Insuring the productivity of sports figures might seem to be a glamorous niche business, but it is also a risky one involving big bucks for its players--those brokers and underwriters on the hook if a highly-paid star comes up lame. Indeed, such exposures have soared thanks to skyrocketing salaries and endorsement deals.
Besides the exploding costs of salaries for star (and even relatively mediocre) players, and the competition to get a high-profile athlete to endorse your product, outside factors now enter into the equation. For example, the tightening of the Lloyd's reinsurance market in this niche has to a great extent reduced capacity, experts say.
As a result, carriers have forced more discipline on their underwriters, such as making certain the length of time they insure the ability of an athlete to perform is explicit, according to one industry broker.
Insuring athletes is also complex because it is not a one-size-fits-all underwriting business, even for team sports.
Contracts for major league baseball, basketball and hockey players are guaranteed regardless of injury, but pro football player contracts are not. Therefore, football teams insure the guaranteed portion of their player contracts--which primarily take the form of signing bonuses--while individual players, usually through their agents, obtain their own additional coverage, industry sources explained.
Meanwhile, individual players take out their own policies during the last year of their contracts to protect future earnings if they get hurt in their "walk" year. In addition, top amateur athletes playing high school or college ball can buy coverage for an injury that short-circuits their career before they have a chance to turn pro.
Outside of team sport participants, individual coverage is also available for professional golfers, race-car drivers, tennis players, skiers, snow boarders, ice skaters, track stars and those in extreme sports.
Beyond the players themselves, underwriters insure stadiums against natural and man-made disasters--including terrorism--while companies that use athletes to endorse their products can also get coverage, particularly for moral hazards.
Mark Peterson, a principal with Peterson International Underwriters of Los Angeles--a family-owned business with a third of its book sports-related--noted that his firm has sometimes insured unusual items, such as Super Bowl rings. One case recently involved a pro basketball player headed to Italy who wanted to take his Rolls Royce with him. "We had to arrange coverage of transportation of [the car] as well as coverage while he was driving it over there," he noted.
Beyond writing disability coverage for athletes and teams, HCC Specialty Underwriters in Wakefield, Mass.--formerly American Specialty Underwriters--is a huge writer of event cancellation insurance for major sporting events. The firm insures against flood, earthquake and fire.
"Typically," said William Hubbard, a principal at the firm, "we insure most things beyond the control of the event organizer"--including terrorism. A decision whether to buy coverage is based on the profile of the target, along with where and when the event is being held, he explained. For prime sporting events, terrorism coverage "is something considered by all sponsors."
"It is a major part of their thinking," he added. "Not all take it out, but they think about it. In this day and age, it is on the frontal lobe of everybody."
Pro Financial Services, based in Schaumberg, Ill.--a big player in the disability and life insurance business for baseball and football--put its liability at any given time in the "billions," according to its president, Dan Burns.
Pro Financial is somewhat of a hybrid, noted Mr. Burns--serving as a managing general underwriter for risks underwritten by ACE American Insurance Company, a unit of ACE-INA Group.
Although BWD is a broker, it provides league-wide disability programs for the National Basketball Association and the National Hockey League, covering their highest-paid players, according to Leigh-Ann Rossi, vice president for sports and entertainment at the Jericho, N.Y.-based firm. BWD had to create these programs because some guaranteed contracts exceed the three-year limits most underwriters are willing to accept on group athletic disability programs, the firm noted.
In the NBA, for example, the maximum length of a contract is now six years. Besides the three-year underwriting limit, the industry standard on nongroup athletic contracts is roughly between $30- and $40 million. Higher amounts are written, but premiums are higher, medical exams more stringent, and the policy must be counterapproved by top management, brokers and underwriters say.
Ms. Rossi said that in BWD's disability program, the standard benefit is 80 percent over the life of the contract. Exceptions or exclusions for age or pre-existing injury are also made, she added, noting that BWD can offer a lower benefit for those reasons.
Jim Edgeworth, of James Edgeworth & Associates--a former pro hockey player and graduate of Dartmouth College who has been brokering sports coverage out of Houston since 1978--said this niche faces "a huge capacity problem."
"Fewer and fewer insurance underwriters are involved in this market because of losses and because of their inability to reinsure their book," he said. Contraction in capacity for the line at Lloyd's in general has been a factor, but losses on large sports contracts have also dissuaded underwriters from entering the market, he added.
"The claims and other factors have hardened the market," he said. "Prices are higher and underwriting much tighter and tougher."
Mr. Edgeworth would not discuss specific cases, but one of the most prominent ones concerned Albert Belle of the Baltimore Orioles, who had a six-year guaranteed and insured contract but played only three years due to a degenerative hip problem.
Another case cited by industry sources was Jayson Williams of the New Jersey Nets, who suffered a career-ending knee injury. Also mentioned were the cases of hockey players Adam Deadmarsh, formerly of the Colorado Avalanche and the Los Angeles Kings, who retired just before the current season after suffering post-concussion syndrome, and Brian Berrard of the Columbus Blue Jackets, who is out for the rest of the year with a back injury.
Mr. Berrard--who was paid $6.5 million for an eye injury, was out for two years, and then repaid some of that money when he returned--is out again with back problems.
Industry officials also cited the case of Robert Edwards of the New England Patriots, who suffered a severe knee injury while playing flag football on a beach before the Pro Bowl all-star game. He was out the next year because of the injury, and after recovering played two more years--albeit at a lower salary. Despite that, he was awarded his full salary on a disability claim by an Alabama court.
While not confirming specific incidents, Mr. Edgeworth said that between litigation and claims, underwriters are saying, "We don't want to write" sports coverage. As a result, he added, "underwriters have segmented the market, and that has made underwriting more demanding. It has become more of an exact science."
Coverage is being restricted to three years, and companies are "defining the tail," he said.
While Mr. Peterson confirms capacity problems, Ms. Rossi qualifies that "group coverage is available."
"We can cover almost all the contracts," she said. "It would be rare that a contract exceeds the limit. Capacity is not an issue in the league-wide programs for basketball and hockey.
"If a contract exceeds our limits, you can go outside, in the marketplace, to get coverage," she added. "It is in individual contracts outside the group policies where you run into capacity issues." She also noted that baseball doesn't have a league-wide program.
Mr. Hubbard of HCC acknowledges that capacity has become more expensive, but it is available. He said his firm reinsures through a number of markets.
"Lloyd's is traditionally known as a market for this type of coverage, but others have developed," he said. "This is a global market, but some companies in the U.S. are still in the reinsurance business."