• 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
• 1 The risk of a sporting event being cancelled
• 2 www.isomitigation.com
• 3 www.indiainfoline.com
• 4 Includes re insurance
• This case study was written by CAnanda Prasad under the guidance of N Rajshekar, IBSCDC. It is intended to be used as the basis for
• class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from
• published sources.