Measuring a business income or gross profit loss for a hotel can present unique dilemmas, but there are several sources of industry data that can be helpful. Due to the competitive nature of the hotel industry and the need for property management to measure their hotel’s position in the market, there are industry reports that can be used to benchmark performance against similar entities. The most widely used industry benchmarking reports are known as “STR” reports, and these can be an important item to request from insureds. In addition to benchmarking data, there is often publicly available data that can be used alongside the hotel’s own financial data to produce a well-supported and accurate measurement of business income loss.

Benchmarking Occupancy Data

When measuring a business income loss for a hotel, a key metric to utilize is the occupancy data. This shows, on any given day, the number of the rooms in a hotel that are occupied. Whereas the insured can provide historical data for the loss location, STR reports provide this data for the hotel in question and a “competitive set”. The competitive set is a group of hotels chosen by management to benchmark the insured’s performance in comparison to local competitors. Typically, this will be hotels of the same size and market, such as luxury, midscale, or economy.

In the hotel industry, having the competitive set occupancy may yield a more accurate measurement than utilizing historical property occupancy data. For some business income loss measures, it is common to calculate lost revenue by utilizing either a historical average or using a same-period of the prior year multiplied by a trend percentage to project what revenue would have been over the period had no loss occurred.

Many hotels’ revenues fluctuate seasonally depending on location and what time(s) of year are the most popular to travel to the given area. Therefore, in the absence of alternative data, one might estimate revenue using the same period of the prior year. However, the same period of the prior year may have any number of different economic conditions (macro and micro) from the year of loss. For example, a ski resort may have enjoyed several months of snow in the winter prior to the loss, but there may be a warm winter with limited snow in the year of loss.

By using STR reports, it is possible to benchmark the insured’s performance against a competitive set. This can be done by examining the relationship between the insured to its competitive set prior to the loss to calculate an ‘competitive set index’ (Exhibit A).

Exhibit A:

Using the historical relationship between the insured property and the competitive set, the occupancy of the competitive set can be multiplied by the competitive set index percentage to project occupancy had the loss not occurred (See Exhibit B). This results in a calculation that reflects the market trends for the loss period rather than relying on what happened historically at the property, which could result in an inaccurate measurement.

Exhibit B:

Benchmarking Average Daily Rate (ADR):

A secondary benefit of the STR reports for business income loss purposes is the data provided for Average Daily Rate (ADR), or average room price for occupied rooms. Similarly to occupancy data, the STR reports provide ADR data for the competitive set.

Exhibit C below illustrates one example of how ADR might be affected during a loss period. It is evident that prior to the loss, the loss location property sold rooms at a consistently higher rate than its competitive set, but during the loss period, the ADR drops below the competitive set. Based on this data, it is clear that a portion of the revenue loss to be measured is due to the lower ADR during the loss period.

Exhibit C:

Using the same methodology as illustrated above for occupancy data, it is possible to create competitive set index for ADR, and then use this to project ADR during a loss period. Using these two calculations together, you can then project revenue for the lost period.

Advantages of Using Competitive Set Benchmarks

Using competitive set benchmarks may be especially useful in instances where the insured has available rooms online but still suffers a loss. For example, in the case of physical damage where a hotel remains open while repairs are completed, the insured may intentionally lower the price of a room due to noisy construction or other inconveniences to customers. Alternatively, if the insured suffers damage to their amenities such as a restaurant or swimming pool, or a reduction in available rooms, this may impact their ranking on hotel comparison websites such as Booking.com and therefore visibility to potential guests. Additionally and perhaps as important, the reduction of available supply may also affect how Online Travel Agencies (OTAs) advertise and optimize the supply of the hotels availability. Using competitive set data provides a benchmark to measure the impact of these issues on a hotel’s performance.

In the case of a catastrophe that damages many hotels in the same region, if the given insured property comes back into service while many properties in the area are still in repair, the occupancy and price levels could be higher than before the loss occurred. The STR reports would allow us to identify if the insured started performing significantly better compared to their competitors than prior to the loss.

For larger hotels, insureds may present a loss of group bookings as a part of the claim presentation. STR reports have an analysis of group bookings vs. transient bookings. This data can be analyzed to establish the importance of group bookings vs. transient bookings when constructing a measurement.

Limitations of Using Competitive Set Benchmarks

There are several considerations to be aware of when using a competitive set benchmark.

If the competitive set performance improves over the loss period, this increase in occupancy could be because the insured property is partially/completely out of service, thus reducing competition for the hotels in the competitive set. This is most likely if there is a limited number of hotels in the area and a competitive market. In this case, using historical financials and other available data from the loss location may result in a more accurate measurement.

Furthermore, industry reports are most useful when a hotel has a competitive set of properties that are in the same geographic area and market classification, and therefore impacted by the same market conditions. The reports may be less useful for hotels in rural areas without any other hotels in close proximity. Or for a luxury hotel in an area with only mid-range hotels. Additionally, smaller or highly specialized hotels may not participate in STR reporting and therefore would not have these reports available.

Other Available Data

In conjunction with industry reports, it may be helpful to see what publicly available data is available, as it can be utilized to understand and assess market conditions. This can be as simple as reviewing weather data for hotels that are highly impacted by weather conditions, such as ski resorts or sporting events in major metropolitan events. Or looking at news reports to see if any local issues would impact the market the hotel operates in.

Many US states with a large tourism industry publish detailed tourism data that may be utilized in a business income loss calculation. For example, the Hawaii Tourism Authority publishes information on the number of visitors to each island, their average stay period, the type of accommodation they use, the purpose of the trip, and average visitor spending by category (entertainment, lodging, food & beverage, shopping, transportation). Visit California publishes data on regional room demand, htel occupancy, room revenue, visitor data, and visitor spending data. This data can be used either alongside industry reports or in instances where this information is not available.

In Conclusion: Hotel Industry Data as a Means to a More Accurate Loss Measurement

Whether a hotel loss arises from a cyber event, a storm, or other damages to the property, relying solely on internal financials is not always sufficient. Perhaps more than any other industry, there is an abundance of industry reporting and publicly available data that can be utilized for a more accurate and informed calculation of business income loss.