COVID-19’s Impact on Event Cancelation Insurance

I recently discussed a paradigm shift I see coming in the travel industry and auto insurance. While these impacts are really about the underlying shift in demand for the industries those coverages protect, another line of business will both an underlying, indirect demand impact and a direct demand impact. That line is Event Cancelation insurance.

What is Event Cancelation Insurance?

For those unfamiliar with it, Event Cancelation and similar Contingency products step in when an event is canceled (as the name implies) because of weather, illness or death of a performer (remember the news around a concert Michael Jackson was to headline after he died, and the question of whether it was suicide and if that nullified coverage? Or when the NYC Marathon was canceled due to Hurricane Sandy?), or many other covered perils. The coverage can pay for contracted services that can’t be canceled and thus must be paid for (e.g., food vendors, venue fees, etc), and can be used to refund ticket purchasers.

And, like any policy, there are exclusions. This could include pandemics, though some policies will also explicitly provide coverage for it.

You aren’t hearing a lot about it in the news since much of the event costs that normally would still have to be paid even if the event doesn’t go on are being avoided through force majeure clauses in contracts that give an out for situations like COVID-19 (which can then create a business interruption claim for the venue who loses the event that was canceled and got no revenue because of force majeure, for example).

In-Person Event Production Economics

Like my discussion about demand for Travel products and services, and the subsequent knock-on effect on demand for insurance for those providing such products and services, I think the Event industry will face a similar situation.

And, of course, the two overlap quite a bit since a events make up a healthy chunk of Travel industry revenues (e.g. hotel bookings, flights, catering). For example, while Las Vegas is known for its gaming and certainly does a lot of business from that core activity (especially on weekends), the city and casinos thrive on the mid-week conference business that can adds tens of thousands of visitors each day. If you have ever been to ITC, you know exactly what I mean as the MGM Grand is awash in insurance, tech and finance industry people networking, eating, drinking, gambling and partying.

In the past, events – especially business events – were held in person. Perhaps webinars or self-help events were held virtually, but the overwhelming majority of business events (whether for corporate or industry/trade group meetings) and cause-themed events (e.g., charity fundraiser galas, annual meetings, honorings, etc.) happen in person.

Until they couldn’t.

When COVID-19 closed the country down, event organizers were left with three choices – cancel, postpone or go virtual.

Canceling may be the right choice for some organizations. Or it may be more appropriate to push the event out, as many have done (and are hoping they can still hold the event on its new date).

But others are realizing they have the ability to hold the event virtually. It won’t be the same, but that does not necessarily mean it is not valuable or worth holding. You lose the in-person networking, but perhaps you gain other things, like increased likelihood that people watch the content because it’s all on demand. Or, better yet, many are finding that registrations for the events are going up – in some cases dramatically – when travel costs and logistics are removed from the situation.

Some events even reduced or eliminated their registration fees, further increasing registration numbers. While this may sound financially foolish, the economics of producing a virtual event may allow for free attendance.

Let’s look at this a bit more. If you host the event in person with, say, 1,000 people who you charge $2,000 each to attend, you have to secure a large venue, guarantee hotel room nights to the venue, cater the event (which means two to three meals a day plus coffee and snack/drink service, and likely an open bar happy hour or two). You need signage, AV and IT equipment on site, and more. And you need people to make that equipment work, so that likely means contracting with an AV or event production company to run all the mics, speakers, lighting, etc.

You also need to have staff on site, which adds travel costs on top of wages, and at that scale, you likely need a small army. One event I attended last year that fit these numbers (1,000 people and ~$2,000 registration fee) had at least 35 people on site). ITC probably had a couple hundred people for their 10,000 attendees, plus plenty of staff from the MGM Grande.

If you have not put on an event or meeting at a hotel, you may not know how expensive it is. Coffee service, for example, is billed per-head, and the cheapest options are often $20 each. Renting a projector and screen can cost several times what the equipment costs (I know because I bought a projector and 10-foot screen for 1/3 the cost of the rental), and that’s before also getting a small table for the projector, a power outlet, and an extension chord so you can reach the outlet – all of which cost extra.

Needless to say, the cost of putting on an event is huge. For that event I mentioned above, assuming they had some number of attendees who were comped (like speakers, who normally don’t pay to attend), and some who got free registration as part of a sponsorship package (my company, who was exhibiting, got three free passes), they probably took in $1.5 million in attendee fees. After their costs, they probably broke even, or possibly eked out a small profit.

The profit for the event really comes from sponsorship. To put in such a large effort, the return from sponsors must be meaningful, or it wouldn’t make sense to be in this business. Some of the sponsorship packages were very expensive, but got you great opportunities, like private meals with C-Suite decision makes in attendance, keynote speaking slots, exclusive branding of research materials and white papers, or marquee placement on banners and event advertising to really drive brand awareness.

