World Cup Breaks Ground, Securitizes Its Risk

By Mark E. Ruquet

NU Online News Service, Oct. 10, 300 p.m.EDT?In a groundbreaking move that one expert said couldbecome commonplace, the organization that stages the soccer WorldCup said it will securitize the risk of event cancellation ratherthan use traditional insurance.

The Federation Internationale de Football Association, based inZurich, said it turned to securitization of its risk becausetraditional insurers appeared unwilling to underwrite the eventbecause of terrorist activity.

FIFA said the move to securitization was made after it foundinsurers were not willing to underwrite cancellation coverage forthe 2006 FIFA World Cup in Germany.

FIFA's World Cup match cancellation risk will be covered with a$260 million bond which covers only the cancellation of the 2006final game for any acts, either manmade or natural, except worldwar and boycott.

FIFA said this is the first sporting event that has sought outthe transfer of risk through the capital markets.

The transaction was structured by Credit Suisse First Boston onbehalf of FIFA.

FIFA said in a statement that it made the move because thetraditional market no longer covers the event as FIFA requires. Itnoted that the terror attack of Sept. 11, 2001, and the subsequentexit of traditional insurers from the 2002 FIFA World Cupcancellation insurance policy caused the association to turn tothis risk transfer vehicle.

AXA Konzern in Cologne, Germany, cancelled its $851.8 millionpolicy package with FIFA after 9/11 for the 2002 games.

Rogan Dwyer, president of Global Asset Protection, an insurancebrokerage firm in Philadelphia, said he believes that when it comesto major sporting events, this trend will continue in the future.Because of the threat of terrorism, when it comes to large sportingevents, there is simply not enough capacity to cover them.

"There is no amount of money in the world that will keepinsurers comfortable with that amount of risk," he said, adding,"This is a big, big problem."

David Mair, the former risk manager for the U.S. OlympicCommittee and former president of the New York-based Risk andInsurance Management Society, said FIFA's securitization is theleading edge of a trend by major sporting events to seek risktransfer through an alternative market approach.

The trend would not affect all sport events, he noted, becausesuch U.S. games as American football and baseball have the abilityto move games to other venues instead of having them cancelled.

Mr. Mair, who is now running his own consulting firm, RiskExcellence, based in Melbourne, Fla., noted that the cancellationinsurance market has been constricting since the 1996 Olympic Gamesin Atlanta.

He said while FIFA probably could have secured a $260 millioncancellation policy in the traditional market, the cost would havebeen greater.

When it comes to modeling for such an event, he said he was notsure if the models were clear for sports and that there is not yetenough experience to know if a model was valid. He pointed out,however, that the risk of terrorist attack for these large eventswas different because states that sponsor terrorism areparticipants in the games and would have a restraining influence onterrorist groups.

"They don't want to find themselves on the outside looking in,"he said.

There is more concern about attacks from internal groups lookingto embarrass their government, he noted.

Gordon Woo, chief architect of the terrorism risk modeldeveloped by Risk Management Solutions based in Newark, Calif.,said his firm has developed a risk model that rating agencies haveenough confidence in to rate the securitization bond in "A" andabove grade.

Mr. Woo added that this is the first time a terror risk has beensecuritized and the model allowed for the successful release of thebond. He compared this to the securitization of earthquake risk inJapan a decade ago. What was new then is commonplace today. And heindicated that he felt the same could happen with such sportsrisks.

"One expects to see more [securitizations] like this in themonths ahead," said Mr. Woo. "This is a landmark transaction."

An executive for an insurance brokerage firm that specializes inmajor sporting events, Bill Hubbard, chief executive officer forASU International, based in Boston, said it remains to be seen howthe capital markets will react if they sustain a large loss fromthis risk. He noted that at least with the traditional insurers theresponse to a loss is known. But he gave FIFA much credit forpursing the alternative market.

"Kudos to them [FIFA] for pulling this off," he said. "I am surethis was an immensely difficult undertaking. But I'm sure theywould not have had the will to go through this if it were not fortheir experience with AXA."