Risk management has great rewards

Lottery companies have a number of options in dealing with the repercussions of the huge jackpot wins that are at the core of the sector, according to Lotto24 chief executive Kim Sloth Bengtsen.

Jackpots can change the lives of customers – who may become millionaires many times over after a prize draw success - but can also lead to problems for the companies from which they win if it they are not protected against risk.

Lottery operator Zeal Network – formerly Tipp24 – last week had to reduce its total operating performance guidance for 2015 by €15m ($16.75m) as a jackpot win of the same value at subsidiary MyLotto24 fell within the retention specified by the company's hedging instruments.

Bengtsen told TotallyGaming.com that it is up to individual companies to calculate the best arrangement for coping with large pay-outs.

“Hedging is a perfectly valid strategy for any business in securing yourself or your company from market uncertainty,” Bengtsen said. “The lottery business is and will always be an uncertainty in regards to price pay-outs, hence a clever investment for your portfolio.

“It is however often a business of a certain size that that operates with hedging as a part of their short- and long-term strategy, since it often demands a significantly larger investment.

"Hedging secures the risk or reward involved in any trade in comparison to ‘putting it all on red’, which results in you making a more secure ‘bet’ with a possible return and at the same time securing company not losing everything.”

Bengtsen, who will be part of the EiG panel session entitled ‘Moving forward with lotteries’ in Berlin in October, added that his own company has chosen different methods of reducing risk.

The company certainly seems to be on the right path, having been formed in Denmark in 1999 and now operating across Scandinavia, as well as in France and the UK.

He said: “You will likely never see Lotto24 working with hedging as a part of the overall business strategy since its pay-outs are financed through an advertisement model, or free-to-play.

“Some might say that Lotto24 chose this model back in 1999 to avoid any larger fluctuation in their revenue guidance, securing an absolute minimum income-to-pay-out ratio that would sustain any expenses.

“Some might say it is due to the legislation in the gambling market, in which Lotto24 cleverly took to a model that needed no license to operate.”