Underwriting manager Andrew Duxbury on cancellation insurance implications

World Cup

Excitement is mounting ahead of the 2014 World Cup in Brazil, and organisers, players and fans are all looking forward to the tournament kick-off.

The insurance industry will also be watching the games’ progress from a purely professional interest. Munich Re underwriting manager Andrew Duxbury examines cancellation insurance - one of the main insurance requirements surrounding the world’s largest sporting events.

Big sporting events are also big business, with revenues generated through TV rights, sponsorship, ticket sales, corporate hospitality, travel packages and souvenirs running into billions of dollars.

The overall economic impact of such events can only be estimated, but the single largest individual revenue stream comes from the sale of television screening rights. In 2010 it was revealed that over 3.2 billion people, or nearly half the global population, had watched some of the South African World Cup. On average each game attracted 188 million viewers. With the financial stakes high, global sporting bodies, local organisers, security forces and (re)insurers combine forces, often many years before, to achieve the common goal of a successful sporting event enjoyed by a worldwide audience on TV and often millions more live in the stadium itself.

Cancellation insurance policies can protect any one of the participating parties against the financial consequences of the sporting event being compromised, or, in the very worst scenario, being completely cancelled.  

While cancellation policy wordings vary, as they are adjusted to individual requirements, cover is fundamentally sought to protect against any unforeseen cancellation, abandonment, interruption or relocation of the event – including the opening and closing ceremonies. Munich Re’s financial exposure to the complete cancellation of the soccer world cup in Brazil is in the region of $300m.

The major underwriting considerations involved in covering such large events include:

  • Contractual commitments/liability of the insured (TV/sponsorship/ticket conditions);
  • The political risk environment (war, internal unrest, terrorism exposure, etc.);
  • Exposure to natural hazards (earthquake, windstorm, flooding);
  • Host country’s experience in hosting large global events;
  • Security arrangements;
  • Host country’s infrastructure; and
  • Organiser’s contingency plans.           

The obvious insurable perils include weather, natural catastrophes, acts of terror, communicable diseases, venue damage, power failure, satellite or transmission failure, riots, strikes, civil commotion, and national mourning. Each type of sport has its own technical challenges, as does each venue.

The biggest challenge posed by sports events of this scale is that they cannot be moved to another venue at short notice if something untoward happens immediately beforehand. And not every nation would be able to absorb the effects of a powerful earthquake, such as that in China in 2008, just a few months before the Olympic Games, and nonetheless carry out the games as planned. Some sports events can be relocated to other stadiums or facilities in an emergency, for example the 2011 Rugby World Cup in New Zealand, where in the wake of the Christchurch earthquakes, the united efforts of all those involved succeeded in conducting the competition in other cities. The additional costs that resulted were borne by the insurers.

Transportation can be a big challenge. In London, where traffic can often be chaotic even on normal days, the very idea of hosting the Olympic Games conjured up fears of the worst – yet everything went smoothly thanks to the city’s outstanding preparations. In Brazil, the challenges lie not only in navigating through the cities where the matches will take place, but also in crossing the long distances between the cities. 

Security threats cannot be ignored. This is well known, certainly since the terrible incident which overshadowed the Munich Olympics in 1972, where 11 Israeli athletes were taken hostage and a total of 17 people lost their lives. Terrorism is an omnipresent hazard that always needs to be taken into account in underwriting. Countries with often the highest exposure to terrorism are also usually the best equipped to counter the threat, particularly given the amount of international collaboration which is undertaken around such events. This was clearly demonstrated at the recent Olympic Games in London and Sochi. As the Chairman of the London Olympic Committee admitted after the games: “That fear never left me.”

Global events can also import international issues into a territory. To assess these, security would include information such as:

  • Host experience – Police/security forces;
  • Main venues – are they purpose-built?;
  • Athletes’ transportation;
  • Employee and volunteer vetting procedures; and
  • Contingency plans.

Terror cover provided will generally be limited by time before and distance from the event. There will be prescribed triggers specifying which authorities are able to cancel or suspend the event. Realistically, for such global sporting events, it will be the government of the host nation which decides such matters. However, there are considerable vested interests in ensuring that the event continues – as was the case with incidents in Munich and Atlanta.  

Munich Re has historically been a provider of underwriting expertise and capacity for very large global sporting events, from the Olympics, World Cup football and rugby to Formula 1, golf, tennis and skiing. And we continue to see this business to be a cornerstone of our contingency underwriting strategy. I, personally, am looking forward to the great football festival in Brazil, which might be crowned with the Seleção’s winning its first World Cup on home soil. And as soon as the sound of the last whistle dies, we will already be directing our attention to the next large-scale event in Brazil: the 2016 Olympic Games.