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Restaurant Finance and Development Conference

A Threat to Corporate Assets - Increased Cost of Construction & Ongoing Expenses

Everyone in the Restaurant Industry is under significant pressures from increasing costs and shrinking margins. The restaurant industry is not alone. With all the destruction in the last year from Hurricanes, Floods, Brush Fires and Tornados, the Construction Industry has seen the largest impact with the cost of just about everything from copper and steel, to any petroleum based product going through the roof. If you combine that with the labor shortage, the cost of construction has been exponential. Even the most sophisticated construction cost estimating software has failed in producing Construction Costs adequately.

We have been involved in multiple claims from Hurricanes to Floods to Fires in the last year, as a consultant and as a broker. In the end, regardless of the amount of insurance, people have estimated in the past, to protect their facilities, the majority are under-insured and at risk.

A recent analysis of a number of Industry Segments from Quick Serve Restaurants (QSR) to Fine Dining have revealed that construction costs now range from $350 a foot to well over $450 a foot. Below is the actual cost used by a very large QSR Multi-Unit Operator who builds 10 or more units a year:

Excluding Site Work and Landscaping & Signs, Construction Costs are still over $280 per foot. In the past many companies have used $125 as a base cost per foot then added on for Contents. In the example above that still brings you well over $200 per foot! In addition, do not forget that you still need to add: Flatware, Dishes, Glasses and Stock to be properly insured.

Business Income & On-Going Expenses

Another area that is grossly under-insured and only realized at the end of a claim but very devastating if not properly insured is Business Income & On-Going Expenses. Doing some quick math, I offer the following: If you put 15% to the bottom line, have 8% occupancy expense, 6% management or franchise fee, plus management payrolls and other contractual obligations of that 6% that will continue after a loss occurs, your Business Income Value is in excess of 35%. All of the losses that we have adjudicated in the last 2 years have been Business Income & On-Going Expense losses in excess of 40% of sales. The trend has been that people have insured for 25%.

These are scary numbers when you add the Construction Costs, with the Business Income and On-Going Expenses and then compare them to what most Restaurant Companies are currently insured for. Not only will a large loss be emotionally and physically draining, it can also create a devastating economical event that can put the company at risk.

Insurance Premiums Will Affect Your Profit and Loss Statement

What you do before your renewal will Determine your premiums

The state of the insurance market is uncertain, with news of Bid Rigging, Contingency Agreements and the recent Hurricanes; the insurance market is in turmoil. 

"As the ultimate consumer, you need to take control of the process early and not get caught up in the difficulties of the market"

Brady Risk Management is a financial risk management company which specializes in the Restaurant Industry and currently acts as Underwriting Manager for different national programs.  Our key to success is taking control of the underwriting and pricing process, and demanding accountability from the insurance and reinsurance companies we work with.  Accountability, not only from a pricing point of view, but most importantly on claims handling.

If you heed this suggestion, you will be putting together a plan to market your account for your upcoming renewal.  Unfortunately, the pricing you will receive will be determined by the Historical Exposures and Losses of your operation.  I have never met a CFO that has looked at their loss runs and felt that they accurately reflect their management and or operational expertise.  The people adjudicating their losses are rarely accountable for the numbers on the loss runs, resulting inaccuracies.  Brady Risk Management has been auditing Third Party Administrators for years, producing positive results, and holding adjusters accountable for the numbers that they put on the loss runs. We have a "pay for performance" contract with our Third Party Administrator which means they only get paid when they abide by the strict claims procedures and protocols that we have developed over the last several years.

This has proven to be extremely successful in assisting us to produce over $9,000,000 of underwriting profits in the last three years.  We can also offer our services on a consulting basis in a review of your claims data and offer recommendations.

Put this experience and knowledge to work for you.  Anyone can quote a policy but it is more than simply pricing, as illustrated above.  What the brokers are using in the form of loss experience, and how they present your account, is critical in the renewal process.

A policy does not make a successful Risk Management Program or Placement.  It is the Loss Control, Claims Oversight and the ability to produce loss runs that accurately reflect the exposures of your company.

You have two options in obtaining the pricing of your Renewal:

Status Quo - Simply accept the losses and exposures as they are represented on the insurance company/program manager’s reports and push for best quote.

Brady Risk Management - Have us review and analyze your loss and exposure information and implement a Risk Management Program that will be aggressive in price, comprehensive in scope and provide you with the accountability that has been lacking in the marketplace today.

Don’t be a victim of the current Market Conditions.  Take control and obtain the accountability from the insurance markets that you demand from your Unit Managers.