If the World Cup is disrupted, insurers may be the big losers

Carbone-WilliamMillions of eyes will turn toward the 2014 FIFA World Cup in Brazil this summer. Most will be looking to see if Neymar can lead the home squad to glory, if Argentina can pull an upset, or if one of the European powers will prevail. (Apologies to the Yanks and Sam’s Army, but the odds, and a daunting schedule, don’t bode well for Team U.S.A.) There will also be a smaller set of eyes watching the news to see if civil unrest, labor strikes, or failed infrastructure will cause games to be delayed, rescheduled, or possibly even canceled. These would be the eyes of those who have written event cancellation coverage for the World Cup.

Event cancellation coverage is common for major sporting events, from Wimbledon to the Olympics. Details of the coverage provided are hard to come by, which is due to confidentiality concerns, but the basic premise is quite clear. While complete cancellations are rare, delays and rescheduling costs are covered as well. Insurers tend to treat most events similarly, but there are certainly more risks associated with the Olympic Games and World Cup. These events span several weeks and many sites over a wide area, and have more money invested in them than annual or regional sporting events. TV coverage and corporate sponsors are also buying coverage to protect their investments. For the Sochi games, the International Olympic Committee purchased roughly $500 million of the nearly $3 billion in coverage provided. The impact of a major disruption would be immense.

This year’s World Cup appears to be a much riskier event than normal. While Sochi had to contend with credible terrorist threats and spring-like weather conditions, Brazil is facing a multitude of issues as the tournament approaches. While travel logistics were always a concern with World Cup matches taking place all across the 3 million square miles of the country, now preparations and civil unrest are the chief concerns. Stadium preparations are coming down to the wire, labor unions are striking to take advantage of the increased international attention, and the Brazilian public is generally unhappy at the level of waste and corruption as promised infrastructure improvements have fallen by the wayside. The Sochi Olympics faced similar corruption charges, but the Brazilian public has been more demonstrative in their protests than the Russians were. Combine these potential disruptions with the necessary travel to get teams from site to site on time, and the potential for delayed matches is significant.

Typically, riskier events with large coverage amounts would be priced accordingly, but not so with event cancellation insurance. Much like trip cancellation insurance, the insured often purchases coverage well in advance of the event, but the similarities don’t end there. Both coverages experience a long period between time of purchase and the peak of exposure to loss. For example, a snow-weary traveler booking a Caribbean cruise for Labor Day weekend in January will purchase a policy to cover the trip. The likelihood of the trip being canceled from January through July is slim, but the factors affecting the likelihood of a cancellation can change dramatically. The price may have risen if forecasters called for an exceedingly active hurricane season or the cruise line started on a path to failure, but the insurer cannot adjust the price of the coverage for these events. Similarly, the Brazilian World Cup coverage was priced before the Soccerex Global Convention was called off and the reports of construction delays and infrastructure issues began. Coverage for the 2016 Olympic Games in Rio was also priced without considering the experience of Pope Francis’s visit in 2013, this year’s World Cup, or the knowledge of the major delays in preparation, as cancellation policies for the Olympics were likely purchased several years ago. One important contrast to trip cancellation policies is that event cancellation risks are highly concentrated and difficult to diversify over time and location.

As it is necessary to price event cancellation policies well in advance, it is likely that the true risk of a disruption of the World Cup or the Rio Olympics was not accurately measured when the policies were sold. As the event draws closer, the true risks associated with the events become clear, but it is too late to adjust the premium. However, history has shown these cancellations are rare, so it’s possible the only claim made this year will be for the Donovan family’s trip cancellation policy.

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