The FINANCIAL — Late, over-budget and facing a potential boycott by the world’s elite, Russia’s hosting of the 2014 Winter Olympics in Sochi beside the Black Sea could lead to a series of major insurance claims, according to Lloyd's.
The event is already estimated to have overrun in cost by 500%, with the total now predicted to be $50bn, versus the $12bn originally projected in 2007. Construction is well behind schedule, with as many as 70,000 people on site working flat out to try to finish on time. Russian opposition leaders – former cabinet member Boris Nemtsov and the anti-Kremlin Solidarity movement’s Leonid Martynyuk – have claimed that as much as $30bn has been siphoned out of the project through corruption and backhanders.
It all adds up to a nightmare for newly elected International Olympic Committee President Thomas Bach, himself a former gold medal-winning fencer from Germany.
Insurers involved cannot speak about it. As with previous Olympics events, those providing cover are bound by strict confidentiality clauses. With an event of this size, it is safe to assume that pretty much every major player is on the team sheet. As Elizabeth Seeger, Head of Contingency at Hiscox, says: “For major global events, brokers travel the world for capacity.” The Lloyd’s market, the major international insurers, US and Bermuda underwriters and reinsurers may all be part of the subscription market for the event’s insurance, according to Lloyd's.
Indeed, the market is awash with capital from new entrants, looking for new ways to make money. Yaël Mimran, Contingency Class Underwriter with Liberty Syndicates, says five or more syndicates in Lloyd’s have started writing contingency in addition to the traditional players.
Chris Jones, Liability Underwriter at Kiln, confirms this: “A decade ago, only a handful of syndicates wrote liability cover for major sporting events. Now there are perhaps 15 syndicates.”
The result of this more competitive environment has been price cuts, despite losses. After 9/11, prices rose but have, according to Mimran, fallen back to below those before 9/11. For Seeger, it is the bottom of the traditional insurance cycle – or, at least, she hopes it is.
JLT partner Duncan Fraser, who has 18 years’ experience in the market, says the process of underwriting Oympics-sized event starts with the cities bidding to run it. JLT provides risk management and insurance advice to cities preparing their bids. The types of risks to be covered include cancellation and abandonment, general liability, property, marine and transport, and accident and health, according to Lloyd's.
Once a host city is selected, JLT’s construction team will begin work. Risks vary. Some host nations have established stadia and infrastructure, others may need substantial refurbishment and some hosts will require complete new builds. For a football World Cup, that might be the difference between the UK, Brazil and Qatar, for example.
Each will also have different insurance opportunities, depending on the level of government support and the experience of using insurance for major events. For example, would the state bail out any overrun out of a sense of national pride, or to save international embarrassment? Fraser suggests that even in Europe, outside the UK, governments are much more interventionist, altering the risk.
Then come the localised risks – natural catastrophes, such as earthquakes and hurricanes, political risks, construction control and health and safety standards. The list rumbles on. Underwriters have a lot to take in. There are also the contractual obligations and liabilities that can vary from one event to another.
Beyond the construction phase comes the massive income at risk if an event fails to run to plan. There are usually two major clients. The international sports governing body – for example, the IOC, FIA or FIFA – typically has responsibility for the major commercial rights, such as sponsorship, TV rights, licensing, hospitality and merchandising. The local organising committee in the host nation takes the money from ticket sales. Fraser says: “That means well over $1bn of capacity available for cancellation and abandonment.”
Mimran, of Liberty Syndicates, says insurers must also factor in a wealth of modern technological risks. “Signal failure is a big risk. Imagine the Olympics takes place, but a signal failure means there’s no broadcasting for five minutes. You could face a huge loss if audiences around the world cannot see the games live at a crucial moment,” she said.
Discussion about this post