FIFA and Terrorism Insurance. Article ID 104-021-1 from IBSCDC org
" The catastrophe bond market has emerged as a complement of the capacity available from the reinsurance market "
Christoper McGhee, Managing Director Marsh & Mclennan Securities Corporation
Introduction
Earthquake, fire, hailstorm, tornado, flood, ice storm; and now terrorism is the latest addition to the portfolio of risks covered by the capital markets. Fédération Internationale de Football Association (FIFA), Credit Suisse First Boston
(CSFB) and Risk Management Solutions (RMS) are credited with this innovation.
AXA, a French insurer, backed out of insuring the 2002 FIFAWorld Cup following the September 11th 2001 (9/11)
attack on World Trade Center and the Pentagon. Eventually, Berkshire Hathaway stepped in and insured the event,
which took place without any untoward incident. Its experience with AXA caused FIFA to look at other alternatives to
addressing the cancellation risk for the 2006 World Cup event in Germany. FIFA hired investment bank CSFB to
transfer the risk to the capital markets. CSFB in turn hired RMS to model the risk and structure the deal. The deal,
completed in September 2003, involved fifteen investors and a limit of $260 million. The investors assume the risk of
cancellation of the 2006 World cup for any reason other than certain specified events, such as world war or boycott.
This contract is the first ever involving the transfer of event risk1 and the first to transfer the risk of man-made catastrophe
as well as natural catastrophe to the capital markets.
Traditionally, insurers and reinsurers assumed the risk for these catastrophes, in return for the premium they
charged. But, Hurricane Hugo in 1989, Hurricane Andrew in 1992, and the Northridge earthquake in 1994 – the three
most costly catastrophes in U.S. history – highlighted the vulnerability of the Insurance industry to such events2
(Annexure1). Bankruptcy of many firms was related to payment of claims related to such rare events (Annexure 2).
Only governments and capital markets possess the capacity to withstand such events. But, governments the world
over seemto be reluctant to share the risk. However, innovative financial engineers have developed ways of securitizing
catastrophe risk to attract additional capital from investors. The principal forms of securitization include catastrophe or
“act of God” bonds, contingent surplus notes, exchange-traded catastrophe options, and catastrophe equity’puts’.
Though Catastrophe bonds (CAT) came into existence in 19943 , the market for CAT actually took off when Merrill
Lynch & Co launched a $477 million bond for the United States Automobile Association in 1997.
While insurance4 is a risk distribution innovation, securitization of catastrophe risk is a product innovation. As an
alternative to insurance, CAT bond market was expected to grow and garner substantial portion of insurance market.
However, this did not happen till 9/11, due to cost-benefit competitiveness of insurance products and lack of awareness.
Though CAT bondmarket picked up after 9/11, its very existence is questioned on two fronts: ethical and effectiveness.
FIFA and Terrorism Insurance
“ The catastrophe bond market has emerged as a complement to the capacity available from the reinsurance
market”
– Christopher McGhee, Managing Director Marsh & McLennan Securities Corporation
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