Event Cancellation Risk

Doubts Buzz Around Rio Olympics

The threat of Zika continues to prompt calls for the cancellation of the 2016 Olympic Games.
By: | July 5, 2016 • 6 min read
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As the threat of the Zika virus remains an urgent one in Brazil, calls have been made for the cancellation or relocation of the 2016 Olympic Games – an extreme decision that would cause enormous losses to the global insurance market.

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Some of the world’s largest insurers and reinsurers, including Swiss Re and Munich Re, have exposures to the tune of hundreds of millions of dollars each for cancellation insurance policies that would likely be triggered if the games were not to take place.

Such policies cover financial losses caused by the cancellation of events and are purchased by the International Olympic Committee (IOC), which organizes the games, and by companies and organizations with significant interests in the games. They include sponsors, TV networks, tourism operators, airlines, brands with Olympic-focused marketing campaigns and others.

Underwriters must have sighed with relief when the World Health Organization said “there is no public health justification for postponing or cancelling the games.”

The risk of cancellation gained steam in recent weeks after a group of more than 150 high-profile scientists released an open letter urging the games to be suspended in order to prevent Zika from spreading around the world.

“An Unnecessary Risk”

“The Brazilian strain of Zika virus harms health in ways that science has not observed before,” the scientists said in the letter. “An unnecessary risk is posed when 500,000 foreign tourists from all countries attend the Games, potentially acquire that strain, and return home to places where it can become endemic.”

They pointed out in the document that the 2003 Women’s World Cup was moved from China to the U.S. due to the risk of SARS, which should be a precedent for the cancellation of Rio 2016.

Royal Oakes, insurance partner, Hinshaw & Culbertson

Royal Oakes, insurance partner, Hinshaw & Culbertson

Underwriters around the world must have sighed with relief when the World Health Organization released an answer to the scientists, stating that “there is no public health justification for postponing or cancelling the games.”

“It is very likely that current policies have no exclusions for public health events such as epidemics,” said Royal Oakes, an insurance partner at Hinshaw & Culbertson in Los Angeles.

The market may have dodged a bullet, but insurers and reinsurers may still face a bill due to the pesky Aedes mosquitoes, which transmit not only Zika, but also other viruses such as chikungunya, dengue and yellow fever; all common diseases in Brazil.

“Cancellation policies are such long shots that usually nobody gives them any attention,” Oakes said. “But now everybody is talking about cancelling Rio 2016 due to Zika.”

According to sources, at least one of Europe’s largest reinsurers signed a large cancellation contract with NBC, which owns TV rights to the Olympics in the U.S. It has been pressured to consider the possibility of triggering the coverage even if the games go ahead, but key American athletes decide not to compete, affecting ratings and, consequently, publicity revenues.

Although this kind of clause may not be usual in policies, Oakes said, it may have been arranged between the parties, as wordings are non-standard and are subject to agreements between buyers and underwriters. That said, he would be surprised if a policy was triggered by the fact that athletes do not show up.

Top golfers Rory McIlroy of Ireland and Jason Day of Australia, and Tejay van Garderen, one of America’s top cyclists, have already announced they are not going to Rio in August because of Zika.

Others include NBA star Pau Gasol, the most famous member of Spain’s Olympic team, U.S. soccer player Hope Solo and tennis star Serena Williams. All have expressed doubts about participating in the games due to the risk of contamination. Some NBC staffers are also passing on the opportunity.

Companies that send staff to Brazil during the games have been advised to provide information to their employees on Zika prevention.

The Brazilian government said that measures have been taken to stop the propagation of Zika during the Olympics. Furthermore, it argued that the games will take place during the Brazilian winter, when the activities of the mosquitoes diminish considerably.

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“There is no risk for the spreading of Zika to gain pace during the Olympics,” Health minister Ricardo Barros said in early June.

But the failure of the Brazilian authorities to stop the virus so far raises doubts about the minister’s claim.

Since the autochthonous version of the outbreak was first spotted in April last year, almost 92,000 cases of Zika contamination were reported in the country, according to the government.

Since October, there have been nearly 1,500 known cases of babies born with microcephaly, which has been linked to the virus. A total of 223 have already been associated to Zika via lab tests. The actual number could be much higher, as the tests to identify both Zika and microcephaly cases are not available to all Brazilians.

Companies that send staff to Brazil during the games have been advised to provide information to their employees on Zika prevention.

They range from simple measures such as applying repellent and wearing long-sleeved clothes that reduce the skin area that can be targeted by mosquitoes, to avoiding poorer regions of Rio de Janeiro, where sanitation infrastructure is precarious, and practicing safe sex, as the virus can also be transmitted during sexual intercourse.

Security Risks

But Zika is not the only risk that worries participants in the event.

