Insight: Coverage Crisis: Raining on the Parade?

Every insurance crisis needs a cause clbre and the latest candidate seems to be the cancellation of the London Air and Balloon Show. The announcement in early May that the event will be scrapped is a bellwether of changing insurance market conditions – lack of capacity, massive increases for certain risks, demands for higher liability limits and what some call knee-jerk underwriting decisions.

The demise of the popular event in southwestern Ontario, which was scheduled for June 28-30, garnered widespread media attention and signaled challenges that special event organizers face across the country, and around the world. Whether it is global sporting events like FIFA’s upcoming World Cup in Korea and Japan, or smaller festivals in Canadian cities, the stories are similar – abrupt coverage cancellations, a search for alternate markets, huge rate jumps and a race to meet submission deadlines.

Several show and festival sponsors say nervous insurers are singling them out for unwarranted premium increases and high limits. The approach from insurers to certain activities defies common sense and represents an overreaction, say the organizers.

HARD HIT

Two areas hit particularly hard in Canada are air shows and street festivals. Canadian airports that act as host facilities for air shows are requiring organizers to pay premiums for general liability and war/terrorism coverage (air shows were previously included on airport policies). Premium quotes for the required $78 million in coverage are more than $100,000 – a ten-fold increase from past air show insurance costs. In addition to the London example, air shows in Leamington, Ontario and Moose Jaw, Saskatchewan were recently cancelled, although the reasons are not entirely clear. “Insurance companies and airports have unilaterally, and with no threat assessment, determined there is a considerable threat [to air shows],” says John Cudahy, president of the International Council of Air Shows. “These new requirements were based on unsubstantiated assumptions about the relative exposure that air shows represent. The Saskatoon Air Show is required to carry $78 million in war and terrorism coverage. Surely, in all of North America, there are few locations with as low a threat as Saskatoon. Airport managers and insurance executives are paid to be cautious, but this is ridiculous.”

Pride Toronto, which organizes a week-long list of festivities for the gay community culminating in the annual Gay Pride parade, saw its insurance cancelled earlier this year. When festival organizers sought new markets, they got quotes ranging from 700% to 10,000% above last year’s cost, according to Pride Toronto’s Kyle Knoeck. “This came as a shock and it is a bad sign for organizers of events later this summer,” says Knoeck, who is co-chair of the not-for-profit event set to run June 24-30. “We are looking at one quote that we can accommodate in our budget and we will go ahead with the festival. But it means shifting money away from community sponsorships and things like access for people with disabilities.”

WHAT NEXT?

“Some say air shows and festivals are just the tip of the iceberg when it comes to availability and pricing of insurance coverage. Auto racing is another important area where capacity has shrunk, or vanished, and rates have substantially increased. With the recent pullback of K&K Insurance, one of the main players in sports and entertainment events, from the Canadian market, many motor sports associations, racetracks and event organizers, such as the Molson Indy and Montreal Grand Prix, suddenly found themselves with no insurance.

“The air shows have received a lot of attention, but motor sports generate billions of dollars for the economy,” says Kevin Besta, a partner in the motor sports division of Toronto-based Jones Brown Insurance Brokers and Consultants, which opened a facility with a Lloyd’s syndicate to write this business effective May 3. “When K&K stopped writing business March 31, many racetracks were without insurance and faced event cancellations and staff layoffs. Some are still scrambling for coverage.”

Insurers point out that the “post 9/11 world” is a different place for many clients seeking to renew coverage. Significant price increases in select areas of business reflect changes in exposure, capacity and reinsurance. Even still, underwriters are trying to keep premiums at reasonable levels, according to David Eastaugh, president of Elliott Special Risks Ltd. He says the majority of special events his firm writes, which does not include aviation risks, are renewing with rate increases from 25% to 50%. “Several of the comments I have seen on this issue are incendiary,” says Eastaugh. “You would assume that premiums are going through the roof and there is no coverage available for any event. I think that is misleading. There are unique cases where the premiums have gone up significantly, but I think these are the exception rather than the rule.”

REAL CRISIS?

Complaints from event organizers also fail to take into account that high insurance costs can be passed along to a wider base through increased ticket or participation fees, according to some in the insurance industry.

