The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
An unlikely pairing in most circumstances, both athletes and insurers were thrown for a loop when talk of canceling the Tokyo Olympics arose in late January, in the face of COVID-19 cases soaring worldwide and much of Japan being under a state of emergency due to a third wave of infections.
While athletes stand to lose out on a critical competition that is the culmination of years of hard work, and could lead to sponsorships and career-making moments, insurers stand to lose US$2-3 billion, which would be the largest ever claim in the global event cancelation market, according to a Reuters report.
For now, the industry can rest easy since shortly after the initial reports about canceling the sporting event, Tokyo 2020 President Yoshiro Mori said that Japan would in fact hold the Summer Olympics, regardless of the situation with the pandemic, and that he was working closely with the International Olympic Committee (IOC) to make the event happen.
Nonetheless, event cancelation insurers are teetering on the knife’s edge, after a year that saw mass stay-at-home orders and social distancing measures effectively put an end to large gatherings, and a dent in insurance profits. Insurers took hits to their bottom line, like Liberty Mutual, with roughly half of its $529 million in incurred losses for COVID-19 being attributed to event cancelation in Q2 2020. Lloyd’s of London, meanwhile, predicted on the back of the first postponing of the Olympics in early 2020 that about a third of its $4.3 billion in COVID-19 payouts to global customers would be paid out on event cancelation policies.
Another postponement or outright cancelation of the massive event may be a rhetorical ‘nail in the coffin’ for some insurers and their financial results for 2021. The Olympics is insured for approximately US$2 billion, plus a further US$600 million for hospitality, according to estimates from Jeffries analysts. Additionally, losses would come from multiple sources, including the IOC and local organizing committee (which have approximately US$800 million and US$650 million in coverage respectively), as well as broadcasters, sponsors, professional sports teams, and the many other organizations involved in the Games.
According to Reuters, the insurers and reinsurers likely to take the largest hits from a cancelation include Lloyd’s of London insurers, Munich Re (which allegedly has a US$500 million exposure to the Tokyo Olympics), and Swiss Re (which has a US$250 million exposure).
The fallout would mainly impact the event cancelation segment. As one of the lines of business that has been most exposed to the coronavirus pandemic, this marketplace already looks mightily different today than it did at the start of 2020. Even before the pandemic, reports noted that many organizations didn’t purchase the coverage for their meetings and events because policies were too expensive or not worth it since they no longer covered for terrorism, except with an endorsement – a trend that has now been mimicked with coronavirus exclusions and will likely be here to stay. One survey conducted by PCMA, a global network of business event strategists, outlined respondents’ key insurance concerns, with one stating, “The biggest issue related to insurance is the reality that getting insurance in 2021 is going to be difficult if not impossible.”
Policyholders who purchased coverage for their future events before the pandemic may be in luck, as these policies generally contained explicit coverage “buy-backs” for losses from “communicable disease,” and did not use the word, “virus”, but rather use “communicable disease,” excluding neither, according to The National Law Review. However, anyone who bought event cancelation coverage after April 2020 will now see that they have full exclusions for COVID-19.
As the pandemic continues to make a mark on economies and societies around the world, the relevance of the event cancelation product will need to be revisited. If coverage excludes cancelation due to the coronavirus, what is the point of purchasing it – and, from the insurance perspective, why would insurers take on that big of an exposure after a painful year?
As a result, the future of the event cancelation space is in flux, and the solutions that come out on the other side of COVID-19 will need to come together somewhere in the middle, in terms of meeting customers’ needs, while ensuring that the impact of potential claims to the insurance industry is manageable.