This Issue - Icwai

COVER COVER ARTICLE
ARTICLE
● Business owners from hospitality industry
should be aware of some of the critical aspects of
‘Business Interruption Insurance’. Given below are
some critical aspects of hotel ‘Business Interruption’
coverage and its usefulness for businesses in the
hospitality sector :
Business interruption period : The business
interruption period is the length of period for which
benefits are payable under an insurance policy. This
period is the most critical part of quantifying the
business interruption loss. It covers a business from
loss of income for a specified period till the damaged
business property is repaired or reopened. Some
hotels—being aware of the losses that may persist even
after repairs are done—opt for “extended period of
indemnity”. As, it may take some time for the hotel
to regain bookings and rebuild market share.
Loss of room revenues : The business in the
hospitality or the lodging industry may suffer financial
performance as two of its main functions—occupancy
percentage and average daily rate (ADR)—may get
affected. In simpler terms, a hotel damaged by a
hurricane or fire or stuck in a deep local recession
will not be able to generate any revenue because of
closed rooms, especially in case of hotels and lodges.
‘Business Interruption Insurance’ compensates for lost
income due to loss of rooms. It covers the profits one
would have earned, based on one’s financial records.
Other lost revenues : Revenues from food and
beverage, conferences, golf, spa, etc. can constitute a
significant portion of a hotel’s income. When a
business is interrupted, not only revenues through
rooms are affected, some or all of these sources
of income are typically interrupted. ‘Business
Interruption Insurance’ covers all the profits that
would have been earned.
Ordinary payroll : Even if the business activities
are temporarily stalled, operating expenses, and other
costs such as rent, electricity bill, taxes, interest
payable on bank loans, payroll costs etc., cannot be
ignored. The business still needs to retain some
employees such as accountants, front office executives
etc. The business owner needs to pay salaries to them.
In this kind of situation ‘Business Interruption
Insurance’ is very helpful as ordinary payroll coverage
is a common endorsement in many policies.
Extra expenses : Business interruption policies
generally allow an insured hotel to claim extra
expenses incurred during the period of indemnity. It
reimburses for reasonable expenses that allow the
business to continue operation while the property is
being rebuilt. Some policies also cover the extra costs
required for moving the business to a different
(temporary) location.
Conclusion
● Hospitality industry is one of the major service
sectors and employers across many economies in the
world.
● India—known globally as the land of hospitality—is
today in the defining stages of the business
of hospitality. The Indian Hospitality Industry is one
of the fastest growing sectors of the Indian economy.
Riding on economic growth and rising income levels
that India has witnessed in recent years, the sector
has emerged as one of the key sectors driving the
country’s economy.
● There are, however, many risks involved in
running hospitality business and CMAs advice
business owners to be aware of these in order to assess
their insurance needs. CMAs suggest organizations
to invest in a structured technology enabled approach
to risk optimization.
● A well-thought out risk strategy by hotel owners
or operators can make a significant difference at the
most crucial times.
● ‘Business Interruption Insurance’ is one of the
most important insurance policy that helps in
minimizing the adverse consequences of some
unwanted events for businesses in the hospitality
industry. Business owners from the hospitality
industry should be aware of some of the critical
aspects of ‘Business Interruption Insurance’ for
putting them in practice.
References
■ Cholamandalam MS Risk Services, Risk Assessment
—Hotel Industry, The CMSRSL Approach.
■ Critical Issues Facing Indian Hospitality, An HVS White
Paper, HVS Hospitality Services, January 2009.
■ Hospitality Industry—An Insight, India Biznews, June
13, 2011.
■ Risk Management Strategies for the Hospitality Industry,
Leonard Queiroz, KPMG, July 17, 2001.
■ The top 10 risks for business—A sector-wide view of
the risks facing business across the globe, Ernst & Young.
■ Global Hospitality Insights—A publication for the
hospitality industry, Top thoughts for 2011, Ernst &
Young.
738 The Management Accountant |September 2011