In Focus: Commercial lines brokers have ‘key role’ to play in supporting struggling hospitality clients through turbulent times

In August, reports hit the mainstream press that nearly three-quarters of British pub owners didn’t believe their businesses would survive the winter without government intervention as rising energy costs and wider cost of living crisis made running their businesses financially impossible.

In the survey – conducted by public house trade press publication The Morning Advertiser via survey of its readers – 65% of respondents said they had seen utility costs increase by over 100%, while another 8% reported increases of over 500%.

Since August, the government has announced support for businesses’ energy bills in the form of the Energy Bill Relief Scheme, which will provide non-domestic customers such as pubs restaurants and cafes with a discount on wholesale gas and electricity prices.

Despite this welcome support, pubs and restaurants are not yet in the clear and the cost of living crisis seems set to continue through the winter.

Pubs and the wider hospitality industry are clearly in a difficult place – these businesses most often fall into the small to medium enterprise (SME) category and generally operate on fine profit margins, making them particularly susceptible to market fluctuations.

Aviva research released this week (28 September 2022) found that the challenging economic environment in the UK was leaving SMEs “open to significant levels of uninsured risk”.

The research, which surveyed 500 SMEs in September 2022, found that 28% of these businesses had not reviewed their sums insured in the last 12 months, despite high inflation rates increasing the value of buildings and physical assets such as stock.

Commercial lines brokers clearly have an important role to play here – while pubs and restaurants prepare to enter a tough winter it is vital that they are properly and accurately insured.

Properly advised, hospitality businesses could rest assured that they were both properly covered for any risks and were not paying over the odds for that cover.

Tough times

The hospitality sector has experienced a tough time over recent years and had only just began to recover before the latest economic turmoil.

During Covid, these businesses had to struggle through lockdowns that cut off their source of income overnight and were already contending with difficulties finding staff after Brexit.

Tom Hill, head of e-trade at MGA Aqueous Underwriting, has close ties with many of the firm’s over 10k SME hospitality customers.

He said: “[Hospitality businesses] were getting back on their feet and finding a rhythm in the new normal” before this current crisis, but “there are marked differences between the challenges being faced now” and those dealt with during Covid.

Nathan Anders, schemes director for Towergate Licensed Trade, concurred. He said: “We had seen a gradual resurgence in the sector since Covid restrictions were lifted, albeit there are now significant headwinds facing the hospitality sector.”

Mandy Walton, chief executive for SMEs at broker Marsh, added that the Covid crisis had seen pubs and restaurants use up what financial reserves they had, leaving these businesses in a precarious position.

She explained: “A lot of our [pub and restaurant] clients, particularly those smaller outlets, sole traders and small groups, used up the majority of their credit lines and cash flow through the Covid pandemic, so they are particularly vulnerable in the current economic climate.”

Risk factors

Supporting these clients with the best advice is vital for commercial lines brokers – so what are the factors contributing to the difficulties pubs and restaurants are facing?

For Hill, the macroeconomic factors are “obvious”.

He explained: “Things like energy costs, inflation or the cost of materials going up and the impact these have on end customers’ decisions to spend are all difficult, as well as staffing because people are looking for different jobs outside of hospitality more often than they were.”

However, Hill also noted microeconomic factors that were contributing to problems, such as supply chain issues impacting on the availability of carbon dioxide and cooking oil, both of which are vital for the operation of a pub.

Food inflation is also an issue, as John O’Hara, commercial lines broker in Verlingue UK’s hospitality business, explained: “Food inflation was hitting even before the recent crisis hit and this is the latest stage.”

Energy prices are also perhaps the largest factor contributing to pub and restaurant owners’ worries, as Anders noted.

He said: “Energy prices are having a huge impact on the sector with many of our customers expressing worry about high costs as we enter the colder months.

“Some customers are planning on closing off parts of their premises to keep down heating costs or reducing opening hours. Many are worried about having to close their doors permanently.”

Key role for brokers

One of the key risks brokers should be aware of is that of underinsurance – as tough times bite some businesses may look to cut back on insurance to save money and risk becoming improperly protected if they need to make a claim.

Mike Hallam, Biba’s head of technical services, explained: “It is almost inevitable that if a business has financial issues it will look cut costs and insurance is often one of the areas considered for this.

“But brokers can play a key role here in not only seeking out the best terms for a business on a bespoke basis but also advising clients.”

It is vital that brokers advise their pub and restaurant clients to purchase adequate and appropriate protection and should make sure customers understand the importance of not skimping on their cover.

Hill said: “In a time when [these businesses are] struggling, they should not be poking holes in their safety nets.

“If [they are] cutting back on cover or buying cheap – both of which are attractive ideas at the moment – the cost savings do not outweigh the risk of having holes in the policy that ultimately keeps you trading going forward.”

Walton echoed the need for appropriate and complete cover for these businesses at the right price, despite their economic difficulties.

She explained: “We must make sure that [these clients] are adequately covered and not by trying to cut down cover or remove cover to try and secure a cheaper price.

“You have to have a good relationship and be able to be honest with clients, they have to be fully aware and have the right advice from this industry – that’s the most important thing.”

Safely cutting costs

While brokers should ensure that their hospitality clients are properly covered via professional advice, this does not preclude helping to save these same clients money at a time when their finances are squeezed.

Hallam explained: “Brokers can go through the business operation with their clients in detail. This would mean, for example, estimates or amounts on turnover, wages and stock may not be as high as they once were and can be reflected in proposals to insurers.

“This helps to keep premium costs down, without the need to reduce or remove cover that may lead to underinsurance.”

Risk management advice can also provide an avenue to reduce premium costs. O’Hara explained: “With a risk management team, we can look at areas to focus on and try to mitigate or manage risks, which helps with long term insurance costs.”

Walton agreed that risk management could provide value to these customers while also saving them money: “There are a lot of health and safety risks within this marketplace and if that is managed well that can absolutely support a no-claims experience, which in turn helps to bring down claims costs and reduce premiums.”

Larger brokers with the ability to spread costs can also explore the option of not charging clients in economic difficulties via one lump sum.

Walton added: “Helping these customers to pay over a six or 12 month period for their insurance will help spread the cost and in, most cases, will provide some tax benefits too.”

Avoiding underinsurance

Perhaps the largest single risk for pub and restaurant clients in terms of underinsurance are the sums insured for buildings and stock.

As Aviva’s research pointed out, 28% of SMEs had not reviewed this figure in the last year despite a large possibility that values will have changed with inflation.

Anders explained: “The sustained rise in construction costs has increased the likelihood of significant underinsurance of buildings in the UK.

“The only way to ensure that a business is not underinsured is to have an up-to-date valuation. Regular communication is key and it is important that brokers draw customers’ attention to the underinsurance threat.”

Walton concurred. She explained: “As an industry, brokers have to understand what changes have applied when providing renewal quotes, particularly concerning freehold property prices.

“Brokers need to make sure that these clients are actually covered for what they think they’re covered for.”

O’Hara also echoed this point and noted that it would require clients paying slightly more for cover when they were financially stretched.

However, he explained: “I’m not seeing a lot of people chopping out a load of covers to save money at this moment in time, but we are heading into this winter.

“If the clients feel like you’re on their side and fighting in their corner, then that helps them be comfortable where they are.”