Are restaurants facing an insurance affordability crisis?

Are restaurants facing an insurance affordability crisis? | Insurance Business Canada

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Are restaurants facing an insurance affordability crisis?

Industry appealing for lower premiums

Restaurant operators are grappling with a raft of inflationary pressures, including rising insurance and labour costs and higher interest rates.

Last month, Restaurants Canada appealed for the federal government to lower employment insurance rates to ease the strain on business owners facing an “affordability crisis.”

In a new report, the business association pointed to the escalating number of bankruptcies in the hospitality industry since 2019 due to the tremendous challenges of running a small business.

It called for lowering the employment insurance premium rate for small businesses and their employers from 1.66% to 1.58%.

Brokers serving the restaurant industry affirmed to Insurance Business Canada that these businesses have confronted rising insurance rates in other coverage areas, such as general liability and property insurance, which has added to their financial burden. “Over the past few years, many of our clients are now paying two to three times what they used to, which is significant for small restaurant owners,” said Danish Yusuf (pictured above left), founder and CEO of Zensurance.

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The impact of the hard insurance market on restaurants

According to Yusuf, the hard insurance market has been exacerbated by a combination of historical trends and the COVID-19 pandemic. “We noticed the trend wasn’t just due to COVID; it started around 2018-2019 when interest rates were low,” said Yusuf.

Insurance rates started increasing due to low interest rates and market losses, initiating a hard market cycle. COVID-19 exacerbated issues with business closures and increased claims alongside extreme weather events.

“Many restaurants went out of business, shrinking the pool of companies to insure. Business interruption losses increased, even though many claims were declined,” said Yusuf.

Climate change-related losses, such as fires and floods, also added pressure, Yusuf said. Restaurants with substantial property and equipment faced significant losses, forcing insurance companies to raise rates rapidly.

Karan Bhanat (pictured above right), a commercial insurance broker at KASE Insurance, pointed to declining competition among insurance carriers as a key factor driving up premiums.

“When there are more carriers, competition increases, and prices become more competitive. However, the restaurant industry faces unique challenges,” said Bhanat. “Restaurants often have claims, primarily due to fire hazards from cooking with open flames.

“Some insurers don’t find it worthwhile to provide insurance to small businesses making $300,000 to $500,000 in revenue. Because of that, fewer companies participate in providing coverage for restaurants, leading to higher rates.”

Inflation, rising insurance costs pushing restaurants to bankruptcy

In addition to rising insurance prices, labour costs have increased due to higher minimum wages and increased competition for skilled workers.

Rents have also increased, hitting restaurants from multiple sides, particularly as many adapted to different business models during the pandemic.

“COVID has definitely changed the landscape of this business,” said Bhanat. “Before 2019, apps like Uber Eats were emerging but not yet a mainstay. [Today], while people still enjoy dining in, the past few years have trained many to order online. These apps have become a factor in restaurant owners making less than they used to.”

Yusuf said that due to the rise in popularity of food delivery apps, foot traffic is down considerably in some areas, and restaurants earn less, often losing up to a third of their revenue to services like Uber Eats or GrubHub.

“As a result, we’ve seen more shutdowns. Restaurant owners cancelling their policies increased by about 2.5 times compared to three years ago,” said Yusuf.

However, it’s not all negative. “While there may have been more bankruptcies, we’ve also seen new restaurants opening, sometimes in more cost-effective formats,” Yusuf said. “Some owners are trying to reduce their coverage to save money. Where they might have had $5 million in coverage before, they now ask for $2 million or insure less of their property.”

Is a soft market on the horizon?

The good news, according to Yusuf, is that the hard market appears to be easing.

“In the last six months, we’ve seen more flexibility from insurance companies, with some becoming more competitive,” he said. “After about seven years of a hard market, we’re seeing early signs of this shift [to a soft market].

However, Yusuf cautioned insureds not to expect prices to drop drastically. He said it typically takes 18 to 24 months for the market to fully adjust.

In the meantime, brokers must ensure their clients in the restaurant industry are on top of risk management. Bhanat stressed the importance of mitigating property risks, such as fires and water leaks, and liability risks, such as slips and falls and alcohol liabilities.

“Restaurant owners should ensure the space is equipped with sprinkler systems and verify that the property owner maintains them. This can help mitigate fire risks,” said Bhanat.

“Additionally, restaurants should regularly inspect their deep fryers and make sure they are equipped with wet extinguishing systems to contain grease fires immediately. Portable extinguishers should be serviced regularly, and there should be a grease cleaning contract in place to avoid fire hazards and reduce the risk of slip-and-fall accidents for employees. Having a monitored fire and burglar alarm system is also crucial.

“These small steps can make a significant difference. Insurance companies want to ensure that the businesses they insure have taken all possible measures to avoid claims, viewing insurance as a last resort rather than the first option.”

What are your thoughts on the insurance challenges faced by restaurant owners and other small businesses? Please share your comments below.