Hospitality Risk

7 Critical Risks Facing the Hospitality Industry

Rapidly changing customer demands and a boom in guest-facing connected technologies are among the factors changing the risk landscape for hospitality companies.
By: | August 2, 2018 • 6 min read

Generational marketing gurus say that millennials have ushered in the “experience economy,” where live experiences are valued more than material goods — excellent news for the travel and hospitality industries.

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But thanks to this technology, millennials also have different expectations about how they should be engaged during those experiences, and other generations have caught on.

The hospitality industry has its work cut out for it keeping up with customer demands and changing technologies.

1) The Sharing Economy

Recent years have seen a spike in sites like Airbnb, Homestay, HomeAway and HouseTrip. Airbnb, with about 150 million users, is the most significant threat. According to a report by Morgan Stanley, hotel cannibalization from Airbnb was around 51 percent in 2017 and is expected to increase to 54 percent in 2018.

More troubling for the industry’s future is Airbnb’s popularity with college students and millennials. This group places heavy value on experiential travel, and the sharing economy may represent for them an experience more unique than a traditional hotel.

2) Continuously Changing Consumer Demands

Technology has dramatically changed the nature of customer expectations and raised the bar in terms of the type of experience and engagement customers consider the norm. This is a particular challenge in hospitality, where reputation and customer satisfaction is vital.

Consumers — particularly millennials — have grown accustomed to customized and streamlined shopping experiences, whether it be a free gift on their birthday or same-day delivery for online

purchases. Clean, well-designed guest suites are no longer enough. In fact, several hotel brands have taken the step of branching out to boutique hotels that specifically cater to the millennial ethos.

“Every major hotelier that has a viable brand you’ve known for 30 years typically has in their portfolio now a more limited service or more millennial-driven type of brand they’re building to attract a certain segment of the marketplace,” said Michael Drayer, CEO of the Global Entertainment Practice with Aon Risk Solutions.

For the rest of the industry, keeping up will require an investment in strategies that will help them learn more about their customers and design services around them. In addition, more social-media savvy is necessary for companies to start thinking about how to offer a travel experience that will motivate guests to eagerly share on social media.

Perhaps because of the changing nature of customer demands, maintaining customer satisfaction has become more difficult in recent years. Social media dramatically exacerbates the risks, in an environment where a single social media gripe by a traveler, no matter how mundane, can spread like wildfire and even be picked up by local news outlets.

Customers demand multiple channels of engagement with service and operations personnel, in order to better connect with customers before negative perceptions have time to set in — and spread.

3) Shortage of Experienced Personnel

According to the Bureau of Labor, the leisure and hospitality sector employed more than 15,000 people in 2016, and that number is projected to jump to almost 17,000 by 2026. As the industry continues to grow, staff will have more options, both in and outside the industry, and the poaching of experienced personnel will become a competitive sport.

Travel and hospitality companies must identify and address wage and worker satisfaction issues to keep their people happy and motivated to provide the level of service customers expect.

Finding the right people may be difficult especially for small hospitality providers. High-end luxurious accommodation providers recruit trained professionals at a high cost, which is an impossible feat for low budget hotels.

Creative companies must focus on referral-based hires and adopt retention programs that help boost employee morale and productivity, like mobile apps for scheduling and benefits, and attractive incentive programs.

Another key factor impacting worker satisfaction is tips, said Drayer, a practice that has been impacted by changing habits and technology.

“The hospitality industry has always [included tips] as an important part of compensation for its customer-facing individuals. But we’re moving more and more to a cashless society. How do they handle that? Do they support or even provide the infrastructure to utilize cashless apps and such as VenMo?”

4) Consumer Perception of Risk

Terrorist attacks, biological outbreaks and incidents of political or social violence can not only significantly impact specific locations but can also have a more widespread chilling impact on leisure travel behavior across a region or even globally.

What’s challenging for the hospitality industry is that related losses are impossible to predict and difficult to insure against, particularly for companies that suffer business interruption losses without any property damage. Loss of attraction coverage and certain newer parametric products are a step in the right direction, but potentially significant exposures remain.

5) Uncertainty in International Travel

According to the U.S. Travel Association, over 75 million international travelers visited the U.S. in 2016, and that number was expected to hit over 83 million by 2020. But recent drops in non-resident arrivals are being attributed by some to President Donald Trump’s travel ban and immigration crackdowns.

That means hospitality companies are facing a period of uncertainty, while still needing to ensure they provide as unique an experience for foreign travelers as for domestic guests. Staff must be aware of cultural differences and the particular expectations any international visitors might have.

6) Guest-Focused Technology

In addition to offering tablet-based kiosks and mobile check-in, hospitality companies are finding ways to incorporate technology that improves operations and enhances guests’ experiences. Hilton’s “Connected Room” and Marriott’s “Internet of Things” room are scheduled to roll out by the end of 2018, offering tech amenities such as digital keys and the ability to use a smartphone to control room temperature, lighting, TV and more. Guests will even be able to swap out wall art with family photos for a more personal stay.

Of course, with this surge of connected technology comes new levels of risk. Vulnerabilities in connected devices raise the risk of attackers unlocking digitally keyed doors to steal guests’ valuables or finding a path into hotel systems.

It seems like not a week goes by without a hospitality client facing a ransomware attempt, with attempts to compromise reservation systems or operations systems, said Drayer.

“The efficacy of the technology to open and close doors and to utilize the different systems that are web-enabled is an extremely risky proposition these days.”

7) New Regulations

After several years of discussion and debate, the Cal/OSHA Standards Board recently approved a standard on “Hotel Housekeeping Musculoskeletal Injury Prevention.” The final regulation became effective July 1, 2018.

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The new regulations are comprehensive, and potentially arduous for some employers. Employers are required to conduct regular worksite evaluations to identify and address specific risks. They must include an effective means of involving housekeepers and their union representative in designing and conducting the worksite evaluation.

Employers must establish procedures for investigating musculoskeletal injuries to housekeepers and correcting such hazards identified. A formal training program is also required and must be refreshed regularly. All documents related to the new standard must be kept as well.

For California hospitality businesses, this development could be a game-changer and require extensive modification to current practices. For those outside California, this development is still worth monitoring; not only does it establish standards to consider adopting independently, but it could also be a sign of things to come in other jurisdictions.

“Regulation typically starts in California and moves east,” said Drayer. “So even though this is only currently affecting our clients in California, it’s going to be coming soon to a theater near you.” &

 

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]