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Typhoon Hato in Macau and Hotel & Casino Businesses

Typhoon Hato in Macau and Hotel & Casino Businesses

Typhoon Hato struck Macau on 23 August 2017 with wind speeds of more than 200 kilometers per hour.  The storm was the most severe storm in 50 years and it was the first time that the Macao Meteorological and Geophysical Bureau hoisted a No. 10 tropical cyclone signal in 18 years.

Most areas of Macau were severely affected by major flooding and property damages, with power and water outage after the passage of the typhoon.  At least 10 deaths and 240 injuries were recorded.

The city’s gaming sector including international and local casino resorts, which has made Macau the world’s best gambling hub, were severely impacted.  Furthermore, they had to suspend their operations temporarily due to cuts to power and water supplies.  Several investment analysts estimated that Macau lost around 6 percent in growth of casino gaming revenue in August due to the Typhoon Hato.

Following Typhoon Hato, on 25 August 2017, Macao Government Tourism Office (MGTO) announced that visitors to reconsider their planned upcoming trips to Macao carefully and assess the latest situations due to massive damage on city’s infrastructure and power and water shortage.

MGTO also conducted an urgent meeting with members of the travel trade and requested local travel agencies to suspend their tour group arrangements temporarily to Macao (25-30 August), so that more resources can be allocated for the city’s recovery.

After the passage of the typhoon, the operations of several casino resorts were suspended, which lead to significant losses in property claims and business interruption claims.

It is useful to understand the main casino revenue streams in Macau, each revenue stream has a distinctive business model.  There are 4 main gaming revenue types in the casino businesses:-

Mass Table Revenue

Refers to the table games played by the Mass Market, which consist of Baccarat, Sic Bo, Blackjack, Poker and Roulette, etc.  The volume played is measured based upon the amount of the Drop (i.e. the money ‘dropped’ for chips at the tables or at the cage (the casino cashiers).  The typical win rate for Non-Rolling Table Games is around 20%.

VIP Casino Revenue

Refers to the table games played by the high-roller market.  These Customers gamble high sums of money at specially allocated tables in specific rooms with what are referred to as rolling ‘non-negotiable’ or ‘non-cash’ chips, which they typically recycle many times.  Volume is measured based upon the amount of cash ‘dropped’, which on average is recycled several times before a player loses all their money and the volume recorded for Rolling Table Games is the amount staked in each hand.  This explains why the win rate for Rolling Table Games is around 2%-3%, as it is calculated against the rolling volume staked rather than a cash amount dropped.  When a Rolling player loses non-cash chips in a game, this is reflected as a Win for the casino but the casino also pays a commission on the amount gambled to the Junkets. These customers are brought into the Casinos through Junkets.

Hotel’s Own VIP Member

Similar to VIP Revenue, it caters to the higher roller market.  However, these customers are not brought in by Junkets and as a result, no commission is paid to Junket.

Electronic games

The house advantage is fixed by machine (and heavily regulated by the gambling authorities) to provide a guaranteed Return On Investment (ROI).  The casino can set the machines within allowable range but must declare the house advantage to the authorities, who inspect the machines.  Aside from short-term volatility, particularly in the high-limit or progressive jackpot games, the win rate on Slot is highly predictable, based on the mix of machines in operation and the drop (known as the “handle”).  The average slot win is around 5%.

Considerations in the Insurance Claim

Even if the loss period is short, the losses can be significantly large due to the scale of their business.  Due to the fact that the Macau’s economy mainly relies on tourism business including restaurant, hotel and casino, the number of visitors play a critical factor in their business operations.  Therefore, the loss of attraction extension may be one of the key issues in their business interruption claim caused by catastrophic events.

The potential scenarios on how the policy may respond to the business interruption loss are listed below.

  1. The casino sustained physical damage but it has no business interruption coverage
    If a small to medium size casino has a policy insuring for property damage only and does not insure for business interruption. In this case, only physical damage to their property will be covered while the losses resulting from the suspension of its operation cannot be claimed.
  2. The casino sustained physical damage with coverage for business interruption but without loss of attraction extensions
    Most of the international hotel chains with casino operations in Macau have business interruption coverage in their Policy. If the casino suffered property damage, this may then trigger the coverage for the business interruption losses.  The Insured may then make a claim for the reduction in profits from operations, as a result of the incident.  However, it may be unclear to what extent of the losses is directly related to physical damage and the losses that is due to the loss of attraction.  As mentioned above, we note the Macau government urged visitors to reconsider their trip to Macau due to massive damage to the city’s infrastructure.  Therefore, this might have deterred visitors from visiting Macau, as safe drinking water was an issue and the overall attractiveness was impacted.  This might also suggest that the financial losses suffered by the Insured may partially have been attributed to the significant damages sustained by the surrounding areas.   Due to these issues, Insurers may need to consider how the policy will respond to these issues.
  3. The casino sustained physical damage and has business interruption with loss of attraction extensions
    The Insured may make claims relating to both property damage and business interruption. The business interruption losses should be segregated into the losses arising from property damage and losses resulting from the loss of attraction.  However, it the losses attributed to loss of attraction is usually subject to a sub-limit.    Furthermore, policy coverage for loss of attraction varies and clarification may be required to confirm what losses due to wide area damage are covered by the loss of attraction wording per the policy.

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