As we reflect back on this year’s World Cup, which wrapped up without interruption after Germany’s victory on Sunday, it is clear that FIFA’s financial position is much stronger now than in 2006, due in part to the availability of terrorism insurance.
Eleven years ago, the global elite of the soccer world learned about innovative RMS risk analysis to help FIFA to prepare for the 2006 World Cup in Germany. Sponsorship money was essential for FIFA’s cash flow and sponsors insisted on having insurance coverage against event cancellation. After 9/11, terrorism insurance became a necessity, but was available only through Warren Buffet, the astute insurer of last resort, and was extremely expensive. So, FIFA pursued alternative risk transfer to the capital markets through a catastrophe bond.
FIFA’s bankers at Credit Suisse turned to RMS to do what had been thought impossible – to get a terrorism risk securitization rated. It took multiple RMS meetings with Moody’s in London and New York over the course of a year to present and discuss the unique terrorism risk analysis and eventually secure an investment grade rating for Golden Goal Finance Ltd. This $260 million deal remains to this day the only stand-alone securitization of terrorism risk. Prospects for further terrorism risk securitizations depend on the scope of the U.S. Terrorism Risk Insurance Act, which will be renewed at the end of 2014 with some further incremental reduction in the role of the federal government, but RMS was instrumental in instituting the precursors to these prospects.
Securitization of the cancellation risk of the 2006 World Cup was feasible in part due to the national importance of the event, which received extensive counter-terrorism protection.
While cancellation was still the biggest risk this year, the predominant local threat to the World Cup was disruption by public protest and riot. Following the start of the Arab Spring in 2011, there has been a surge of demand for international riot insurance, with a commensurate interest in riot analysis. As with terrorism, security is particularly crucial for the control of riot risk. With 170,000 Brazilian security personnel on duty for the month of the soccer tournament, insurers were able to enjoy the matches without concern that the July 13 final in Rio would be delayed.
While terrorism insurance is more widely available than in the past, it is still in short supply. Expanding modeling capabilities and increased demand for products such as terrorism and riot insurance will result in more insurance-linked securities (ILS) transactions such as the 2006 catastrophe bond, and ultimately promote a more resilient society.