Payouts regarding spectators should be limited to losses from ticket sales and hospitality
Japan’s decision to bar spectators from the Tokyo Olympics could cost the global reinsurance sector $300m to $400m, reported Fitch Ratings.
The credit rating agency estimates the total insurance cover for the Olympics to be around $2.5bn, comprising of $1.4bn taken out by the International Olympic Committee and the Tokyo Organising Committee, $800m by broadcasters and $300m by other parties, including sports teams, sponsors and hospitality.
Fitch Ratings predicts that reinsurers will bear most of the losses arising from Olympic-related insurance claims as high severity exposures are typically heavily reinsured.
Reinsurance payouts should be mostly limited to losses from ticket sales and hospitality due to the lack of spectators, the agency added.
Despite this, the total cost of reinsurance losses should not be materially detrimental to firms due to the reserves that reinsurers have already set aside in anticipation of potential losses around the sporting event.
Preventing future loss
Considering how the Covid-19 pandemic has shown that mass cancellations can happen simultaneously due to a single trigger, Fitch Ratings stated that insurers and reinsurers need to factor in correlation and the potential for extra large aggregated losses into reserving decision-making.
In doing so, the industry could improve its assessment of the insurability of risks and, in turn, price more accurately.
Moreover, renewed insurance policies for event cancellation now excludes cover for losses due to communicable diseases such as Covid-19, which Fitch Ratings predicts should shield insurers and reinsurers from further lockdown-related costs.
Nevertheless, event cancellation policies are typically multiyear, so it will take time for existing risk exposures to end.
In terms of how the industry can better prepare for correlated risks, as well as reduce losses, report author and director of insurance at Fitch Ratings Robert Mazzuoli said: “(Re)insurers have started to withdraw communicable disease coverage in event cancellation and business interruption policies as this poses a systemic risk to the industry.
“Public-private partnerships may replace this coverage over time to avoid a heavy social fallout of future pandemics.”