Event cancellation cat bond
An insurance-linked security that transfers to investors the risk that a major event is canceled with no possible postponement, following a natural catastrophe or a terrorist attack.
The organizer of a global event commits enormous revenue to a single date: broadcasting rights, sponsorship, ticketing. Conventional cancellation insurance covers that risk, but its capacity contracts sharply after a large loss, and an amount of several hundred million exceeds what a handful of insurers will carry on a single event. The event cancellation cat bond transfers that risk to capital markets: a vehicle issues notes, places the proceeds in collateral and pays them to the organizer if the event is canceled for a defined cause and cannot be rescheduled within the set window. Investors get a risk with little correlation to financial markets, and the organizer gets fully collateralized capacity, hence no counterparty risk. The hard part is drafting the causes, since terrorism, war and epidemics are not excluded or included the same way.
In 2003, FIFA had Golden Goal Finance Ltd, arranged with Credit Suisse First Boston, issue 260 million dollars of notes protecting it against cancellation of the 2006 World Cup in Germany, including after a natural catastrophe or a terrorist attack, if the tournament could not be rescheduled. The tournament took place and investors were repaid.
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