With the cost of event cancellation insurance doubling or tripling during the pandemic, many associations are reconsidering traditional insurance methods. Some are looking at self-insuring or creating additional reserve funds to help offset event-cancellation costs.
Many associations obtain event cancellation insurance (ECI) policies to protect from potentially catastrophic losses should they be forced to cancel an important event. These policies typically cover lost revenues, fees, penalties, and costs associated with event preparation.
Event cancellations were rare until the COVID-19 pandemic. With the pandemic forcing many cancellations, the cost of ECI premiums has increased dramatically—250 to 300 percent, according to several association executives and insurance industry experts. ECI policies now cover fewer circumstances than before: communicable disease coverage is currently—and for the foreseeable future—impossible to get, as are specific weather-related coverages in certain parts of the country.
Knowing this, associations are looking for new options to deal with risks related to events. Here are two different approaches currently undertaken by separate associations.
Case One: Budget More for ECI
Vincent A. Pistilli, chief financial officer of the Society of Nuclear Medicine and Molecular Imaging, shared his organization’s positive ECI experience in 2020. SNMMI hosts two meetings for members each year: a small winter meeting and a large annual meeting in the summer. Together, the events account for approximately 41 percent of the organization’s budgeted revenues. The winter meeting went smoothly in January 2020, but the 2020 annual meeting was cancelled. Having had an ECI policy in place, approximately 93 percent of their losses were covered by the insurance proceeds.
Associations should consider having an attorney review all insurance policies and event-related contracts to ensure the organization is as fully protected as possible.
For 2021, all of SNMMI’s events were held virtually. In 2022, the organization plans to hold an in-person annual meeting. Aware of the current spikes in ECI pricing, as well as additional risk, Pistilli asked his board to triple the budget line item for ECI. Part of the motivation for holding the event in-person is the potential loss of corporate sponsorships if it were held virtually again.
Additionally, recognizing that ECI may not be all it once was, SNMMI has taken other steps to safeguard against losses from event cancellations. It adjusted the budget, avoiding other large-dollar investments for the time being. It also obtained a larger line of credit, secured by their invested reserves. Finally, SNMMI plans to build additional reserves on an annual basis from projected surpluses, saving up for possible high ECI costs or other event cancellation loss recovery.
Case Two: Build a Self-Insurance Reserve Fund
Scott Grayson, CEO of the American Public Works Association (APWA), had originally proposed the idea of building a special pool of reserves for self-insurance to his board three years before the pandemic. He knew this would be a good idea for three reasons:
- ECI premiums were expensive even then.
- The risk of loss was very low.
- The self-insurance pool could be cultivated slowly over a period of five to 10 years.
While the board was generally in favor of the idea, no action was taken. The association continued to purchase ECI policies to protect against loss.
APWA hosted two primary annual events: a winter conference and a summer exposition, which were expected to net the association a profit of between $1.8 to $2.8 million annually. In January 2020, as the first cases of the coronavirus emerged, the association contacted their insurance company to ensure their events would be covered under these conditions. They were assured that was the case. However, after filing three claims for loss, all were denied. A clause in the fine print stated if the World Health Organization (WHO) declared a global pandemic emergency, coverage would be denied.
In March 2020, the board began to more seriously consider a self-insurance reserve pool. Discussions surrounding this pool’s legitimacy and necessity resumed—and persisted. In April 2021, the board approved moving forward with plans to build this additional pool of reserves. The framework of the strategy is to initially fund the pool with enough to bankroll one year’s loss of event surpluses—and then to gradually build the pool over an eight-year period to cover up to three years of additional event surplus losses.
These cases are two examples of the thought processes and strategies associations are considering to protect against event cancellations going forward. Here are other considerations to keep in mind from two insurance experts, Robert Horenberg, director of NFP, and Lou Novick, national director, associations, nonprofit practice at Arthur J. Gallagher & Co.
- To determine whether an ECI policy makes sense, associations must have a good understanding of both the size and probability of risk, as well as any extenuating circumstances.
- Associations may also consider alternative forms of insurance. One option might be to obtain an alternative risk transfer (ART) policy, which allows associations to transfer risk without going to traditional commercial insurance carriers. The ART market utilizes risk retention groups, insurance pools, and captive insurers. If your organization has a good understanding of what sort of loss it could absorb without insurance, retaining a policy with a high deductible may make sense.
- Associations should consider having an attorney review all insurance policies and event-related contracts to ensure the organization is as fully protected as possible.
- Associations should evaluate their events in risk-management terms, as a piece of revenue-producing property. Determining the best way to do so in the current landscape may take a little more creative thinking than in the recent past.