Why It’s Harder to Insure New Restaurant Ventures

COVID-19 ushered in a whole host of changes in the restaurant industry, including several innovations, such as ghost kitchens, and now start-ups from those who see new opportunities on the heels of the pandemic. In underwriting a restaurant account, it’s important to note that one of the foundational blocks in the process is looking at an operation’s prior loss experience. However, with a new venture, you lose the ability to assess a risk’s prior loss history, its safety culture, and how successful it is in implementing measures to prevent and mitigate claims.

Restaurant Management Experience Plays a Huge Role

In the absence of having access to loss history, there are other indicators Distinguished utilizes in the underwriting process of a new venture. One critical indicator is to look at the people hired to run the establishment, including their credibility and experience and its applicability to the operation. Start-ups that hire a full-time manager with solid restaurant management background will be looked upon favorably from an underwriting approach. It comes down to who is at the helm of the operation and his or her credentials, experience, and philosophy on running a restaurant.

Our underwriters will also dig deeper into a new venture, requiring a business plan to be submitted. Plans may range from major presentations to a couple of pages. The plan should outline the owners’ vision and restaurant concept, expectations for success, factors behind the selected location, what the competition looks like in the area, and the ownership structure, including bios of the full-time manager(s). The underwriter needs to understand what components and vision are behind making the restaurant successful and the owners’ plans for execution. It’s a red flag when a business plan is unavailable.

Underwriters also want to understand how owners plan to finance the start-up and that the operation is well-capitalized. For example, is the restaurant backed by private equity investors, or did the owners receive a significant bank loan for the start-up? If the operation is heavily leveraged and owners have loan payments in addition to meeting their expenses, underwriters will want to understand the restaurant’s pro forma and how owners plan to meet their financial obligations and run a successful operation. Most start-ups aren’t instantly successful; it takes time to build up a following and turn a profit. Therefore, owners must have the resources to get through the start-up period and reach a point of generating a profit and not be in a situation where they must cut corners to save money.

Start-Ups Are More Likely to Pivot Their Operations

There is obviously more risk with new ventures, as they may need to adjust their business model to achieve success. Owners of start-ups tend to make more tweaks to their operations while figuring out how to generate more revenue. For example, you may have a restaurant that offers happy hour from 4 p.m. to 6 p.m. with discounts on wine and beer then closes at 11 p.m. To draw more of a crowd, the restaurant decides to extend its happy hour, adds some live music and a dance floor, and keeps the bar open until 1 a.m. (while the kitchen still closes at 11 p.m.). Such significant changes may not be within the underwriting appetite, which is another reason why new ventures are a challenge.

In evaluating the property coverage for a new venture, Distinguished’s underwriting is pretty straightforward. On the general liability (GL) side, start-ups aren’t eligible for an experience credit. Only operations in business for at least four years can get an experience credit in our rating system. New ventures may pay a somewhat higher rate due to their lack of loss experience; conversely, they may get a better liability rate than an operation with a not-so-stellar loss experience. The rates for the GL for most start-ups will likely be at the midpoint.

Distinguished is open to looking at all combinations of restaurant risks. Take a look at our package policy available for fine dining, family casual with full table service, fast-casual, wine bars, off-premises caters, and ghost kitchens. We will also consider new ventures with experience.