By: Bill Fisher, AIF®, Senior Consultant
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Can you imagine how many billions of dollars were lost once 2020 March Madness was canceled due to COVID-19?
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As you may remember, the NCAA Men’s and Women’s basketball tournaments forced cancellation resulted in huge losses to event organizers, tournament venues and host cities. That said, the losses from an event like the canceled 2020 Tokyo Summer Olympics must have been even more staggering.
The pandemic adversely affected many nonprofit organizations, especially those that rely on special events for a significant portion of their budgeted revenues or fundraising goals. As such, event cancellations in 2020 caused major disruptions to the budgets and forecasted revenues of these organizations, which forced them to adjust their budgets or make difficult decisions concerning expense reductions.
In particular, the pandemic threatened the solvency of many trade and professional associations, especially 501(c)(6) organizations, which were not eligible for the first round of governmental relief in the form of PPP Loans.
Event Cancellation Insurance
Many organizations obtain Event Cancellation Insurance (ECI) policies to protect themselves from potentially catastrophic losses should they be forced to cancel an important event. These policies typically cover lost revenues, fees and penalties as well as expenses and costs associated with event preparation that had no real return on investment due to the cancellation. While most ECI policies contain certain exclusions, for example, communicable diseases may not be covered, endorsements may be available at additional cost to cover these less commonly insured events. Admittedly, event cancellations are typically rare or, at least, they were rare until the COVID-19 pandemic made them all-too-frequent.
While many events remained virtual in 2021, some organizations have started to host in-person events. Some have been intentionally held on a reduced scale due to COVID-19 restrictions, though. Unfortunately, the limited scale of attendance also reduces gross revenues and net profits.
A problem with scheduling these events in 2021 and beyond is that the cost of ECI premiums
has increased dramatically – 250-300 percent in most cases, according to several nonprofit executives and insurance industry experts. ECI policies now cover fewer circumstances than before. An endorsement for 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.
It is difficult to obtain communicable disease coverage because the pandemic took its toll on the insurance companies themselves, which were also overwhelmed. One source in the insurance industry estimates that event cancellations led to a decade’s worth of claims in a single year. Imagine being asked to fulfill your career obligations for an entire decade in a matter of months. In that sense, the exorbitant ECI costs almost seem justified. Almost.
So, if the cost of insuring events against cancellation has tripled and insurers are providing less coverage, what options are available to nonprofit organizations?
Below are two different approaches currently being undertaken by separate nonprofit organizations in response to the cancellation of 2020 events due to the COVID-19 pandemic.
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Case One: Maintain ECI Coverage
One CFO of a professional society in the Greater Washington DC area shared his organization’s positive ECI experience in 2020. The organization hosts two meetings for members each year – a smaller-scale winter meeting and a large-scale annual meeting in
the summer. Together, the two events accounted for approximately 41 percent of the organization’s budgeted revenues. The winter meeting went smoothly in January of 2020, which was prior to the pandemic’s expansive proliferation onto the global stage. The annual meeting, on the contrary, needed to be cancelled due to the pandemic; however, having adopted the communicable disease endorsement on their ECI policy, approximately 93 percent of their losses were covered by the insurance proceeds, including penalties and
legal fees.
For 2021, all of this organization’s events were held virtually. Yet, in anticipation of 2022, this organization plans to hold its annual meeting as an in-person event. Aware of the current spikes in pricing of ECI as well as additional risk, the CFO asked his board to triple the budget line item for Event Cancellation Insurance. Part of the motivation for holding the event in-person, as well as obtaining the ECI policy was the potential for loss of corporate sponsorships if the event were to be held virtually again.
Additionally, recognizing that ECI may not be all it once was, this organization has taken other steps to safeguard against losses from event cancellations. One way was to adjust the budget, avoiding other large-dollar investments for the time being. Another action was to obtain a larger line-of-credit, secured by their invested reserves. Finally, this organization 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.
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Case Two: Build a Self-Insurance Reserve Fund
A CEO of a Midwest professional association explained how he 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 main reasons:
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• 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 5 to 10 years.
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While the board was generally in favor of the idea, no action was taken at the time. The association would continue to purchase ECI policies to protect against loss.
This organization also hosted two primary annual events: a winter conference and a summer exposition. Together, these two events 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 began to emerge in the United States, 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 during the year, all were denied. There was a clause in the fine print that 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 the concept of a self-insurance reserve pool. Discussions surrounding this pool’s legitimacy and necessity resumed—and persisted. In April 2021, the board gave its approval to move 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 to gradually build the pool over an eight-year period to cover up to three years of additional event surplus losses.
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Other Considerations
These cases are just two examples of the thought processes and strategies nonprofit organizations are considering to protect against event cancellations going forward. In addition, there are other considerations they should keep in mind, including:
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• Sources in the insurance industry recommend having a good understanding of both the size and probability of risk as well as any extenuating circumstances. This is key to determining whether an ECI policy makes sense for your organization.
• Nonprofits may also consider alternative forms of insurance. According to a source in the insurance industry, one option might be to obtain an Alternative Risk Transfer (ART) policy, which allows organizations to transfer risk without going to traditional commercial insurance carriers. The ART market utilizes risk retention groups (RRGs), 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.
• Nonprofits should consider having an attorney review all insurance policies and event-related contracts. Specifically, relating to Force Majeure clauses, to ensure the organization is as fully protected as possible.
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Essentially, according to one insurance industry expert, nonprofits should evaluate their events in risk management terms, as a piece of revenue-producing property. From that perspective, why wouldn’t you want to protect it? Determining the best way to do so in the current landscape may take a little more creative thinking than in the recent past.
For more information, please contact any of the professionals at Fiducient Advisors.
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Sources:
Scott Grayson, CEO, American Public Works Association
Robert Horenberg, Director, NFP
Lou Novick, National Director – Associations, Nonprofit Practice, Arthur J. Gallagher & Co.
Vincent A. Pistilli, CFO, Society of Nuclear Medicine & Molecular Imaging
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