When a Lottoland player won the largest ever secondary lottery payout of €90m last month, both the player in question and Lottoland itself were understandably chuffed. But the insurers backing Lottoland’s innovative insurance-linked securities offering were likely to have been rather less excited, says Joanne Christie
Insurance-linked securities (ILS) are financial instruments that are sold to investors that pay out if an insured event takes place. These have long been used to insure events such as earthquakes and hurricanes but Lottoland, as well as Zeal Network’s MyLotto24, also use them to insure against jackpots.
In August last year, Lottoland increased the size of its ILS coverage to €120m and the following month set up its own insurance company, which insures against the risk of large jackpots such as last month’s using both insurance-linked securities and traditional reinsurance.~
The company has not divulged exactly how the funds were paid out, but it is fair to assume investors in the riskier portions of the ILS — it is divided into four layers, with various risk levels and corresponding returns — were looking at significant losses.
Steve Evans, owner and editor of www.artemis.bm, a news website covering alternative risk transfer such as catastrophe bonds and insurance-linked securities, says he believes around half of the win came from the ILS.
“While there was a jackpot win of €90m, they haven’t disclosed how much of that is going to be paid for out of the ILS. We were told that it could be roughly half the €90m, typically when they have a big payout they are going to be retaining some of the loss and using other sources of insurance, and then the ILS kicks in above that.”
Increase in costs?
With such a whopping hit to Lottoland’s investors, the obvious question becomes – will it have to pay more for its insurance in future? The answer is not as simple as one may assume.
“In general the insurance tradition, how it works is if you have a loss of course your premium will go up slightly,” says Blerina Essen, managing director of MyLotto24.
But Evans says: “The important thing to note is that this is what would be considered an expected tail event for many investors. They would expect to see a loss like this, perhaps every 10 years or something like that, and at the moment their loss experience is probably not anything they would worry about and consider unusual just yet.
“There might be a very slight uptick next time, but my gut feeling is that Lottoland will probably do a bigger deal anyway and then sometimes the more risk you can bring to the investors the better the terms you can often achieve. So I think it will probably even itself out.”
Indeed, bigger risks helped MyLotto24 achieve better pricing when it issued its latest ILS transaction in February this year. “In general the pricing for us has gone down because: a) we have built the trust with the investors; b) we have a lot of transparency; and c) we know this is a growing market for us and we are growing our products and risk,” says Essen.
It’s worth pointing out that Zeal is in a slightly different position to Lottoland in that it has never claimed on its ILS. Before this recent win, Lottoland had already hit up the investors in its ILS twice before to pay out €14m and €22m jackpots.
Even if Lottoland does see an increase in pricing, it may not mind given the reputational boost the win has given the company.
This is particularly true as it came at a time when the company was facing a ban on lottery betting that would effectively shut down its Australian business – detractors of the company Down Under have frequently claimed the company would not be able to pay out a big win.
“It is inevitable in the industry we work in that there will be big jackpot winners. The fact that we were able to pay out the winner as quickly as we did showcases once again that our structures work and discredits those in the industry who say we can’t pay out,” says Nigel Birrell, Lottoland’s CEO.
Other operators say it gives a boost to the entire industry. “It increases confidence in customers that obviously lottery betting operators are paying out,” says Essen.
“We hope that this win — along with our own US$30m jackpot win (Aura from Panama) last year — will increase the industry’s reputation and trustworthiness,” adds Remco Yizhak-Cooremans, spokesperson for lottery messenger service theLotter.
Unfortunately, however, the proof of concept was not enough to sway Australian lawmakers, with the nation’s government passing a law to ban lottery betting later last month.
Others to follow?
Lottoland’s win and subsequent speedy payout could lead to more betting on lottery operators looking to set up their own ILS structures, says Evans.
Prior to Zeal setting up the first lottery betting ILS back in 2011, some operators used prize insurance to insure against jackpots, however the value of this has been in doubt since 2009 when Zeal’s insurer refused to pay out a claim for its Tipp24 site.
“I think what it could do is show other lottery providers that there is a different way to get insurance coverage, above and beyond the limits they have been able to traditionally get in the past,” says Evans.
“Potentially this could increase demand from the insurance buyer side. We might see a number of other lottery betting type companies look at this and it doesn’t even necessarily have to be lottery, it could be all sorts of other things — I know in the past people have looked at casino type risks as well.”
There’s certainly capacity in the marketplace for more deals if the experiences of Lottoland and MyLotto24 when refinancing are anything to go by. When announcing its increased ILS last August, Lottoland said all previous investors were on board, along with some new ones.
Essen says MyLotto24’s deal in February was oversubscribed, and adds: “There is a lot of capacity as far as I understand in the market for this kind of risk and there is appetite from investors.”
Evans estimates the industry could potentially support up to £1bn of ILS for lottery operators and considering Lottoland’s €120m is the largest in the industry, there seems plenty of scope for other companies to get in on the act.
Alternatively, we could see the existing ILS users significantly increase their cover if other operators choose to draw on Lottoland and Zeal’s experience by entering into B2B deals rather than turning to the capital markets on their own.
Lottoland has a B2B arm, Lottoland Solutions, which allows other operators to offer lottery betting and guarantees any wins from its insurance structure. So far, it has signed up Kindred, William Hill Australia and Playtech BGT Sports.
MyLotto24 also has B2B deals in place, but does not disclose the names of partners it is working with.
While Lottoland’s hefty insurance claim may not exactly have been welcomed by its insurers, it seems that rather than being an event that causes insurers to rethink their continued support, it may instead be an event that leads others to follow in the lottery giant’s footsteps as it proves the insurance-backed lottery model does work.
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