Japan’s decision to bar spectators from the Tokyo Olympics is likely to cost the global reinsurance sector USD300 million–400 million due to payouts for ticket and hospitality refunds, Fitch Ratings says. However, this is only 10%–15% of the amount reinsurers would have faced had the Olympics been cancelled, and its impact on earnings should be limited, leaving capital and ratings unaffected.

We estimate the total insurance cover for the Olympics to be about USD2.5 billion, comprising USD1.4 billion taken out by the International Olympic Committee and the Tokyo Organising Committee, USD800 million by broadcasters and USD300 million by other parties, such as sports teams, sponsors and hospitality. We believe reinsurers would bear most of the losses arising from this cover given that high-severity exposures are typically heavily reinsured.

Cancellation of the Olympics would have led to the largest ever insured losses from a single event cancellation, adding to pressure on reinsurers’ earnings from the pandemic and US casualty reserve deficiencies, and following several years of high natural catastrophe losses. With the Olympics now set to go ahead, but mostly without spectators, reinsurance payouts should be mostly limited to losses from ticket sales and hospitality. Total reinsurance losses, likely to be USD300 million–USD400 million, should not materially affect earnings, particularly given the reserves that reinsurers had already set aside in anticipation of potential losses.

The pandemic has led insurers and reinsurers to rethink some of the cover they provide and how they price it. In the past, they may have considered cancellation risks for different events to be mostly uncorrelated. However, the pandemic has highlighted how mass cancellations can happen simultaneously due to a single trigger, with even mega events, such as the Olympics, potentially at risk. To assess the insurability of risks, and to price accurately for them, insurers and reinsurers need to factor in correlation such as this, as well as the potential for extra-large aggregated losses when correlated risks crystallise together.

The pandemic has led the insurance market to generally stop offering cover for losses resulting from communicable diseases, although cover for event cancellation due to other causes is still available as before. We believe cyber risk could give rise to the next widespread catastrophe losses triggered by a single event, which could lead insurers and reinsurers to rethink the cyber cover they provide.

Renewed insurance policies for event cancellation now exclude cover for losses due to communicable diseases, which should shield insurers and reinsurers from losses resulting from further lockdowns to fight the coronavirus pandemic or future pandemics. However, event cancellation policies are typically multi-year, so it will take time for the existing risk exposures to run off.