Insurers dodged a multi-billion-dollar loss on the Tokyo Olympics. But the hundreds of millions of dollars they still expect to lose, along with the fact that COVID-19 remains a global pandemic, means securing a financial safety net for the Paris and Los Angeles Games later this decade will be a lot harder.
“It’s either gone, or it’s going to be a very, very high premium with conditions,” Frank Zuccarello, a partner at Exceptional Risk Advisors, said in a phone call. Zuccarello, who specializes in deals for high-grossing live events and isn’t involved with the current Summer Games, says communicable disease coverage will be most difficult to find. “You might be able to find a couple of underwriters who will charge some crazy rate, by which I mean 5% to as much as 20% of the amount insured.”
The decision to hold the Tokyo Summer Games without fans, and a year after originally scheduled, will cost reinsurers as much as $400 million, according to Fitch Ratings. As steep as that amount is, it’s just a fraction of the crippling $2.5 billion they would have lost had the Olympics been canceled altogether.
“Certainly there are revenue issues with ticket sales, but they’re not as big a potential issue as for the broadcast rights,” explained Brian Schneider, senior director at Fitch Ratings and head of its global reinsurance coverage. Broadcasters paid to cover $800 million of value for the Tokyo Games, with Comcast’s NBC division almost certainly the biggest buyer, having agreed in 2014 to pay out nearly $8 billion for rights to broadcast the Olympics through 2032. The International Olympic Committee and Tokyo organizing group bought $1.4 billion of coverage, with the balance from hospitality organizers, sports teams and sponsors, according to Fitch data.
Even with the estimated $400 million payout, reinsurers probably won’t see much of a hit to their bottom lines, having set aside funds for Tokyo losses. Still, globally across all claims, insurers may lose up to $100 billion in pandemic-related cancellations. That already has sent insurance rates for 2021’s sporting events up sharply.
“Rates are two to three times what they were pre-COVID. It’s harder to find contingency underwriters who will go on-risk,” said Zuccarello. “COVID is not covered at all, and people are aware of that. But they will still buy coverage for terrorism, wildfires, adverse weather, whatever the case may be.” In some cases, sports organizers could sidestep insurers completely, and shift the financial risk to participants. One example of how that may work is the NFL’s decision to hold teams financially responsible for pandemic-related cancellations this upcoming season.
It’s not too soon to be discussing rates for Olympic Games coming later this decade. Given the size of the events, discussions for insuring Paris’ 2024 Games, as well as the Winter Games in Milan in 2026 are likely to be underway; deals for L.A. in 2028 can’t be too far from discussion.
There’s likely little chance communicable diseases will ever be covered in the general manner they have been, certainly not until COVID is contained worldwide. Insurers’ business model is predicated on the law of large numbers—that the many policies that never have to be exercised cover the occasional payouts that do occur. Right now, the math for Olympic coverage doesn’t work in an ongoing pandemic: To provide the $2.5 billion in coverage for Tokyo, insurers probably took in $25-50 million in premiums.
One possibility for getting insurance coverage for future Olympics is for taxpayers to provide backstop insurance for upcoming Games, said Fitch’s Schneider. In such cases, governmental bodies provide backstop coverage, usually on top of requirements that private participants accept a certain level of financial loss before public dollars would step in. Another option could be to start securitizing sports event risk into catastrophe bonds. Catastrophe bonds have been used to spread risk on terrorism and specific natural disasters. First developed in the 1990s, they are usually bonds with three-to-five-year terms sold by insurers. Insurers pay out interest while maintaining the principal as collateral. Buyers lose their money only if the disaster consumes all the money from the bonds. Otherwise, they get a return of some or all principal and interest payments.
“There’s the potential for risk to be transferred to investors in the capital markets, looking to take on additional risk that is potentially uncorrelated with their overall risk portfolio,” added Schneider. “But as we’ve seen with the pandemic, there certainly has been correlation with other investments so far.”