Insurance During Difficult Times

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Insurance is, literally, a risky business. It starts with identifying specific risks, proceeds into calculating the likelihood that any particular risk might produce an undesirable outcome, and finally seeks to monetize those risk calculations: how costly an undesirable outcome might be, and what kind of premium should be charged accordingly.

While that sounds relatively simple, there are many risk factors—some real, some theoretical—involved in running an adventure park, and the details of any insurance policy can become confusing. What potential risks need to be covered completely, and what can be assigned a lower priority?

With the landscape of risk forever in a state of flux—consider nouveau risks such as the coronavirus or the increase in natural disasters like hurricanes and wildfires—how should existing policies be modified? What amount of coverage is sufficient? What measures can help to keep insurance costs down without risking exposure to potential financial catastrophe? What’s negotiable and what isn’t?

KEY ELEMENTS

An adventure-park insurance package usually starts with three key elements, according to Cameron Annas of Granite Insurance: general liability, workers’ compensation, and property insurance. For many, auto insurance is a fourth basic component. Premium costs can vary considerably depending on the nature of the business; they tend to escalate as the risk rises.

Start with property insurance. Property damage at adventure parks is typically not a major risk. In the past year, though, natural disasters such as wildfires and hurricanes grew more common, and any park in an area that might be exposed to such phenomena is likely to face higher premiums. The insurance industry, says Robert Monaghan of the insurance brokerage Hibbs-Hallmark, establishes “scores for natural risks in a local area, which can change premiums.”

To buy or not to buy. Because of the considerable variability in the impact of natural phenomena from one park to another, a park operator needs to make an astute cost analysis, or risk assessment, of what is worth covering and what’s not.

For example, First Flight Adventure Park on North Carolina’s Outer Banks is in one of the most hurricane-prone areas in the country. One might assume that wind insurance would be a must. But when First Flight owner Brad Carey saw wind-insurance premiums nearly triple, he determined that, despite the park’s location, its infrastructure was actually relatively windproof. He opted not to buy wind insurance.

Carey’s decision points to another critical factor in determining property-insurance coverage: the quality of construction. Carson Rivers, VP of High Gravity Adventures, says that if a park operator has chosen a reliable contractor for any construction project, any damage wrought by nature should be relatively small, and that minimized risk should be reflected in property-insurance premiums. Current construction standards contribute to both stability and safety. Thorough maintenance logs help create a low-risk profile.

Cost factors. Annas says that carriers “look at a lot of different things” in determining property-insurance costs, including “who the course was built by, different belay systems, staff training, and even arborist reports.” A park or its broker should be prepared to present documentation of all this to describe how it has mitigated risk and reduced the potential for costly claims.

Carey invests every year in a third-party inspection of facilities as well as third-party staff training. Those measures have been instrumental in not just reducing insurance inflation but, according to Carey, have actually resulted in “a decrease in our rates every year” since the park opened in 2014.

An adventure-park-savvy broker—in Carey’s case, Granite—can help keep costs down by crafting a policy that best fits a park’s needs. Rivers says that hooking up with a “flexible underwriter” through an astute broker was critical in securing policies properly tailored to High Gravity. Granite switched from an insurance company that pooled the adventure park in with a variety of entertainment businesses to one more focused on adventure parks. The result was a significant rate reduction, especially for workers’ compensation.

Workers’ comp fee-setting. For workers’ comp, insurance companies charge either a flat rate for the entire company, or they charge according to each employee’s job responsibilities. “A universal rate,” says Rivers, “is usually based on the highest-risk job,” meaning that the same rate would apply to, say, clerical workers at a park and guides working at height. Assigning occupation codes to each position can result in “credit for low-risk jobs,” says Rivers, resulting in a significant reduction in workers’ comp costs.

General liability issues. With the rising costs of litigation and medical expenses, insurance companies are increasingly facing seven-figure pay-outs. (That’s true even though insurers continue to exclude the transmission of communicable diseases, as they have since the SARS outbreak of 2003.) Insurers will go to great lengths to avoid the big hit, and that process starts with taking into account the loss history of both individual clients as well as the jurisdiction in which the client’s operation is located, according to Tim Barnhorst, senior vice-president for the insurance underwriter MountainGuard.

Claim limits. A clean record can help a park negotiate a moderate premium for liability insurance. But the premium is only a part of the numbers game. The other big component is the claim limit. Should a park insure itself for claims up to $500,000, $1 million, $10 million? To help parks keep liability premiums within a reasonable range, insurers usually turn to larger insurance companies for reinsurance against exceptionally high claims. If a park’s liability policy tops out at, say, $3 million, reinsurance will cover any amount over that.

As claim amounts increase, though, reinsurance companies “bump up the rates they charge insurance companies, and that ends up getting passed down to clients,” says Monaghan. “It comes down simply to what [companies]are paying out versus what they are charging,” says Barnhorst.

BEYOND THE BASICS

Cyber security. A few other components should be considered in a full coverage package. Relatively new to the mix is cyber security, an especially fraught issue in a time when many parks, spurred by an effort to go as contactless as possible in the age of Covid, are doing virtually all ticketing online. A park operator has a custodial duty, often mandated by state law, to protect personal information exchanged in online transactions.

About 10 years ago, cyber security became a hot topic in the insurance industry, and associated insurance costs were expected to rise rapidly. “It hasn’t caught on as quickly as people thought,” says Barnhorst. But that might well change. With many parks likely to rely heavily on online transactions in a post-pandemic era, the need for—and cost of—cyber insurance is likely to creep upward.

Employment practice liability covers claims related to hiring and firing and, especially given the heightened sensitivities of the MeToo era, sexual harassment.

Small liability coverage. Carey purchases relatively inexpensive insurance to cover small liability issues. The idea is to help a guest who incurs a relatively minor injury cover a health-insurance deductible. The policy payout tops out at $10,000, but the goodwill gesture in such a payout might well stave off the filing of a much more substantial claim.

RISING COSTS, AND CONSEQUENCES

Premiums to rise. The insurance experts we interviewed expect premiums to rise, in some cases substantially, in the foreseeable future. Monaghan says that “insurance companies are losing their shirts on property damage. They jack up premiums but are still losing.” This is at least in part because, “reinsurance companies have been hit hard by huge natural disasters,” says Annas. And eventually, reinsurance costs will filter down and impact park premiums.

Increased regulation. Barnhorst notes that higher and more frequent claims are likely to produce increased industry regulation, and lead to additional expenses only peripherally related to insurance.

Prevention is the best protection. How can a park keep insurance costs in check? “Keeping yourself from having claims is going to have a massive impact on premiums,” says Rivers. That comes down to best-business practices—well-constructed facilities, thorough staff training, smooth operational procedures, and so on. If a park can demonstrate that a large claim payout is unlikely, the size of premiums will be reduced commensurately.

Higher deductibles are a simple way to reduce upfront premium costs.

Guest waivers. The utility of waivers varies, of course. But a waiver, like any risk management strategy that transfers the burden of responsibility from the park to its guests, helps reduce the chances of a major liability lawsuit. And the better a park’s loss record—or its avoidance of big insurance payouts—the more favorably an insurer is likely to treat that client.

The bottom line, literally, is how much risk a park is willing to take on. A broker can help ensure that the essentials, some legally mandated, are covered and that excesses are excluded. (For example, a standard property-insurance policy might include hurricane coverage, clearly unnecessary for a park in, say, Colorado or Illinois.) Striking the proper balance between premium costs and coverage can be a tricky—and yes, risky—business.

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