A real estate company in the hospitality sector was concerned about occupancy rates in its hotel rooms. In their business, occupancy equates to revenue and this company needed stable income to underpin their business plans and optimise operations.
That is, in a nutshell, how a broker presented the situation to Swiss Re Corporate Solutions. How were we to translate this need for stable income into a risk transfer arrangement that would make the client feel secure about the future?
We had to work with the customer to understand their business and pinpoint the factors that could lead to a major drop in room reservations. Our research and discussions identified three risks: a terrorism event, a pandemic, and widespread travel disruption (WTD).
We then had to assign a trigger to each of these risks by defining each insured event. We established the following criteria: terrorism had to be declared a “certified act of terrorism” by the US Treasury Department; a pandemic was Phase 6 as defined by the World Health Organisation (WHO) plus 12,000 confirmed deaths; widespread travel disruption was an event causing the closure of six or more airports for at least three consecutive days.
Having established the causes, we then had to define the outcome, i.e. lost revenue. This was set at a drop of more than 10% in demand for hotel rooms according to an independent industry index. The customer would be compensated when the index dropped by over 10%, until the demand deficit returned to under 10%.
The appeal of this solution lies in its simplicity. The customer got just what they wanted because we were able to analyse their risk exposure, identify the underlying factors and assign a value to those factors.
What adverse scenarios are you worried about? Do you feel they are distracting you from developing your business? If so, you should share them with us, then you can stop worrying.
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16 July 2019
07 July 2019