Some of these things are hard to do in anything but an in-person setting (like the private meals), and some of them can be done, but the perceived marketing value to the sponsor is lower. In-person is definitely more valuable to sponsors.

Virtual Event Economics

Now, let’s look at what it means to do it virtually. None of the venue costs, including food, beverages and equipment are incurred. None of the staff travel costs, or supplemental staffing costs needed to corral so many people are needed.

You still have marketing costs. You still have IT costs, but they are likely to be much smaller. You have platform costs for Zoom or whatever tools you use to actually host the event. Even at its most expensive, this would still be minimal. Zoom’s webinar/event solution, when set for 5 hosts and 10,000 attendees, is under $6,500 for a month (which you wouldn’t need more than since you can just sign up to run the event and cancel once it’s over).

While we talked about breaking even or being slightly ahead on registration fees for an in-person event (meaning the costs are likely somewhere north of $1 million), here, we are looking at high-five-figure to low-six-figure costs, including labor, marketing, etc.

While you may not be able to garner the same sponsorship revenue, the bar is so much lower to be profitable, that even 1/10th the sponsorship income could still give a 100%-or-better ROI.

While the ROI is strong, the dollars are smaller, but you can run virtual events more frequently than in-person events, and you may be able to do so with a leaner team. You also will save on your insurance costs since you are removing a huge liability exposure by not hosting people at your event. You save on permits, too, as I learned last minute when hosting a charity event years ago when I had to scramble to get a permit and insurance at the last minute or risk losing the venue and getting shut down by the local police (rookie mistake).

Net Impact on Event Demand

While every event will not be canceled or go virtual in perpetuity, there is no question that a shift has occurred. Event organizers who would never have thought of going virtual had to do so, and realized that it works as a model. This mandate to be virtual or have no event will continue for some time as most states and countries will continue to limit the number of people who can gather in large groups for some time still, and many would-be-attendees remain apprehensive, driving down in-person attendance forecasts.

The more event organizers do these events virtually, the better they get at it. And the more their audiences attend virtually, the more comfortable they will get with it (and will likely appreciate not having to deal with the travel).

And the more these events are done this way, the better the tools get to do them. Zoom alone has improved its features and reliability in the past few months, while new virtual conference tools have been coming to market in a steady stream. Many of these newer tools are expressly built to try to create new networking and interactive solutions to make up for not being in person.

What this means is that at least some portion of the Event industry will shift to being virtual. None may be virtual in their entirety with every event, but any shift will reduce the demand for all the providers and services mentioned above. Which means the economic size of the Event industry will likely shrink (beyond the expected contraction from the recession).

Net Effect on Event Cancelation Insurance

This reduction in size of the industry alone would drive down premium in the space since revenue is a key ratable in Event Cancelation insurance. But the main driver of reduced premium is the contraction in exposure because of all the costs that are no longer being incurred. And if events shift to no-cost registration, one of the primary drivers of loss cost is taken out of the equation. Even if the fees are simply reduced, that shrinks potential severity.

While that all seems clear, what I think is a bigger open question is whether the impetus to buy event cancelation cover is non-existent with virtual events. Since so much of the costs can be shifted to a new date or simply avoided (don’t register for Zoom or other tools until the event is very close) with few penalties or contract-breaking fees (since you likely have no contracts), the risk to an event organizer for moving or canceling a virtual event is perhaps too small to warrant even buying coverage in the first place.

There is a similarly unclear counter-pressure here. One thing the pandemic did was raise awareness for coverage like Event Cancelation (and Business Interruption), and specifically to ensure there is no pandemic exclusion. For those events that do happen in person, I think the likelihood that they purchase coverage, and are willing to pay extra for pandemic coverage (at a time when carriers are likely pushing to explicitly exclude it, thus making coverage even more expensive) is going up.

I’m always amazed when I hear from event organizers that they did not purchase Event Cancelation insurance (usually, their response isn’t to say they didn’t buy it, but, perhaps more concerning, they ask “What’s Event Cancelation insurance?”). This might be a catalyst for changing that awareness and willingness to purchase. It certainly gives agents and brokers an easier path to raising the idea of the coverage, and should lower the friction to making the sale.

On balance, I think the reasons for reduced demand will outweigh the increase that may come from awareness for those holding in-person events. The line of business may be more profitable as event organizers may be more thoughtful in their contracts and other decisions they make that drive exposure to a cancelation loss. At the same time, there will likely be a rate hardening as pandemic coverage is carved out and explicitly rated for at higher factors.

This post is inspired by the upcoming book, The Future of Insurance: from Disruption to Evolution, coming out June 24th, 2020 at Connected Claims USA (which is not virtual and free, as discussed above), written by Bryan Falchuk and published by The Insurance Nerds.

Sign up for updates on the book’s release today.