Terrorism risk cat bond prevails

The terrorism risk catastrophe bond written by Golden Goal Finance Ltd. To cover the cancellation of the 2006 FIFA World Cup was recently applauded by Risk Management Solutions (RMS).
RMS, a provider of products and services for the management of natural hazard risk, says the bond stayed the tournament without incident, proving to be successful for the risk analysis and the investors.
In 2003 RMS undertook a terrorism risk analysis based on the principles developed for global terrorism risk modeling in order to assist FIFA in transferring the risk of event cancellation to the capital markets.
RMS says it provided Fdration Internationale de Football Association (FIFA), the world football governing body, with an elaborate event tree model of potential terrorism-related pathways to incompletion of the FIFA World Cup.
The principles underlying the probabilistic risk analysis have been well upheld, as demonstrated, RMS notes, by the military security for venues and teams commensurate with such high profile international terrorist targets.
Although the German government provided security for the tournament, RMS says any decision on event cancellation rested solely with FIFA: there was no German government guarantee to investors.
The 2002 FIFA World Cup took place in Korea and Japan within a year of 9/11, and only an insurer of last resort was prepared to provide terrorism cover for the event, according to RMS.
Soon afterwards, FIFA engaged bankers at CSFB to obtain cancellation risk cover for the 2006 FIFA World Cup(tm). The price paid by FIFA for the $260 million issuance of Golden Goal Finance Ltd. was lower than the least expensive insurance option. As the first terrorism catastrophe bond ever issued, the $260 million issue was over-subscribed, and with its success, investors in this new asset class have profited.
“As with natural catastrophe bonds, the existence of this alternative mode of risk transfer acts as a regulator on insurance market price increases,” Dr. Gordon Woo, chief architect for the RMS Terrorism Risk Model, says. “With the success of the first terrorism risk bond, and with continuing uncertainty over the future of TRIA after 2007, further interest in terrorism alternative risk transfer is expected.”