Finance, Accounting and Control Case Study

FIFA and Terrorism Insurance

OR

Abstract:
Insurance and reinsurance firms provide financial protection against natural catastrophes like earthquakes, fire, hailstorms, tornados, floods, ice storms; and also man-made catastrophes like terrorist attacks. The increasing magnitude of catastrophe losses led to many insurance and reinsurance firms going bankrupt. For example, the terrorist attack on the World Trade Center (WTC) led to the bankruptcy of many firms. AXA, a French insurance firm backed out of its contract with FIFA, after the WTC incident. As a result, FIFA turned to capital markets for insuring against a risk of cancellation of 2006 World Cup matches. This was the first instance when the terrorism risk was transferred to the capital markets through catastrophe bonds. What are 'catastrophe bonds' all about? Can the capital markets do a better job than insurance industry?

Pedagogical Objectives:

To discuss the implications of FIFA's tapping of the capital markets through catastrophe bonds and the implications therefore for the Insurance companies.

Keywords : Catastrophe bonds (CAT), Terrorism insurance, Risk linked securities, Risk management solutions (RMS), International Trade & World Economy Case Study, Contingent surplus notes, Catastrophe options, Federation Internationale de Football Association, Zero beta, Equity puts, Securitisation, Contingent security, Rish sharing, shafting and shifting, Credit Suisse First Boston, Bankruptcy, Kenneth J Arrow