Event Cancellation Insurance
Michael Jackson’s recent untimely death has produced a flurry of articles in the mainstream media. Aside from tributes to the deceased, many of them have focused on what outlays and expenses, if any, for his projected 50 concerts at London’s O2 Arena, can be recouped by the promoter, AEG Live, from insurance coverage.
While high profile rock stars make the headlines, event cancellation coverage isn’t limited to events like Jackson’s concert. “There’s a whole range of event types, from rock concerts, the Football (Soccer) World Cup, to the Olympics, on down to many smaller events,” said Mark Symonds, contingency underwriter for Beazley in London in a telephone interview.
Any scheduled event runs the risk that something will occur that prevents it from going ahead; therefore, anyone organizing an event has to consider the fallout if it doesn’t come off. “Coverage is becoming increasingly high profile,” Symonds said, “as it’s taken on increasing importance for risk managers, who want to protect their revenue streams. It’s a growing field, that’s well established in the U.S., the UK and certain parts of Europe.”
K&K Insurance in Fort Wayne, Ind., a division of Aon, has specialized in event cancellation coverage for more than 50 years. “Concerts are certainly the most often requested event type,” K&K said in response to a series of e-mailed questions. “Other frequent types requesting coverage are sporting events, conferences, tradeshows, and festivals.” Weddings, reunions, graduations, large private parties, political rallies and local charitable events can also obtain coverage.
Symonds noted that most of London’s theatres, which operate on an almost daily basis, have coverage to protect them if the show can’t go on. For K&K this kind of coverage would fall under the “multiple event” category, and, where there is one policy in force, “a breakdown per event, including a limit,” is imposed.
Cover the Cost, or the Potential Profits?
Whatever the event may be, there are essentially two types of coverage: 1) the costs and expenses of putting on the event, and 2) the anticipated profits the event is expected to generate. The first covers the organizer’s out of pocket expenses, such as rentals, promotion costs, fees charged by service providers, etc. The second covers the profits the organizers anticipate they will obtain from the event.
K&K notes that, “coverage can be written on a gross revenue basis or a cost and expense basis. Often organizers anticipating profits insure their expected gross revenue while non-profit ventures insure event costs and expenses only.”
While costs and expenses are fairly straight forward, calculating anticipated revenue is more complicated. “You need to have some ‘revenue history,'” Symonds explained. “To calculate the gross revenues you need the sponsor’s figures.” For example these could be based on payments for television rights, or on the amounts generated by “presold tickets.”
K&K explained that, as the “assured is the policy buyer with a financial interest in the event,” he must “be able to prove what would have been earned had the event taken place (or the costs that were incurred).”
Companies like Beazley and K&K enjoy an added advantage from their experience in the event cancellation field. Beazley has been writing this kind of coverage for more than two decades, exclusively through Lloyd’s of London. Both organizations have long established client lists, and in many cases know the assureds they work with, and can therefore factor in prior knowledge in placing coverage.
That coverage is quite specific. “Contracts are not written to insure financial failure of events from lack of sales due to poor weather, for example,” said K&K. “The coverage is written to protect financial impact from necessity of cancellation, abandonment, postponement, interruption or relocation of an event in whole or in part as a direct result of any cause beyond the control of the organizer, including adverse weather causing a safety concern.”
What Causes Event Failure?
Symonds and K&K both acknowledge that in fact “adverse weather,” is the main cause for the cancellation of an event. “The weather, especially for sporting events, causes the most loss frequency,” said Symonds. “It very much depends on the time of year, the location and the type of sport.” He cited the example of cricket, which must be played, like baseball, under dry conditions, whereas rugby games (the ancestor of U.S. football) go ahead, even if the players are half drowned. “Two years ago [when parts of the UK were hit by severe floods] we had some big losses,” said Symonds.
There are a number of other potential hazards besides bad weather. K&K offers the following list of some of the most common ones: Power failure – Damage to leased or rented venues – Damage to surrounding venues or infrastructure resulting in lack of access – Failure of public transport facilities or denial of access – Natural catastrophe such as earthquake and flood – Non appearance of key individuals – Inability to erect facilities at venue – Disease outbreak (certain exclusions may apply) – Strike risks – Failure of TV broadcast, and notably, “Any other previously unforeseen cause not excluded.”
