Major international sporting events are emerging as a potential market for alternative risk financing products.

Demand among event organizers for capital market solutions is still at an embryonic stage, but interest is growing, driven by the rapidly increasing value paid for broadcast and marketing rights. If all or part of an event is canceled, organizers may have to reimburse those amounts to television stations and other broadcast outlets.

Sports insurance experts note, however, that securitization of sporting risks has not been done before and that traditional insurance markets remain event organizers' first choice for coverage.

But the capital markets are expected eventually to play a larger role in solving the problem of obtaining excess capacity for big-time international sporting events.

The 2000 Olympic Games, to be held in Sydney, Australia, and soccer's next World Cup in 2002, to be jointly hosted by Japan and South Korea, could become test cases for such capital market placements as part of the events' risk financing programs.

Although the broker for the next Olympics is taking a wait-and-see approach, the insurer for the World Cup is actively exploring capital markets financing for natural catastrophe exposures.

Since 1974, insurer Albingia Versicherungs A.G. of Hamburg, Germany, has provided insurance coverage to the Federation Internationale de Football Assn., the governing body of international soccer and organizer and promoter of the World Cup tournament.

Albingia, in conjunction with a range of co-insurers and reinsurers, has always covered FIFA's World Cup cancellation risks through traditional insurance programs. However, Albingia recently announced that it is looking to place some of the risk of future World Cup tournaments with international capital markets (BI, June 22).

The huge increase in the sums insured for the World Cup is driving the move to look beyond traditional insurance, said Juergen Goerling, head of Albingia's sports unit.

FIFA's latest insurance program, arranged by Albingia and German sports broker Himmelseher GmbH of Cologne, includes cancellation insurance of 2.1 billion Swiss francs ($1.4 billion) for the 2002 World Cup in Japan and South Korea, and 2.4 billion Swiss francs ($1.6 billion) for the 2006 World Cup, the host of which has yet to be selected.

Those sums insured are roughly four times the amount of coverage for this year's World Cup, which was held in France. The 1998 World Cup had cancellation coverage of 535 million Swiss francs ($355.8 million) (BI, June 8).

Mr. Goerling said the steep increase in the limits of cancellation insurance is mainly due to the escalating value of broadcast and marketing rights, which FIFA would have to reimburse in the event of a cancellation. The higher limits of the 2002 World Cup also is due to the greater risk of natural disasters, such as earthquakes and tsunami, as well as political unrest in the region.

Of the total 4.5 billion Swiss francs ($3 billion) in cancellation insurance placed for the next two World Cup tournaments, Albingia is looking to place up to 1 billion Swiss francs ($665 million) with capital markets investors by some form of risk securitization.

Mr. Goerling said Albingia is currently in discussions with international investment banks about potential securitization of the World Cup risk, but he would not reveal the names of any banks involved in the discussions.

He said the full details of the 2002 World Cup insurance program, including any securitization, still are being finalized.

Mr. Goerling did note, however, that Albingia's approach is to place as much of the risk as possible in traditional insurance markets before looking to the capital markets for excess capacity.

"The first choice is the insurance market," he said.

Mr. Goerling projected that the 2.1 billion Swiss francs ($1.4 billion) cancellation insurance program for the 2002 World Cup could possibly be structured this way:

* 1.5 billion Swiss francs ($997.5 million) in all-risks cancellation insurance from traditional insurance markets.

* 300 million Swiss francs ($199.5 million) in special-class earthquake insurance from traditional insurance markets.

* 300 million Swiss francs securitized in capital markets to cover natural catastrophes such as earthquakes, volcanoes and tsunami.

Taking into account that securitization of the risks of a major sporting event has not been done before, Mr. Goerling said he believes the capital markets are best suited to assuming the risk of natural catastrophes.

The capital securitization concept usually involves an insurer or reinsurer issuing bonds to financial institutions. Such a bond provides its investors with high returns but allows its issuers to withhold interest payments in the event of a loss.

Mr. Goerling said investment markets increasingly are keen to work in conjunction and, in some cases, compete with the traditional insurance market.

But he said it would be difficult for investment banks to provide the type of protection offered by all-risks coverage. Coverage for such an event as the World Cup includes exposures for political unrest and transportation strikes, as well as property and liability coverages.

A broker for the Olympic Games agreed.

Patrick Vajda, director of sports and events insurance for broker Gras Savoye S.A. in Paris, said the first option for event organizers should be to find as much capacity as possible in traditional insurance markets.

Cancellation insurance is not very expensive in the current market, he noted. Low rates are available, especially if organizers are able to prove they are good risks, he added.

"If you can find capacity (in the insurance market), you should go with that," he said. "But if the exposure is so high, you may have to look at a mixture of insurance and capital solutions."

Mr. Vajda said the rapid increase in the value of television rights for major international sporting events is forcing the organizers of such events, and their insurers and brokers, to look for new risk financing solutions.

Future insurance programs for major sporting events could involve a mixture of traditional insurance and capital securitization, he said.

Gras Savoye was insurance broker and risk consultant for the past five Olympic Games, and it is the broker for the 2000 Summer Olympics in Sydney.

Gras Savoye has always insured the Olympics' risks through placements with the traditional insurance market.

According to Mr. Vajda, the first Olympics with a substantial amount of television rights was the 1976 Montreal Games, which had television rights of $2 million. In comparison, television rights for the 2000 Olympics in Sydney are expected to be about $1 billion.

Such increases are subsequently pushing up the limits of cancellation insurance and, therefore, forcing sporting organizers and their insurance partners to look for excess capacity, Mr. Vajda said.

It is still "too early to say" whether capital market securitization will be used for some of the cancellation coverage for the 2000 Olympics, he said.

Securitization of sporting event risks is still developing and is a "bit secretive," according to Mr. Vajda, noting that not all such placements are publicized.

Nevertheless, he said he believes capital market securitization is a good option for sporting organizers seeking excess capacity.

"I think, in the future, we will be able to find such solutions, especially if organizers of the event have a good reputation," Mr. Vajda said.

The Olympic Games, for example, are a good risk because the security and design of modern stadiums has improved significantly over the years, he said.

"But it is not just a question of exposure to risk," he said. "It is a question of the worldwide capacity for this type of risk. There is not enough capacity for total cancellation."

As a result, he said, the move toward capital securitization "is only a question of capacity."

Mr. Vajda said the need for capacity from the capital markets is only relevant, however, to the largest international sporting events, such as the Olympics, the World Cup and, possibly, the World Track & Field Championships. A major exposition, such as the World Expo, could be another candidate for securitization of risk, he added.

There likely is enough capacity in the traditional insurance marketplace to cover other large sporting events, such as the Tour de France, as well as major concert tours, he said.