Debora Rocha, regional security manager, International SOS

Debora Rocha, regional security manager, International SOS

Security is a big issue in Brazil, and 90,000 security agents will be deployed by the authorities to guarantee safety. Although terrorism is not a common threat in the country, the security forces said that they have been collecting information about potential attacks during the games and are working with other countries to neutralize the risk.

“Brazil has hosted the Pan American games, the Confederations Cup and more recently the FIFA World Cup, so there is considerable experience in dealing with large events and collaborating with security forces from other countries,” said Debora Rocha, the regional security manager at International SOS in Brazil.

But crime is a major concern in Rio de Janeiro, and it is on the rise as a consequence of Brazil’s economic crisis.

Rocha said visitors should avoid walking around beautiful Rio de Janeiro while carrying valuable items — such as iPads, smartphones or expensive watches — and they should not wander around impoverished parts of the city.

“We do not recommend that people go to ‘favela’ tours that have been fashionable in recent years,” she said, referring to Rio’s famous, and very dangerous, shantytowns.

Another important precaution is to only take taxis that are called by hotels, restaurants or telephone services. Picking a taxi on the road is a particularly bad idea as some cab drivers can be criminals in disguise.

In general, information on risk management systems and structures have not been made public, which has raised questions about the robustness of ERM at the Rio games.

“Crime is among the top two or three concerns, along with Zika and the general preparedness of infrastructure and venues in Rio,” said Abbott Matthews, an analyst at IJET International.

In the latter case, the Olympics organization has been dogged by work delays, bribery suspicions and faulty execution, as illustrated by the crumbling in April of a scenic, seaside waterway that was built as a legacy of the games to the city of Rio de Janeiro.

Preparedness has in fact been a concern throughout all of the construction of Rio’s Olympic structures, and a lack of focus on risk management may have played a role.

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The local organizers hired an experienced Brazilian risk manager to focus on enterprise risk management in 2013, but he left the next year after disagreements with his bosses. Since then, the position has not been filled.

Public speeches on risk management at the games have been delivered by a military police colonel who is in charge of security and who focuses mostly on policing issues.

In general, information on risk management systems and structures have not been made public, which has raised questions about the robustness of ERM at the Rio games.

“In large scale events, especially when there is taxpayers’ money involved, there is a deep obligation to have the most transparent processes in place,” said Joanna Makomaski, president of Baldwin Global Solutions, who was the vice president of ERM with the Toronto 2015 Organizing Committee of the Pan American Games.

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]
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Reinsurance

Basking in the Sun Once More

Solvency II equivalency and NAIC’s “qualified jurisdiction” designations help Bermuda strengthen its position as a leading reinsurance domicile.
By: | May 24, 2016 • 5 min read
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Bermuda is one of the world’s biggest and most successful offshore reinsurance markets, largely as a result of its tax advantages, strong regulatory system and its proximity to the U.S. and Europe.

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But in recent years, many of the island’s reinsurers redomiciled to Europe, amid concerns over Bermuda’s international reputation, regulatory uncertainty and political instability.

The outflux started in 2010, when Flagstone Re redomiciled to Luxembourg and Allied World moved its holding company to Switzerland. The latest, Canopius, followed suit at the end of last year.

Companies are now returning to the island, though, after the announcement in March that the European Union granted it Solvency II equivalence.

Bermuda, along with Switzerland, is the only country that garnered Solvency II equivalence and was designated a “qualified jurisdiction” by the National Association of Insurance Commissioners (NAIC), allowing free cross-border trade with the U.S.

Brad Kading, president and executive director, ABIR

Brad Kading, president and executive director, ABIR

Further evidence of the island’s resurgence is borne out by the fact that 64 new reinsurance companies incorporated in Bermuda last year, according to the Bermuda Monetary Authority (BMA).

Meanwhile, seven of the island’s biggest reinsurers merged or were acquired over the last four years, with more deals expected, according to the Association of Bermuda Insurers and Reinsurers (ABIR).

Bermuda is also firmly established as one of the leading offshore domiciles for captive insurance, as well as an alternative capital market.

“Bermuda was always a leading reinsurance domicile,” said Brad Kading, president and executive director of ABIR. “These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.”

Movers and Shakers

XL Catlin’s proposed move from Ireland back to Bermuda made the biggest headlines this year and will be accomplished in the third quarter, subject to shareholder approval. Bermuda was a stronghold for both companies before their merger. XL moved its main operations there 30 years ago, and Catlin incorporated its holding company in Bermuda in 1999.

XL Catlin’s CEO Mike McGavick said the fit with Bermuda is a natural one, given that a significant part of the company’s business and its largest operating subsidiary are already there.  He cited Solvency II equivalence as the main reason behind the move, adding that it would benefit clients, partners and shareholders alike.

