Food Services Sector Offers Tasty Risks Sound underwriting appetite keeps insurers from relying on pot luck

The nations eating and drinking establishments represent one of the most vibrant and fast-growing segments of the U.S. economy. By 2004, the total number of accounts in this sector had pushed appreciably beyond the half-million mark and were generating a staggering $350 billion in annual revenues.

The very size of the food services sectorwith estimated standard lines premium potential of about $6.5 billionhistorically has made it an attractive target for commercial lines agents and insurers.

Of late, this sectors creation of roughly 4,000 new accounts each year has further bolstered its attractiveness as carriers struggle to expand premium writings despite softening market conditions.

With about 200,000 accounts each, the full-service restaurant and limited-service restaurant segments account for 75 percent of overall sector establishments and generate 80 percent of its revenues. Other limited service eating placesincluding coffee, doughnut and bagel shops; cafeterias; and ice cream shopsaccount for another 8 percent of establishments.

Alcoholic drinking places comprise a bit less than 10 percent of the total sector. Special food services, the final segment, comprises food service contractors, caterers and mobile food services.

As numerous carriers have demonstrated, size and growth alone do not necessarily guarantee profitable underwriting results in this important market segment. Indeed, the eating and drinking industrys complex makeup, its regional nuances and changing dynamics all but demand that carriers carefully evaluate each distinct sub-segment, develop a detailed underwriting appetite, and then target only those risks for which they have adequate underwriting expertise and an appropriate rating structure.

While recent growth for the entire food services sector has been strong, its various sub-sectors have demonstrated very disparate growth patterns. This is a key indicator of special issues in underwriting (such as changes in loss frequency distribution) as well as in loss control and even premium audits.

For example, the special food services sub-sector has recorded the strongest of the overall sectors growth, at least in terms of the number of accounts. This groups 31,000 accounts grew at a 2.2 percent annual pace over the 1997-2002 periodalmost double the pace at which the economy as a whole added new accounts.

In contrast, the number of alcoholic beverage drinking places declined at a 1.6 percent annual rate from 1997-to-2002.

However, while drinking places were one of the few business classes to experience appreciable, sustained decline in the number of accounts, the revenues generated by these establishments actually rose at a brisk 4 percent annual rate. (This is only a bit slower than revenue growth in the seemingly booming fast food segment.)

In fact, growth of revenue generated per drinking place was especially high at 5.6 percent per year, indicating the importance of both effective account retention and premium audit practices to the successful writing of these alcohol-related risks.

Within the food services industry, the sources of an individual establishments revenues are an important factor in its loss exposures and insurance coverage needs. Among full-service restaurants, for example, alcoholic beverages account for 17 percent of revenue on average and are served by fully 66 percent of these establishments.

In contrast, alcohol is a minimal component of total revenue among limited-service restaurants and other limited service eating places (snack shops, etc.). That being said, however, among the 9.5 percent of limited-service restaurants that report serving alcoholic beverages, about 8 percent of revenues came from this source.

With respect to alcohol-related exposures, caution is called for in two segments. The first is special food services. Here almost 10.5 percent of establishments report serving alcohol. While this is a relatively limited share of accounts, their exposure is roughly as sizable as that in full-service restaurants, with about 15.4 percent of their revenues derived from alcoholic beverage sales.

Smaller still in number is alcohol-serving food service contractors, yet these firms reported generating almost 25 percent of their revenues from alcoholic beverages.

What is the other segment with an unexpected alcohol-related exposure? Well, its full-service restaurants again. This time, however, its the firms selling packaged alcoholic beverages for off-premises consumption. Nationally, only 2.6 percent of restaurants reported selling packaged alcoholic beverages, but those that did realized almost 10 percent of their revenues from this source.

However, there are other issues besides alcohol exposure to consider if you wish to successfully underwrite the rapidly changing food services industry.

As in so many sectors of the U.S. economy, food service firms have been under enormous pressure to increase productivity. Indeed, almost anyone whos had the opportunity to watch a burger assembly line in operation for a few minutes can appreciate the potential impact on loss frequency each time productivity increases another notch.

A workers compensation claim arising from deep-fat frying gone amok, or a slip-and-fall claim caused by a stray French fry are just two of the readily apparent elements of loss potential that can be exacerbated by an accelerating pace of food service.

Surprisingly, revenue growth per employee has been fairly uniform across the various food services segments. Such growth was a bit stronger in the full-service segment (rising at a 3.7 percent average pace). Nevertheless, revenue-per-employee in both fast-food restaurants and other limited service eating places (snack food shops) were not far behind, with each recording 3 percent-plus gains in this measure of productivity.

In contrast, payroll-per-employeea measure of growth in the rating basis for workers comprose significantly faster in the full-service segment than it did in special food services. As a result of the sizable rise in premiums that resulted, its quite likely that workers comp loss experience improved significantly among full-service restaurant workers.

In the special food services segment, however, the more sluggish pace of payroll growth means that rising loss costs will likely outpace the premiums collected.

Nationally, full-service restaurants account for a sizable 45 percent of all eating places. However, the composition of the sector varies appreciably state-by-state. Full-service restaurants comprise the largest share of all eating places in the Northwest, and in many of the Mountain and Northern Plains states.

Many Central Atlantic and Midwest states, in comparison, tend to have fairly low percentages of full-service restaurantsand, by implication, larger proportions of fast-food and snack food shops.

Indeed, the highest share of fast-food and snack-food shops relative to total eating establishments exists in Maryland, which at a full 51 percent narrowly edged out New Jersey and the District of Columbia for this distinction. Other states with especially high concentrations of fast-food risks include the quick-growth markets of Nevada and Utah.

In contrast, Floridaanother rapid-growth statehas a relatively low concentration of fast-food establishments in its quite large food services sector.

Frederick “Fritz” Yohn is the developer of “MarketStance,” a market analysis tool for U.S. commercial property-casualty insurers and a registered trademark of IntelliStance, LLC, in Middletown, Conn.

Flag: Recipe For Success

Stick To The Basics

By Fritz Yohn

Fast-food vs. sit-down restaurants, alcoholic beverages vs. dry establishments, fast growth vs. modest growth localesthe number of potential combinations of characteristics within the food services sector might seem as overwhelming as the ingredients typical of pot-luck concoctions.

However, the recipe for success in this sector relies simply on sticking to the basics. Following such time-tested techniques and ingredients will assure that your offering will produce a crowd-pleasing performance.

Identify a segment, or set of segments, with homogeneous risks that match your underwriting expertise.

Make sure that an adequate number of prospective accounts exist for those segments.

Be certain those prospective accounts have positive growth prospects.

Finally, select the target group of states in which this combination of characteristics is most consistent.

Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Food Services Sector Offers Tasty Risks

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