Terror Bonds Prove Their Worth At World Cup

A catastrophe modeler said today that the World Cup soccer event has proven the viability of using terrorism catastrophe bonds to handle risk.

“It's a vindication,” said Gordon Woo, a catastrophist in the London office of Risk Management Solutions, which did a risk analysis concerning the possibility of event cancellation due to terrorism for the F?d?ration Internationale de Football Association.

The Golden Goal Finance Ltd. $260 million terrorism catastrophe bond issue covering the cancellation of the FIFA World Cup was oversubscribed when it was offered, he noted.

Among the factors taken into account in the analysis, said Mr. Woo, was the fact that soccer is extremely popular in the Arab world. In fact, he said, there had been postings on a terrorist Jihad Web site complaining that “too many people were watching soccer to get on with militant activities.”

Mr. Woo also noted that there were a dozen soccer stadiums available for use by FIFA in Germany, so that if one facility was damaged, “there was an element of redundancy” that would allow play to go on.

Mr. Woo's company said that “the pioneering terrorism risk catastrophe bond stayed the tournament without incident, proving to be successful for the risk analysis and the investors.”

RMS said that after doing its terrorism analysis for FIFA, it provided the world football governing body with an elaborate event tree model of potential terrorism-related pathways that would lead to something preventing completion of the FIFA World Cup.

The principles underlying the probabilistic risk analysis, RMS said, have been well upheld, as demonstrated, for example, by the military security for venues and teams commensurate with such high profile international terrorist targets.

Although the German government provided security for the tournament, any decision on event cancellation rested solely with FIFA. There was no German government guarantee to investors, RMS explained.

The company noted that when the 2002 FIFA World Cup took place in Korea and Japan within a year of 9/11 only an insurer of last resort was prepared to provide terrorism coverage for the event.

Soon afterwards, FIFA said it engaged bankers at CSFB to obtain cancellation risk coverage for the 2006 FIFA World Cup.

The price paid by FIFA for the $260 million issuance of Golden Goal Finance Ltd. was lower than the least expensive insurance option, according to RMS.

RMS said it has performed provisional risk analyses for several additional terrorism risk securitizations as industry interest in this option continues to grow.

“As with natural catastrophe bonds, the existence of this alternative mode of risk transfer acts as a regulator on insurance market price increases,” observed Mr. Woo, who was chief architect for the RMS FIFA Terrorism Risk Model.

“With the success of the first terrorism risk bond, and with continuing uncertainty over the future of TRIA after 2007, further interest in terrorism alternative risk transfer is expected,” added Mr. Woo.