Lottery
Lottery
RISKY BUSINESS
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 using both insurancelinked 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 artemis. bm, a news website covering alternative risk transfer such as catastrophe bonds and insurance-linked securities, believes around half of the win came from the ILS.
“ 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”
“ 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,” he says.“ 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 is: will it have to pay more for its insurance in future? The answer is not as simple as one may assume.“ With traditional insurance, how it works is if you have a loss then your premium generally goes 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.
iGamingBusiness | Issue 112 | September / October 2018 99