What AM Best Says
When the Show Can’t Go On
AM Best analysts discuss the ins and outs of event cancellation insurance, a part of the inland marine insurance line, with AMBestTV
From conferences, to concerts, to the Olympic Games, cancellations and postponements have swept across the globe amid COVID-19 outbreaks. With this comes a renewed focus on event cancellation insurance.
Samiksha Gupta, an AM Best Rating Services financial analyst, and Sam Hanig, senior industry analyst, discussed a new AM Best Commentary, Event Insurers May Have to Rethink Their Strategies, with AMBestTV.
Following is an edited version of the transcript.
Who usually buys this type of insurance?
Hanig: First, let's make sure we understand the product. Event insurance is an insurance which helps provide for circumstances where an event needs to be canceled for unexpected reasons, and the insured incurs additional costs because of the cancellation.
These costs can include lost deposits, lost down payments. There might be costs associated with rescheduling the venue, and there might even be marketing costs associated with advertising the rescheduled event. These types of events where event insurance can be purchased are a pretty broad set of personal and commercial gatherings.
In terms of who are the customers, individuals are the customers, and businesses and organizations are the main customers of event insurance. Individuals might seek event insurance for weddings, birthdays, or graduation parties, while businesses and organizations might seek event insurance for events like conferences, conventions, concerts, sporting events, and a lot more.
In terms of covered perils, these are always going to be contract-specific, but in general, covered perils include events like snowstorms or unexpected floods, but it can also include perils like terrorism, war, a key speaker may be unable to attend, or the venue may become unavailable.
Do we have any idea of how much event cancellation premium is written annually?
Hanig: It's difficult to measure exactly industrywide event insurance premiums as they are not captured distinctly in our annual statements. Instead, they're grouped with other coverages as part of the inland marine line of business. While we might not have a sense for an exact annual premium volume, we do have some sense for how much a policy may cost.
We know small events at small venues can cost between $500 and $1,500 and can be written for about $0.90 for every $100 of limit purchase. Prices are always going to vary commensurate with risk. If an event covers multiple days, has a large number of guests, the prices are going to be a lot greater.
Prices also depend on coverage. If a coverage is offered for reduced attendance, includes liquor liability, or also includes marketing expenses for the event rescheduling, this will also bump up the price for the insured.
Prices are going to be dependent on covered versus excluded perils. An all-risk policy is going to be more expensive than a policy with many exclusions.
How is communicable disease treated on these policies, and do you expect that to change in the future?
Gupta: Event cancellation coverage is generally not an imperiled coverage, therefore, anything that is beyond the control of the insured is covered, unless specified otherwise.
Communicable diseases is usually an optional coverage, but in most cases of large events, it is bought by the insureds, and how pandemic diseases will be treated on the policies is generally dependent on the contract language and its interpretation.
Generally, a lot of the insurance carriers pay 70% to 80% of policy limits for a full cancellation, and about 20% to 50% of the limit for a rescheduled event.
This is because an event cancellation policy is written on a net ascertained loss basis, that is losses adjusted for recoveries and expenses not incurred. If an event is postponed, the primary loss is mostly the extra expenses incurred to postpone the event.
Of course, now we expect all of this to change, because insurer awareness of communicable diseases increased following the 2003 outbreak of SARS, after which insurance contracts began to list pandemic exclusions, with SARS specifically named as an exclusion.
With another outbreak and pandemic outbreak within a span of 20 years, a lot of the insurers are already looking at moving to a complete communicable disease exclusion going forward.
To what extent can losses on this line of business impact the carriers that write it?
Gupta: It's too early. It's too early for the market to assess the likely quantum of insurance losses from COVID-19, but early indications show that virus-related loss exposures from event cancellations should be manageable for insurers and reinsurers given the relatively small size of this line and the use of policy limits, sub-limits, and exclusions.
As opposed to some other impacted lines of business like business interruption, D&O, workers' comp, or losses on assets. For example, the world's biggest event this year was undoubtedly the Tokyo Olympics, with anticipated coverage of approximately $2 billion, but the postponement reduced the insurance exposure to much less than it would have been if the event were canceled.
Reinsurers including Swiss Re and Munich Re, which have greater market share of event management and cancellation covers are expected to be impacted more than others.