“These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.” — Brad Kading, president and executive director, Association of Bermuda Insurers and Reinsurers

“With the recent determination of full Solvency II equivalence in Bermuda, it has been concluded that the BMA is best situated to serve as XL’s group-wide supervisor and to approve XL’s internal capital model,” McGavick said.

Qatar Re also announced at the end of last year that it would relocate its main operations from Dubai to Bermuda after its merger with parent Qatar Insurance Co.’s Bermuda-domiciled reinsurer Antares Reinsurance.

CEO Gunther Saacke cited Bermuda’s “decades of proven reliability” and said that the move would enable the company to consolidate its capital and move closer to its brokers and clients in the U.S.

Ross Webber, CEO of the Bermuda Business Development Agency (BDA), said the decision by all of these companies to redomicile to Bermuda sent a “very positive message.”

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“No doubt Solvency II equivalence played a big part in all this, but Bermuda’s improving economic outlook and growth in business confidence is also a factor,” he said.

“Our company register is growing across all sectors at present, while consolidation only strengthened the physical presence of companies such as XL Catlin here on the island.

“As a result of all this, we are already seeing companies looking to set up new operations, to merge or to expand their operations here in Bermuda.”

Taking Flight

Webber said that the main reason behind companies leaving Bermuda in the first place was a move from U.S. and European regulators to bring companies back onshore.

Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” he said.

Ross Webber, CEO, Bermuda Business Development Agency

Ross Webber, CEO, Bermuda Business Development Agency

“Some left simply because the CEO and leadership wanted to physically move themselves back onshore, along with the corporate structure that goes along with it.”

David Brown, a retired insurance industry veteran and former CEO of Flagstone Re, which redomiciled from Bermuda six years ago, said there was no single trigger for the exodus.

“I think that people were almost hedging their bets — not knowing if Bermuda was going to get Solvency II equivalence — by moving to jurisdictions in the EU that were considered more likely to succeed,” he said.

“Another factor at the time was the political risk associated with an unsustainable public debt growth, as well as a negative political climate against international business and expat employees generally.”

But he added that since the government started to tackle the debt problem and make the island more welcoming to international business, companies now are taking another look at the island.

Solvency II Equivalence

Gaining Solvency II equivalence means that Bermuda is now better positioned to meet the regulatory standards being redrawn by the International Association of Insurance Supervisors, said Kading,  as well as to provide more capacity for markets like Asia and Oceania.

Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” — Ross Webber, CEO, Bermuda Business Development Agency

“All this means is that the Bermuda Monetary Authority is now recognized as a global group supervisor for targeted insurance groups and reinsurance can be conducted on a cross-border basis without market barriers,” he said.

“For Bermuda insurers, this means an efficient rather than redundant layer of group supervision and for reinsurers, it means cross-border trade without individual jurisdictional restrictions.”

Susan Molineux, senior financial analyst at A.M. Best, who was based on the island for more than a decade, said that achieving Solvency II equivalence was a “big win” for Bermuda.

“Bermuda expended a lot of effort to really explain to Europe what they do and how they do it, and it paid off in the long run,” she said.

The Future

Despite the positives, Bermuda still has a way to go to convince everyone that it is on the rise.

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Saddled with a $2 billion debt after seven years of deep recession, the government is under pressure to rein in costs and to find new revenue sources, mainly through tax collection.

A.M. Best said last year that it maintained a negative outlook for the island’s reinsurance industry. In response to this, the BDA is setting up industry focus groups. It is promoting Bermuda as a domicile in conjunction with ABIR members to attract new business from emerging markets such as Latin America and China.

After years of departures and uncertainty, Bermuda is seemingly restoring its position as a leading reinsurance market. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]
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Sponsored Content: XL Catlin

Think You Don’t Need Environmental Insurance?

The risk of environmental damage is there no matter what business you're in.
By: | September 14, 2016 • 5 min read
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“I don’t work with hazardous materials.”

“My industry isn’t regulated by the EPA.”

“We have an environmental health and safety team, and a response plan in place.”

“We’ve never had an environmental loss.”

“I have coverage through my other general liability and property policies.”

These are the justifications clients most often give insurers for not procuring environmental insurance. For companies outside of sectors with obvious exposure — oil and gas, manufacturing, transportation — the risk of environmental damage may appear marginal and coverage unnecessary.

“Environmental insurance is not like every other insurance,” said Mary Ann Susavidge, Chief Underwriting Officer, Environmental, XL Catlin. “The exposure is unique for every operation and claims don’t happen often, so many businesses view coverage as a discretionary purchase. But the truth is that no one is immune to environmental liability risk.”

