said.”

Realizing better contracts

A silver lining that COVID had for the risk management space, Xu said, is that it allowed risk managers such as herself to take a step back and look at the contractual obligations they have with their insurers.

“When COVID happened – and this is something I’ve learned not only from our hotels but also some of our peers and other risk managers – we noticed an interruption in our business and saw our losses,” she said. “So, we went back to our contracts and suddenly, we realized that the contract is silent on some force majeures or incidents that are not controlled by either party. How do we then deal with these financial losses? Would we need to dispute, or take the case to court, and other ways to settle it?”

Musing on business for the past decade and how it has been running so smoothly with tremendous growth in place, Xu said that COVID applying the brakes on everything gave the sector time to look at all the contracts and realize that there should be provisions for incredibly affective event that are out of everyone’s control.

“I think the starting point is to make sure that we structure contracts in the right way,” she said. “Knowing what these uninsurable exposures are, we can transfer the risks under the contract to the other party or – depending on how much leverage there is – sometimes, you may not have much choice but to forgo transferring and make the difficult decision to retain the risk. When you retain the risk, it goes back to your company’s risk retention policy. Some companies would say, ‘These are the risks that we are not afraid of, and we feel comfortable retaining.’ Some would also say that ‘I have an appetite for 2 million, 5 million, maybe even 10 million…’ These aspects give risk managers a good guideline on how to make proper decisions.”

On the other hand, in her line of business, Xu said that difficult decisions are just part and parcel, and that this is something that a skilled risk manager will need to consider, especially as the industry has grown smarter in a post-COVID world.

“Sometimes a company could also say, ‘I don’t want to take any risk; I would rather transfer the risk out as much as possible.’ That could be a hard decision to make – if you retain the risk, you have no option not to. That might be something that your company is not so comfortable in dealing with; it’s in this area that a risk manager has to work with finance leaders to make proper decisions on how to handle that risk,” Xu said.

“The nature of uncertainty”

If there is something that’s incredibly important in risk management, it’s foresight. Xu said that looking at things on a broader scale, we can never really know when or what the next black swan event will be, and that this is something that is being faced by almost every risk manager on the market. However, the pandemic offered the industry a rare opportunity to see just how resilient businesses can be and apply these learnings to become more resilient in the face of another global economic crisis.

“I would say that it’s really hard for people to predict what would be that next big event that will impact everyone’s insurance policies,” she said “I think what we can do is to work with brokers and intermediaries and to make sure that based on the company’s business nature, we have the most appropriate insurance coverage in place, so that we know that if something does happen, at the very least we can try to tender the policy.”

Noting that another COVID-like event would be “fine” compared to something more unknown, Xu said that the pandemic made industries consider the measures they put in place to help minimize the economic impact. However, citing “the nature of uncertainty,” she said that there might still be some things that we are yet to learn, and that we might get to learning these together in the case of another COVID-like event.

“I would say to put proper expectations because insurance cannot solve everything. We can only learn so much from an event, so be realistic and reasonable on the expectations. Talk with brokers and insurers to make sure that the breadth of the policy coverage is competitive enough; there is always an opportunity to enhance the policy, and there is still a lot that we can do,” she said.

Part two of this interview with Sharon Xu will be published in the coming weeks. Stay tuned.

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