Symonds pointed out that the attacks on London’s transport system in 2005, which shut down large portions of it, also triggered a lot of claims, as a number of events had to be cancelled. Partially as a result, Beazley now offers coverage “for any terror event.” It comes as an option in addition to the main policy. “It’s much broader than property damage,” said Symonds. It covers situations where “access to an event” has been closed off, either from an actual attack or the threat of one.
It also covers specific threats made against the event itself, which result in its cancellation. “It’s an option a lot of assureds take,” he added.
How are Premiums Determined?
As event cancellation coverage extends across such a variety of potential losses, the premiums charged also vary widely. K&K said the “rates are a percentage of the limit (either gross revenue or costs/expenses). They vary “depending on event type, indoor vs. outdoor, if outdoor – what protection (e.g. stages with roofs and sides vs. open air), coverage inclusive of non-appearance or not, and weather forecast.”
Symonds concurred, indicating that the “premiums are dependent on the risk itself. It really comes down to how much experience the underwriter has.” It’s often been said that underwriting is as much an art form as it is risk analysis. In other words, experienced underwriters “feel” the nature of the risk, as much as they analyze it.
“From our experience with our clients, we know the minimum rate,” said Symonds, referring to the risks involved, which put any given event in peril. Statistical analysis, such as what threats are there from adverse weather, is then employed to calculate the percentage of risk — high, low, or somewhere in between.
In the case where an event is dependent on an individual, such as a concert, an opera or a stage production, there are additional factors to consider. “Non-appearance for artists is underwritten based on the age and known health issues of the individual(s),” K&K explained. “Non-appearance coverage can be tailored to include less covered scenarios if an individual presents particular concerns (e.g., coverage can be written for performer’s death and/or travel delays only, and not inclusive of sickness). Concerts can be written for cancellation only; however, without non-appearance coverage for the artist(s). This would cover adverse weather and other noteworthy exposures like natural catastrophe at the event site.”
Apart from experience, “it very much depends on the individual,” said Symonds. Among other factors, “we would consider their age, for which we can use life actuarial tables.”
How are Losses Calculated?
A “one time only” event that doesn’t take place is usually a total loss. K&K indicated that “more often than not the claims are for total loss where the entire event is cancelled.”
But what about a three-day event that’s rained out on one of the days, or an event that can still be rescheduled? Symonds said: “There’s usually some offset on the losses. It’s unusual that the full policy limits would be reached.” He also explained that there are normally provisions for rescheduling an event, if it has been cancelled. Coverage for this type of loss is normally included in event cancellation policies, “with the additional cost being paid by the insurer.”
How Does it All Work?
While rock concerts and the Olympic Games are relatively rare events, cancellation coverage isn’t that rare at all. Symonds called it a “growth market.” It’s also a very extensive market with lots of opportunities for independent agents — large and small. K&K offers a good example. It writes “the majority” of its “business through independent agents.” As a wholesale broker it offers “coverage for smaller retail operations that may come to us direct, specifically coverage for small events (weddings, reunions, etc.) amateur teams and leagues, vendors, exercise studios, and other risks that would fall into our Mass Merchandising unit. While certain specified programs are available on a direct basis, most of our clients purchase coverage through their local insurance agents or brokers. Producers can work with K&K by simply verifying proper state insurance licensing and providing evidence of E&O coverage. No volume requirements apply.”
K&K, Beazley and a number of other brokers and carriers, place their event cancellation coverage through Lloyd’s brokers. Beazley also writes coverage at Lloyd’s (the company’s U.S. and Bermuda subsidiaries write other specialty lines). K&K benefits from Aon’s extensive and sophisticated communications network, placing most of the risks at Lloyd’s electronically.
“It comes to Beazley through Lloyd’s,” said Symonds, “and in many cases — certainly for the smaller risks — we can cover it ourselves.” In cases involving larger risks, Beazley has agreements in place with other syndicates to take part of the risk, or to assume excess of loss cover. It also has reinsurance treaties in place covering its exposures to event cancellation claims. “How much we retain varies significantly, depending on the risk,” said Symonds.
Those risks are expanding, as evinced by the relatively recent addition of terrorist coverage. Event cancellations come in all forms and sizes.
Symonds pointed out that there’s a growing market in Asia, notably in Hong Kong and Singapore, but it’s also increasing in China. Unless there’s an unlikely decrease in the number of events, the need for cancellation coverage looks set to continue its growth.
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