Conrad Speirs, president of Sports-Can Insurance Consultants Ltd., says he has seen several huge rate increases, citing a recent hockey tournament designed to showcase amateur talent for pro scouts. “The quote went from $5,898 last year to $35,100 this year with the same $5 million liability limit – a big increase of around 600%. But it is contact hockey and if you spread it among all the players, you are looking at an extra $24 per person. If the tournament were important enough, it would have gone ahead. It’s up to them to decide.” Speirs says.

Even Cudahy acknowledges that the air shows in Leamington and Moose Jaw may have been cancelled due to perceptions of insurance problems or for other reasons. “We have enough problems with insurance, we don’t need to start blaming everything on it.” So, the question emerges – is there really an insurance liability crisis in Canada? The answer depends on how you define the term “crisis” and whom you talk to.

SIGNS OF CRISIS

An insurance crisis typically involves changing perceptions of risk by underwriters, a substantial withdrawal of capacity and significant rate increases across several lines of business. In Canada, there have been distinct signs of each. “It is not that the risk itself changes,” says Eastaugh. “You can ask the question whether the London Air Show in 2002 is really any riskier than the 2001 version, but the point is there is an increased perception of risk.”

Ray Willie, president of Vancouver-based MGA Special Risk Insurance Brokers Ltd., says underwriters in the London market are particularly concerned about the potential of future terrorist attacks. “As devastating as the September 11 hijackings were, they were only one example. The UK has been dealing with IRA terrorists for years and has suffered from multiple events. I think underwriters are looking at when and where the next one may happen. That is what they are paid to do.”

Event organizers also seem reluctant to discuss the new risk environment on the record. Several phone calls into special event coordinators in Canadian cities were not returned. One private promoter in Toronto likened the current renewal process to “being in a lawsuit. You don’t want to give someone the impression that you are doing business in certain areas or you will be put on trial.”

Several insurance markets in Canada have pulled back significantly from underwriting certain areas. K&K’s decision to stop writing business in Canada came after its only market, TIG Insurance Group, was downgraded by AM. Best last November. This triggered a series of negotiations that ultimately resulted in the two players going their separate ways, according to K&K vice president, Tom Butler.

Canadian MGAs familiar with the London market, such as Ray Willie, say some Lloyd’s syndicates have also stopped writing event coverage in Canada. And standard carriers have little appetite for speci
al events. “A lot of insurers are cutting the high hazard liability stuff,” Willie says. “The reason is that cashflow underwriting no longer works in today’s investment environment. Insurers have to strengthen their reserves and one way to do that is to cut back on growth and get rid of the bad stuff in their current business. That is not what they tell brokers when they get canned, but it’s the main reason why.”

Several brokers and MGAs say it is virtually impossible to find markets for certain risks, such as aviation (even relatively low risks, such as gliders), adventure tour operators, amusement centers, marinas and dealerships, night clubs and one-off festivals, especially if alcohol is served.

Gary McMillan, CEO in Canada for AIG, says “it is the one-off events that are hard to handle and here the premium increases are high. I don’t want to blame it on the reinsurers, but the fact is that many of these special events typically represent a high concentration of people in one place and could represent a higher risk of terrorism. That is exactly what reinsurers have been pulling away from. So that leaves the pricing to the underwriter. And it’s the same old story. If nothing happens, the event was overpriced, if something bad happens, the event was under-priced.”

CAPITAL AVAILABILITY

McMillan adds that although some observers point out there is still plentiful capital in the industry, “much of it is inactive capital. Companies are asking themselves why they should put more money at risk if they have already been hit.”

The concern around capacity for special events seems particularly high at the moment, as the busy festival season begins this summer. Jim Stirling, an associate vice president with the Montreal-based brokerage B.F. Lorenzetti & Associates Inc., says his firm faces an extremely difficult time finding carriers for special events in the current marketplace. “I don’t think it has hit a crisis yet, but it is moving in that direction,” Stirling says. “Unless some players in the industry step forward with solutions, I don’t see how things are going to get better.”

