Insuring the Goal
On June 12, the national soccer teams of Brazil and Croatia will run out onto the field of the Arena de Sao Paulo stadium to play the opening game of the 2014 FIFA World Cup. In the following weeks, 32 teams from six continents will battle it out to win the famous gold trophy.
Getting to this point has cost billions of dollars in training, security, construction and other areas. And over and above all this cost is another fight, the battle to insure it all.
Brazil is an alluring market for insurers and reinsurers. Eduardo Marques, managing director of Marsh Brazil, said that the Brazilian insurance market has seen significant growth over the last five years, above GNP levels.
“The growth is a consequence of changes in the economy in general. Wealth distribution has significantly contributed to that, as more people now have interests to protect and can afford an insurance policy.”
In addition, the Brazilian government has acted to open the (re)insurance market up to increased competition.
Brazil was the only Latin American country to see its risk rating increase from “medium” to “severe,” according to Aon’s Terrorism and Political Violence map.
According to Marques, the main regulatory change that impacted the plans of foreign companies for Brazil was the opening of the reinsurance market more than five years ago. Since then, there have been several changes in insurance regulation, primarily related to controls and operations of insurance companies.
Foreign companies were attracted by the opening of the reinsurance market, growth of the economy and the size of the insurance market in Brazil, which has been significant.
Data from the Superintenděncia de Seguros Privados, the Brazilian insurance regulator, shows that insurance premiums have been rising steadily over the past four years. The market grew by 17.6 percent in 2010, 16.6 percent in 2011, 23.2 percent in 2012 and 10.5 percent in 2013.
AM Best’s latest Special Report on the Brazilian reinsurance market also points to growing interest in it on the part of reinsurers, due to the increasing premium volume being difficult to resist.
A “Severe” Risk
Having the World Cup in Brazil has obviously raised the profile of the country around the world. However, there are potential risks in holding the World Cup in Brazil.
In January 2014, Aon Risk Solutions released its annual Terrorism and Political Violence map, which looks at risk levels of terrorism and political violence across the world. Brazil was the only Latin American country to see its risk rating increase from “medium” to “severe.” This was due to widespread large-scale violent anti-government protests throughout 2013.
Looking at the types of insurance that are required for an event the size of the World Cup, Andrew Duxbury, underwriting manager-contingency, at Munich Re told Risk & Insurance® that these varied widely.
“The organizers — for instance, the international or national organizational committees, sports associations and other organizers — naturally have a vital interest in limiting their financial risks. But television broadcasters, sponsors, souvenir manufacturers, travel operators and hotel owners can also protect themselves against losses.
“The term of a policy for the main organizers of a major sports event, such as the Olympic Games, is usually several years, given that the financial risk commences as soon as a city or country wins the bid.
“Cancellation-of-events insurance has gained in importance ever since television viewing rights were granted in the 1960s-’70s in view of the significant financial commitments involved.”
Duncan Fraser, partner at JLT Specialty, said that aside from property and liability insurance issues around the World Cup, there is also the accident side.
“There will be tens of thousands of employees and volunteers there and hundreds of thousands of spectators. That said, Brazil is generally deemed to be a good risk. There’s no major natural catastrophe peril in the area.
“You could have disruption from civil disturbances or rioting, but recent worries about this have been slightly inflated — it’s not a major issue. After all, Brazil can point out that a year before the 2012 Olympics, London had some very significant rioting.”
“Competitions such as the 2014 World Cup are global in their reach,” said David Boyle, class underwriter at specialist sports insurer, Sportscover.
“It takes billions of dollars to put on an event of such enormity and large insurers will risk millions of dollars underwriting aspects such as event cancellation. Exclusions can be written back into a policy but risk management will be critical.
“As with all major world events, terrorism is high on the list of consideration for World Cup organizers,” he said. “Assessing and managing risk for an occasion of such magnitude will have been deliberated upon from the early stages of the event planning and will be continuously reassessed beforehand and throughout the event itself.
“The [risk management] process will examine even the remotest of weak spots in the security at all venues as well as the transportation routes that will see tens of thousands of people moving around cities that would not normally see such traffic.” — David Boyle, class underwriter, Sportscover
“The process will examine even the remotest of weak spots in the security at all venues as well as the transportation routes that will see tens of thousands of people moving around cities that would not normally see such traffic.
“For a run-of-the-mill event in a small town, such as a parade, risk can be assessed and insurance put in place within a week or two of the event,” Boyle said.
“But for an occurrence such as the World Cup, the risk management process will begin some three years or more in advance. This will include countless inspections of venues and negotiations that will take every possible eventuality into account before insurance terms and premiums are agreed.
“With tens of millions of dollars at stake, insurers need to do all they can to reduce their risk and alongside the local authorities need to provide assurances to the general public that their security has received the utmost scrutiny,” he said.
With so much at stake, risk management will of course also be looking at the lessons learned in the past.
One recent major event that was affected by a natural disaster was, as Duncan Fraser points out, the 2011 Rugby World Cup in New Zealand. Five pool matches and two quarterfinals were scheduled to be played in the city of Christchurch in September and October of 2011.
However, Christchurch was hit by two major earthquakes in September 2010 and January 2011, followed by a major aftershock in June 2011, which caused extensive damage to the city, the sporting venues within it and the infrastructure surrounding it. The organizers of the Rugby World Cup were forced to relocate the matches to other venues.
“This was a complex process for such a major event, which threw up logistical challenges,” Fraser said, “but in the end it was successfully dealt with.”
Sportscover’s David Boyle also pointed out the lessons learnt from what happened in New Zealand: “The Christchurch earthquake of 2011 disrupted the Rugby World Cup due to significant structural damage to a venue and the transport routes being severely disrupted. This meant that many games had to be relocated to other stadiums with the additional impact on hospitality income at alternative venues.”
For many insurers however, terrorism will always be a worry.
“Terrorism is an omnipresent hazard that always needs to be taken into account in underwriting,” Andrew Duxbury said to Risk & Insurance®.
“On 9/11, scenarios no one would have reckoned with became reality. Since that day, everyone has been aware of the risk. As a consequence of the attack on the WTC, the insurance industry also subjected its covers for major events to a fundamental rethink. The soccer World Cup in 2002 did not have full cancellation-of-events coverage because the organisers were unable to agree on terrorism cover.”
According to Duxbury, in order to be able to assess the hazard of terrorist attacks, insurers take a close look at the host country’s experience with terrorism prevention (police, security staff, etc.). They also take into consideration whether the event is held in a stadium that is relatively easy to secure or whether it will be held out in the open, for instance a marathon.
Insurers also bear in mind what kind of transportation the athletes are offered and how staff and volunteers are vetted.
He added that countries that have been confronted with terrorist attacks for many years — such as the United Kingdom and its experience with attacks by the IRA — also have the greatest experience in preventing terrorism.
Hence, their risk management is also likely to be excellent. The relevant authorities work together on a cross-border basis in order to keep an eye on the terrorism hazard not only in their own country but also in the athletes’ and guests’ home countries.
And with the 2014 World Cup about to start, risk managers and insurers are of course already looking to the future.
Russia is scheduled to host the 2018 World Cup, with the 2022 event scheduled for Qatar. Both events will also face significant risk management issues. Russia continues to face terrorism issues due to unrest in the Caucasus, as well as the recent tensions over the Crimea.
Qatar has been criticised as a venue due to the high temperatures that a World Cup played in the summer months will encounter there. One thing can be said to be certain — risk managers will be looking at both events well in advance, if they aren’t doing so already.