Olympics are an anxious event for underwriters

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30 July 2012

With the London Olympics now in full swing, athletes and their families have their fingers crossed and their hearts in their throats. But they are not the only ones.

Those involved in insuring the Games are just as anxious, with most counting the days until the event is over and hoping nothing that will affect their coverage comes to pass in the days in between.

One such figure is Andrew Duxbury, London-based Underwriting Manager at Munich Re.

The giant German reinsurer is one of the largest players in the contingency market, and Mr Duxbury has been closely involved with underwriting its coverage of the Games, which involves cover for cancellation, abandonment, interruption or even relocation.

He says Munich Re’s financial exposure to a complete cancellation of the London Games is “in the region of €350 million ($414 million)” through both the primary and reinsurance markets.

“We operate as both an insurer through our dedicated insurance company and provide reinsurance capacity to regular treaty clients so we have to make sure the overall amount we’re committing doesn’t exceed what we’re comfortable insuring for a single event.

“For Munich Re, it’s about managing our accumulation – we do need to know what our absolute maximum financial downside is.”

Mr Duxbury says Munich Re is almost certainly the leading capacity provider for the event, which is one of the largest events the company covers.

He puts the overall exposure – both insured and non-insured – for a total cancellation of the Games at around $US5 billion ($4.8 billion), but adds that the cost to the UK economy would be far greater.

The major risk to the successful completion of the event is a terrorist attack, in stark contrast to the previous Games in Beijing where a natural disaster such as an earthquake was considered most likely.

Mr Duxbury says flash flooding from summer storms may also cause some disruption to the London Games, especially in light of the wet summer and floods the UK has been experiencing.

Unlike many other major events, the Olympics are unique in that they are almost solely reliant on sport-specific venues clustered together in a single precinct. Mr Duxbury singles out the main stadium as a significant risk because it hosts the opening and closing ceremonies as well as the athletics – events which are integral to driving TV viewing figures on which much of the Games’ flow-on revenue is based.

“If something were to happen to the stadium – and it doesn’t have to be a terrorist event, it could just be a regular fire – it would be a real challenge,” he says. “Without that stadium, I think organisers would have a very real problem.”

The major underwriting considerations involved in covering such a large event include liabilities of the insured through any contractual commitments such as TV deals and ticketing; the political risk environment of the country and the event; the potential exposure to natural hazards; the host country’s experience in hosting large global events and its infrastructure; the robustness of the security arrangements; and the organisers’ contingency plans.

One worst-case scenario for the Games’ underwriters has already passed. Mr Duxbury was aware of the risk of an entire event cancellation occurring on the night prior to the opening ceremony, when the vast bulk of costs had already been incurred and would have had to be indemnified by insurance.

While that moment has passed without problems, he admits that being a contingency underwriter does impact on his enjoyment of sport.

For him, his highlight of the Games will be “when that closing ceremony is taking place”.