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London 2012: If the worst happens?

16 August 2011

With less than a year to go until the Olympic Games open next Summer, the organisers are probably experiencing one or two sleepless nights.

If everything goes to plan, we are told that London 2012 will be the greatest show on earth. But what if something goes wrong? The vast risks are being managed in a number of ways, including by insurance.

What are the key risks?

First, there is the possibility that the Olympic Games are cancelled altogether. Unlikely though this might seem, it is not unknown. The Olympic Games were cancelled three times during the time of two World Wars. In 1908, whilst the Games went ahead, they were relocated from Rome to London: the eruption of Vesuvius meant Italian funds had to be diverted to a domestic recovery programme.

Secondly, the Games are vulnerable to disruption. Sporting events are inevitably affected by problems outside the organisers' control, as evidenced by the postponement of the Bahrain Grand Prix earlier this year due to political unrest unrelated to the event. However the Olympics are not just about sport. They represent unity and the coming together of nations. They also have a massive global audience both on television and through other media. As a result, they can become a focal point for attention of the wrong sort. In the past, this has made them the subject of both terrorist attacks (such as in Atlanta in 1996) and politically-motivated boycotts. In Moscow in 1980, for example, 60 countries withdrew their participation in the Olympics in protest at the Soviet Union's invasion of Afghanistan. London is not immune to such disruption. It is still under the shadow of rioting and looting that no-one would have predicted a month ago, and has experienced terrorist bombings in the past – indeed it suffered bomb attacks the day after it won its Olympic bid.

As well as terrorism, the organisers will also have the following on their minds: a public transport melt-down; the collapse of a key building or other construction accident; a natural disaster such as flooding; and an outbreak of disease, such as SARS, swine flu, Ecoli or something still unknown to science.

If any of these risks were to materialise, the upheaval – and cost – would be colossal. The cost of London 2012 is predicted to surpass £10 billion. More than 10,000 athletes are predicted to take part in the Olympics. Already, tickets for most events are sold out. Visitor numbers will rank in the several millions. By any reckoning, the figures involved are immense.

The role of insurance

Insurance is an inevitable and important element of managing these risks. Insurance exists to replace the possibility that an insured will have to bear an uncertain loss with the certainty that, in return for a payment of premium, if an insured risk does occur the insurer will bear an agreed amount of the loss. This is subject always of course to the terms of the insurance contract and principles of insurance law.

The details of the insurance cover that has been bought for the London Olympics are shrouded in secrecy, and there are understood to be strict confidentiality agreements in place with insurers in place to keep it that way. One can therefore only speculate on the amount of cover that has been bought, and at what price. However in Athens in 2004, the International Olympic Committee (IOC) is said to have purchased cancellation insurance to protect against terrorism or other catastrophes for a premium of $170 million. The cost of that cover is surely going to be greater for London 2012. Important questions remain unanswered: what retention does the policy have? How are the exclusions drafted? Would the policy limits truly be enough to cover all losses that would arise?

The IOC's cancellation cover is not the only insurance that is needed. When it comes to delivering Olympic venues, according to the Olympic Delivery Authority's procurement policy, consultants, suppliers and contractors are bearing the burden of employers' liability insurance and professional indemnity cover. Over and above this, the Olympic Delivery Authority has apparently secured site-wide insurance cover for damage to works (Contractors All Risks) and third party liabilities.

Where events are taking place outside the main Olympic venues, additional consideration will have to be given to the insurance, in order to reflect the different risks (such as reduced security and increased interaction between athletes and visitors) and entities (such as local authorities) involved. Add to this the many policies that will have been taken out by broadcasters, advertisers, sponsors, merchandisers and caterers, not forgetting travel insurance that will be taken out by visitors to the Games, and the scale of the cover – and the scale of potential recoveries in the event of cancellation or disruption - becomes clear.

Insurance as a last resort

There are other means of managing risks than insurance.

The threats of terrorism and rioting are to be met with high security in the form of bag searches, security guards, a large police presence and possibly even the involvement of the army. Indeed security alone is likely to account for £1.5 billion of the total costs of the Games. Where construction is involved, careful site management and solid building work will reduce the possibility of accidents. Finally, a transport crisis can be mitigated to some degree by good planning and improved infrastructure. Clearly any call on insurance will be as a last resort.

However as all insurers and insureds know, although one can limit the likelihood of a particular hazard occurring, or limit its degree, risk by its very nature cannot be controlled absolutely. That said, it is to be hoped that the worst of the insurance claims to come out of the London Olympic Games will be for weather delays caused by too much rain.