CYCLE AT WORK

Some observers argue that the term “crisis” does not fairly represent the current situation in liability insurance in Canada. Eastaugh says insurer rate increases are warranted and based on real trends in loss experience, such as higher liability awards from Canadian courts. “The fact is that these events have not been huge money makers for our markets, so reasonable premium increases are justified. Sports and recreation events are subject to increasing claims costs, as well as the trend to more legal activity. There are also clearly classes where the perception of risk is so high that the premium increase is huge, such as aviation risks.”

Even perceptions of risk may be based on misunderstanding, according to Cudahy. He notes that a consortium of seven airports – Edmonton, London, Ottawa, Montreal, Saskatoon, Vancouver and Winnipeg – belong to a liability pool and originally excluded air shows from their coverage in the hopes of premium savings. Cudahy says there is now evidence that excluding air shows will result in no premium reductions for airports. “We are still looking at two or three air shows that might be affected as opposed to 21, and we are quite positive we can resolve this issue with the airports,” say Cudahy. “Many of the larger events, such as the Canadian International Air Show at the CNE in Toronto, have already confirmed that they will go ahead.”

In terms of festivals, parades and theme events, Speirs says the premium increases he has seen on initial quotes are large, but have leveled off with additional information provided by brokers and clients. “Underwriters have to look at the fact that there are often parades, beer tents, street dancing – the exposures become greater.” Furthermore, he notes that liquor liability in particular is currently a huge issue in the Ontario and B.C. markets.

Although the withdrawal of markets such as K&K Insurance has caused market disruption, Speirs says you have to look at the individual situation and not generalize. “TIG lost more than $450 million in 2001 and one-third of that was K&K business. I think the problem was poor underwriting more than anything else.”

Speirs says he is quite bullish on the availability of insurance markets and the growth of Sports-Can Insurance. “I know brokers have seen shrinking markets but we haven’t had any problems. Our portfolio is very profitable. We have written business through ING Canada, and Lombard Canada and Sovereign General have shown a distinct interest.”

Other markets are filling in to meet demand. Kevin Besta of Jones Brown Insurance Brokers says the brokerage’s new motor sports facility has bound 75 racetracks so far across Canada and is taking submissions “as fast as we can. We are a market for this area and we want to entertain these risks.”

SIZE MATTERS

While some festivals have been hit with massive rate increases, risk managers for other high-profile events, such as the Calgary Stampede set for July 5-14, say market conditions are challenging, but not a crisis. Indeed, it is the larger events, with higher self-retentions, track records of loss experience and more sophisticated risk management, that stand a chance of coming through the current market reasonably well.

“The Calgary Stampede has its insurance in place for this year, and while renewals have been more difficult, we have not lost any of our required coverage,” says Curtis Emery, the event’s risk manager. “Although others may have experienced major increases, the Stampede has not.”

There is similarly little concern that other major events, such as the CNE in Toronto, PNE in Vancouver, Winter Carnival in Quebec or Winterlude in Ottawa, face cancellation risks. “Insurance premium increases for liability coverage is an issue on our radar screen and we are watching it closely, but I am not aware of any tourism events that have cancelled due to higher rates,” says Randy Williams, president of the Tourism Industry Association of Canada.

The situation is similar in the U.S., where convention and visitors bureaus in cities across America are reporting few event cancellations, even after 9/11. “There’s a serious disconnect between reality and what the mainstream media is reporting when it comes to the hospitality industry and event cancellations,” says Steven Hacker, president of the International Association of Exhibition Management. “The negative news out there just feeds on itself.”

Instead of fixating on rising premiums, some insurers counsel event organizers to get their submissions in early – and complete. “That is my main message: get all your information together, especially on loss experience and even potential areas of claims and exposures,” says Stirling. “Underwriters are swamped and will not look at a submission unless it is complete.”

Others say clients should focus on loss prevention, inspections, safety and security, and be able to prove they have programs in place to mitigate losses. If all else fails, some events may have to be cancelled, which Eastaugh says is a reality of the hard insurance environment. “Some of these events have been cancelled before for one year and then come back. It is not like a business whose earnings are affected. Some of these festivals can simply be cut for a year,” he adds.

“Insurance companies know they are the only players in town on some of these special risks,” observes Stirling. “They can charge whatever they want. After many years of getting beat up on prices in a competitive market, they are trying to get some back. That is how our business works.”