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sochi 2014

The largest buyers of cancellation insurance include global television companies, which pay for the right to broadcast the Olympics to billions of fans.MIKE BLAKE/Reuters

Insuring the Olympic games against catastrophe has become a herculean – but lucrative – task for a select group of the world's largest insurance and reinsurance companies.

As more event organizers, sponsors and other stakeholders seek financial protection against potential lost income, the financial stakes for global insurance giants such as Munich Re Group and Swiss Reinsurance Co. have become correspondingly larger. And so far, profits have followed.

One of their biggest customers is the International Olympic Committee, which has $500-million (U.S.) in coverage for the Sochi Winter Games spread among various insurers. That is the same amount of coverage that the IOC purchased for Vancouver's Games in 2010 – but three times the coverage it sought in Athens a decade ago.

"The income generation that the Games produce is greater and greater as time goes on," said Tom Phillipson, head of special risks at Swiss Re, a company with more than $100-million in exposure to the Games. "Organizers are more intent than ever to transfer some of that risk into the insurance market."

An outright cancellation of the Olympics could have an estimated economic impact in excess of $5-billion, said Andrew Duxbury, event cancellation insurance expert at Munich Re, which has been involved in Olympic insurance since the Munich Olympic Games in 1972. The company is now one of the largest insurers involved in the Games, with about $300-million of exposure to the games in Sochi.

The largest buyers of cancellation insurance include global television companies, which pay dearly for the right to broadcast the Olympics to billions of fans. The organizers of Olympic events, and those with plans to build stadiums and accommodations, also spend heavily for coverage. These clients begin seeking insurance up to six years ahead of an Olympics. Later, local sponsors, hotels and even souvenir shops search for smaller insurance policies to cover their own Olympic investments.

Purchasing cancellation insurance entitles the buyer to financial compensation should the Games, or individual events, be interrupted, abandoned or cancelled. An earthquake, hail or windstorms could trigger a payout, as could civil unrest, a collapsed stadium, an outbreak of communicable disease or a terrorist attack.

The underwriting process has become more challenging in recent years. Extreme weather is increasing in frequency and severity, there are more countries involved and political unrest has also been of rising concern.

Cancellation coverage can typically be purchased for single-digit percentage rates – less than $10-million for $100-million of coverage, according to Mr. Duxbury of Munich Re. To the best of his knowledge, his employer has never had to pay a cancellation loss claim in the decades it has provided Olympics insurance.

Providing multimillion-dollar coverage to insure large events is a business limited to only a few firms, he said. Large clients and brokers look for insurers with experience, a good credit rating, and the capacity to underwrite the coverage years in advance.

The giant companies that dominate the business do lots of due diligence before writing a policy. Swiss Re, for instance, most recently sent a delegation to Sochi more than a year ago to watch test events and check on such things as electricity supply and crowd-control methods.

Insurers of the Sochi Games have had to pay special attention to the risk of terrorist attacks. The firms say they gained valuable experience in assessing the potential danger from the Summer Games in London, where there were warnings of waves of terror attacks.

"In Sochi you've got the border with Chechnya and Georgia," said Mr. Phillipson. "But this is one of the most high-profile events in the world, so it will attract attention of that nature. We just have to factor that in."

So far both Munich Re and Swiss Re are confident that event organizers in Sochi are doing a good job in controlling threats, in part because of the enormous pressure the host country feels to defend Russia's reputation in the eyes of the world.

"The more worried they are, the more likely they are to get things right," Mr. Phillipson said.

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