The two basic maxims of risk management:

1. High-severity loss threatens the financial viability of an association.
2. Associations should insure against low-frequency, high-severity events.

Meeting revenue—whether a single anchor event or an entire calendar of income-generating conferences, workshops, and seminars—is, for many associations, the biggest revenue line item. Once established as being worthy of attendee, exhibitor, and sponsor support, a successful meeting can be relied upon year after year to generate income for the sponsoring association.

Since event cancellation claims generally fall into the category of low-frequency, high-severity events, why is there so much confusion among some association executives about the need for and value of coverage? From that perspective, it's an asset in need of protection, right? In part, this confusion has to do with some misconceptions about the coverage.

Event-Cancellation Insurance = Property Insurance

The notion of a successful meeting as being an item of property is not well understood by most people. But, in risk management terms, that's exactly what it is. The meeting may not be tangible property in the sense that a building or a desk is. But there are many kinds of non-tangible property: for example, intellectual property rights such as a copyrights, patents, or trademarks that represent significant sources of income to the property owner.

Placing reserves at risk because of a weekend of bad weather or an outbreak of Legionnaires' Disease implies a degree of risk tolerance that few association boards would likely find acceptable.

"It Seems Like Everything is Excluded"

In fact, everything is covered unless it's specifically excluded. Of course, understanding the exclusions—where they are found (not always in the exclusions section) and what the text means (definitely not an intuitive read)—is challenging even for experienced insurance professionals. However, the principal exclusions, (i.e., the ones that are typically the basis of a declination) are fairly straightforward:

• Financial failure. This includes an event which is generally unsupported by funding sources such as attendees, exhibitors, and sponsors; the underlying explanation may have to do with a lack of interest in sessions and other event programming, reduced exhibit-hall attendance that dampens exhibitor interest, or a competing event
• Loss of support. This is related to financial failure and includes everything from loss of committed financial support to the inability of government and military employees and contractors to participate following a government shutdown or loss of budget authority.
• Necessity. This applies to circumstances that are elective in some respects, such as not liking an ordinance or simple inconvenience.

"It Costs Too Much"

Check the math. If there is anything close to the historic lows in mortgage rates of the past several years it has to be event cancellation insurance rates. Rates have not been this low since ASAE originally introduced the coverage to the association community in the early 1980s. Base rates, the cost for basic coverage not including specific perils such as communicable disease (CD), have fallen to as low as .0020 (rate X gross revenue = premium). Surcharges for perils such as CD and enhanced terrorism will increase the premium expense, but these are still historically low rates.

"We Have Force Majeure Clauses In All Our Agreements"

A carefully written force majeure clause will mitigate the risk of loss (a form of non-insurance risk management) if cancellation or curtailment of your event triggers the clause, but even the most favorable force majeure clause will not make your association whole in terms of net income. While release from venue rental and food and beverage commitments may be successfully accomplished via a force majeure, if the association wants to retain budgeted net income and be in a position to refund attendee and exhibitor registration, insurance is necessary.

"We Self Insure"

Chances are you don't. There is an important difference between self-insuring and simply retaining the risk on your balance sheet.

Self-insurance implies a formal decision by management to retain risk that is based on reliable projections of expected loss frequency and severity and for which funds are both dedicated and restricted. Retained risk (what most associations mean when they say self-insure), however, is less formal and far more commonplace.

Even if your association is fortunate enough to have the balance-sheet strength to withstand the loss of annual meeting revenue, you need to question whether this falls within the intended scope of reserve use. Placing reserves at risk because of a weekend of bad weather or an outbreak of Legionnaires' Disease implies a degree of risk tolerance that few association boards would likely find acceptable.

"We've Saved A Lot of Money By Going Without Coverage"

When it comes to insurance (not just for event cancellation), many people take the view that, since they haven't had a claim, they have saved money. It's true that the dollars that might otherwise have been expended on premiums are still in the bank.

But there is a serious weakness to this argument. Like any observation of a historical event, the statement is made with the benefit of certain knowledge. The reason insurance serves such an important purpose, both for businesses and individuals, is that it eliminates the element of uncertainty. It's the difference between cost of risk and cost of insurance.

When you can't predict the peril that affects you, when it will affect you, whether it will ever affect you, and how significant the loss may be if it does, insurance mitigates the risk of uncertain loss by flattening out expense in the form of a premium.

To Buy or Not To Buy

Whether an association includes event cancellation insurance in its insurance portfolio depends on a number of factors. To help organize your thinking along some objective guidelines, here are some the most important decision criteria.

• Does your meeting generate a significant fraction of your association's gross or net revenue?
• Does your association have the financial strength to absorb the loss of net revenue from a cancelled meeting?
• Is the success of the meeting sensitive to external factors such as weather, earthquake, communicable disease, political unrest, or other types of events?
• Are there significant financial commitments (e.g., room block, food and beverage, or speaker fees), nonrefundable deposits or prepaid expenses that impact the financial outcome if the meeting is cancelled or curtailed?
• Finally, what is the risk tolerance of your organization?