Jul 15, 2007

The Financial Risk of Mega Events

International competitions like the World Cup and the Olympic Games have become commercial mega-events involving enormous financial risks for the organizers. In order to cover such events, the insurance industry needs both a high level of know-how and sufficient capacity.

2008 will see the staging of the European football championships in Austria and Switzerland and the summer Olympics in Beijing, two mega-events whose financial risk has skyrocketed in the last few decades.

Most of the revenue for these events comes from the TV broadcasting rights. The more popular an event is and the higher the expected viewing figures, the more TV channels can charge for advertising time and the more expensive the broadcasting rights are to acquire. Back in 1984, the broadcasting rights for the Los Angeles Olympics were sold for US$ 225m. At the Athens Olympics 20 years later, the price of the TV pictures had more than trebled.

Given the enormity of the sums involved, it is vital to clarify well in advance of an event who will pay for any economic losses, for example when TV pictures cannot be transmitted or if events have to be abandoned or cancelled. As conventional lines of insurance cannot cover such risks completely, event organizers risk having to bear some or all of the costs or facing major claims from the sponsors.

Creativity, knowledge, experience

Such unusual risks, for which the law of large numbers is only of limited value, require creativity, an acute awareness of the hazards involved and international experience on the part of insurers. Munich Re has many years of technical expertise in cancellation-of-events insurance and can draw on its wide range of know-how at the company and at its many international business units.

Among the biggest risks at a mega-event are its full or partial cancellation and the failure of TV broadcasts. This is not only of relevance to such big occasions as the Olympic Games and World Cup but also to events like trade fairs or world exhibitions, the financial risks of which have also grown enormously over the years.

Given the wide range of coverage concepts involved, know-how and international experience are of paramount importance for the coverage of big events. Munich Re more than fulfilled its role as the leading risk carrier at past mega-events like the winter Olympics in Turin and the World Cup in Germany.

The 2008 summer Olympics in Beijing

In early 2006, the International Olympic Committee decided to buy long-term insurance coverage for the next three Olympic Games. A cancellation-of-events policy was duly placed in the London market which will cover the 2008 summer Olympics in Beijing, the 2010 winter Olympics in Vancouver and the summer games in London 2012. Munich Re is one of the leading reinsurers involved in this project and played a major part in designing the insurance policies.

China's exposure to most natural hazards is a very real risk and has to be taken seriously. A massive earthquake, heavy floods or a severe typhoon could well lead to the complete cancellation of the games. As most of the events will be held in Beijing, that is where the main emphasis of insurance lies. A similar case was the 1998 winter Olympics in Nagano, Japan. On that occasion, it was also necessary to consider damage to the infrastructure in other parts of the country that would have made a continuation of the games impossible.

A hotly disputed topic is whether insurance policies for big events should cover terrorism. We appreciate that clients require comprehensive insurance protection and we strive to find appropriate solutions that are acceptable and feasible for all concerned. This means on the one hand that the covers for terrorist attacks have to be limited in terms of time and location.

At the same time, a risk-adequate and equitable price has to be found. In view of the lengthy duration of some risks, a right of veto is frequently agreed for the insurer, which comes into effect if the political situation in a country seriously deteriorates.

The 2010 World Cup in South Africa

The 2010 World Cup in South Africa presents enormous challenges for insurers. Although we are talking about the same event that we insured in Germany in 2006, the circumstances will be completely different next time around.

The World Cup will be held in ten stadiums in nine cities. Most of these stadiums are run-down rugby grounds and it is by no means clear who will be paying to have them suitably upgraded for the World Cup. As the stadium operators will have to more or less hand over their stadiums for the duration of the World Cup, not be able to advertise there, and have to leave their hospitality boxes and suites to FIFA's advertising partners, they clearly do not have much of an incentive to invest in much-needed structural improvements.

The South African Football Association, which posted a loss of some €8m in 2004, will also find it difficult to come up with the necessary funds. The national organizing committee is therefore considering the possibility of paying an extra premium to have "non-availability of venue" written back into the policy.

There are also major differences in the infrastructure compared with Germany. Public transport is pretty basic, the road network is poor and hotel capacity is inadequate. With an unemployment rate of up to 40%, crime — in particular violent crime — is very high. Although, primarily thanks to Nelson Mandela, the political situation is currently stable, there is no way of telling what it may be like in four years' time.

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