Every business needs to be aware of their environmental exposures. To do that, they need a partner with the experience to help them identify exposures and guide them through the remediation claims process after an incident. The environmental team at XL Catlin has been underwriting these risks for 30 years.

“Insureds might not experience this type of claim every day, but our environmental team does,” said Matt O’Malley, President, North America Environmental, XL Catlin. “We’ve seen what can happen if you’re not prepared.”

Susavidge and O’Malley debunked some of the common myths behind decisions to forego environmental coverage:

Myth: My business is not subject to environmental regulations.

Reality: Other regulators and business partners will require some degree of environmental protection.

Regulatory agencies like OSHA are more diligent than ever about indoor air quality and water systems testing after several outbreaks of Legionnaires disease.

“The regulators often set the trends in environmental claims,” Susavidge said. “In the real estate area it started with testing for radon, and now there’s more concern over mold and legionella.”

Multiple hotels have been forced to shut down after testing revealed legionella in their plumbing or cooling systems. In addition to remediation costs, business interruption losses can climb quickly.

For some industries, environmental insurance acts as a critical business enabler because investors require it. Many real estate developers, for example, are moving into urban areas where their clients want to live and work, but vacant lots are scarce. Those still available may be covering up an urban landfill or a brownfield.

“We’re able to provide expertise on those sites and the development risks so the contractor can get comfortable working on it. It’s about allowing our clients to stay relevant in their markets,” O’Malley said. “In this case, the developer is not an insured with a typical environmental exposure. But if there is a contaminant on the worksite, they could inadvertently disperse it. In a high-population urban area, the impact could be large.”

Banks also quite often require the coverage specifically because developers are turning to these locations with higher potential environmental risk.

“Though it’s not a legal requirement, insurance is a facilitator to the deal that developers really can’t operate without,” Susavidge said.

Myth: The small environmental exposure I have would be covered under other polices.

Reality: Environmental losses can result from exposure to off-site events and are excluded by many property and casualty policies.

Environmental risks on adjoining properties can lead to major third party losses. Vapor intrusion under the foundation of one property, for example, can unknowingly underlie the neighboring properties as well. The vapor intrusion can then seep into the surrounding properties, endangering employees and guests.

In other words, your neighbor’s environmental exposure may become your environmental exposure.

O’Malley described a claim in which a petroleum pipeline burst, affecting properties and natural resources 10 miles downstream even though the pipeline was shut off two minutes after the rupture. The energy company that owns the pipeline might have coverage, but what about the other impacted organizations? Many other property policies exclude environmental damage.

Sometimes the exposure is even more unexpected. In 2005, for example, a train carrying tons of chlorine gas crashed into a parked train set sitting in the yard of Avondale Mills — a South Carolina textile plant. The gas permanently damaged plant equipment and forced the operation to shut down.

“It’s not always obvious when you have an environmental exposure,” Susavidge said.

“When there is a big loss or a pattern of losses, the casualty market will typically move to exclude it,” said O’Malley. “And that’s where the environmental team looks for a solution. Environmental coverage has been developed to fill the gaps that other coverages won’t touch.”

Myth: We already have a thorough response plan if there is an incident.

Reality: Properly handling an environmental event requires experience and expertise.

In addition to coverage, risk managers need experience and expertise on their side when navigating environmental claims.

“For many of our clients, their first environmental claim is a very different experience because the claimant is not always a typical third party – it’s a government agency or some other organization that they lack experience with,” Susavidge said. “Our claims team is made up of attorneys that have specific domain experience litigating environmental claims issues.”

Beyond its legal staff, XL Catlin’s claims consulting team and risk engineers come with specialized expertise in environmental issues. 85 to 90 percent of the team members are former environmental engineers and scientists, civil engineers, chemists, and geologists.

“Handling environmental claims requires specialized expertise with contaminants and different types of pollution events,” O’Malley said. “That’s why our 30 years of experience makes a difference.”

Thirty years in the business also means 30 years of loss data.

“That informs us as a carrier how to provide the right types of services for the right clients,” Susavidge said. “It gives us insight into what our insureds are likely to experience and help us determine what support they need.”

Insureds also benefit from the relationships that XL Catlin has built in the industry over those 30 years. When the XL Catlin team is engaged following a covered pollution event, the XL Catlin claims team can deploy seasoned, experienced third party contractors that partner with the insured to address the spill and the potential reputational risk. And they receive guidance on communicating with regulatory bodies and following proper reporting procedures.

“The value of the policy goes beyond the words that are written,” O’Malley said. “It’s the service we provide to help clients get back on their feet, so they can focus on their business rather than the event itself.”

For more information on XL Catlin’s environmental coverage and services, visit http://xlcatlin.com/insurance/insurance-coverage/casualty-insurance.

The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of September 2016.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.




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