Real Insurance for Fantasy Football
Fantasy football is big business. And where there’s business with money at risk, insurance is sure to follow.
Fantasy football participants might be surprised to know that there is now an opportunity to buy real insurance that provides coverage when players on their teams have season-ending injuries.
The Fantasy Sports Trade Association (FSTA) estimates that 41 million people play fantasy sports annually, with the overwhelming majority — 33 million — engaged in fantasy football.
Major corporations including ESPN, Yahoo!, and the National Football League have created online platforms for fantasy leagues. Writing at MSN Money, Jeff Cade cited estimates of the economic impact of fantasy sports “at more than $2 billion a year, including advertising, player fees and players’ related spending.”
The NFL has directed all teams to display fantasy statistics on scoreboards during games. ESPN also runs these stats on its news ticker.
And, at the most recent FSTA conference, representatives from the San Francisco 49ers and the Minnesota Vikings spoke about “how their new stadiums are being built with the fantasy sports player in mind.”
Playing in a fantasy league provides the opportunity to act like a combination general manager/head coach of your own NFL franchise — buying, selling, and managing the world’s top talent. (To avoid confusion, I will refer to the fantasy players as “owners” and to the NFL players on the fantasy team as “players.”)
Realism is a key part of the experience, and an owner’s skill in managing the draft, trades, and free agency is the key determinant of success. As with real football, injuries to top players can have a devastating impact on the season.
While participating in a fantasy league generally costs $100 to $200 per year or less, Cade reported that some leagues charge owners up to $10,000. A back-of-the-envelope estimate of market potential might look like this: If 10 percent of the 33 million players are willing to pay a $20 annual premium to insure a single player, that’s a $66 million insurance product each season.
While this figure currently would still be a fraction of premium levels for other niche property and casualty products, if priced right, and if growth in fantasy sports continues, the size of the market would be difficult to ignore. This market potential should likely entice more insurers to enter into the business.
Who Provides the Insurance?
Fantasy sports insurance is an online product. While publicly there is mention of a few players in this market, as of the time of this article only one product offering for the upcoming 2014 season appears to be available: FantasyPlayerProtect (FPP).
This product is offered through MiniCo Insurance Agency of Phoenix, and is underwritten through Hudson Insurance Group, an insurance carrier rated “A” by A.M. Best, and a member of Odyssey Re Holdings Corp. Hudson offers a wide range of property and casualty insurance products.
FPP is designed to recover costs for owners whose players experience season-ruining injuries. FPP’s policies define this condition in terms of the number of games missed. The coverage is triggered when a player misses eight or more games of a 14- or 15-week season, and nine or more games of a 16- or 17-week schedule.
The coverage is intended to replace the league entry fee, plus research expenses such as magazine or online subscriptions. FPP’s coverage maximum is $1,000, including up to $250 for ancillary research expenses.
Owners can insure as many as five players per fantasy team and 10 players per season with FPP, and FPP provides a list of approximately 100 players for whom coverage is available. The premium per player insured ranges from 9 percent — for a historically healthy player — to 13 percent for an injury-prone player — of the coverage amount, plus taxes and fees.
FPP promises to “settle valid claims within 30 days of the end of the regular sports season.”
Underwriting and Product Pricing
When you look at the existing FPP insurance product, the cost differential of insuring the highest-risk versus the lowest-risk players is relatively small. For example, consider an owner who pays an entry fee of $100 plus $50 on subscriptions and decides to insure his or her star player for $150. If the star is a low-risk player, the 9 percent premium comes to $13.50 compared to a premium of $19.50 at the injury-prone 13 percent rate.
Do those rates accurately reflect the risk exposure? Fox News reported that another provider paid out more than $15,000 in claims for the 2012 NFL season. But the story doesn’t say whether or not the total collected premiums made this a profitable line of business.
Technology is making more data available all the time, and this is easily accessible to insurers and fantasy owners alike. From an actuarial perspective, the player risk assessment needs to begin with historical injury data on the player’s position: How often do tight ends touch the ball? What is a quarterback’s exposure to injury on a game-by-game basis or a season-by-season basis?
Next, you’d address the player’s specific condition: How old is he? How long has he been in the league? Are there indications that his body is wearing down? If he’s a quarterback, you’d look at how often he gets sacked. If he runs with the ball, does he know how to slide or run out of bounds to safety? Or does he take the big hits — to show everyone how tough he is?
Finally, you’d move to a consideration of rule changes and trends in the league affecting how injured players are treated. Clearly, the overall NFL environment is now more cognizant of injuries, specifically head injuries, and rules are in place to make sure that there’s sign-off from the team doctor before players are permitted to come back in the game. Presumably, that rule would cut down on season-ending injuries.
But, at the same time, teams with more proactive approaches to protecting players might keep them out of more games, which could end up triggering more claims for the insurer to pay (note that FPP provides an email to policyholders containing a certificate of insurance, which provides details on how a claim will be triggered).
While winning money playing fantasy football is legal, there is some concern over whether fantasy sports insurance is legal.
“It is undeniable that a fantasy football owner’s sole monetary interest in their players is based on the bet they made when paying the league entry fee,” Joseph Balice, senior associate of Ezra Brutzkus Gubner LLP, said to Law 360. “The whole purpose of the insurable interest is to prevent using insurance policies as a form of gambling — fantasy football insurance is a wager on a wager. It would make little sense that this could be an insurable interest.”
He also noted that insurers currently have no way of verifying whether or not an owner buying a policy actually has the insured player on his or her team. In this case, buying the policy could be interpreted as simply a bet on whether or not the player will sustain a season-ending injury.
Another problematic scenario is that of an owner who drafted a player and purchased insurance before the season, but then dropped or traded him before the required eight or nine games were missed. Clearly, systems for verifying valid “ownership” before paying claims certainly need to be developed.
Fantasy football is now becoming institutionalized as a legitimate part of the sport. In this context, it seems likely that these insurance products will also grow in popularity.
Vendors May be Weak Link
Vendor risk management is often too overlooked by Fortune 1000 companies.
Three-quarters of supply chain executives said operational risk management is important for dealing with unpredictable events such as disasters, geopolitical risk, and demand volatility, according to “Don’t Play it Safe When it Comes to Supply Chain Risk Management,” a survey of more than 1,000 companies conducted by Accenture.
At the same time, 65 percent of executives at Fortune 1000 companies do not believe vendors are doing enough to minimize risk, according to another recently-released survey from the Consero Group, which focused on shared services.
The findings are indicative of one of the most volatile business environments seen in the last 15 to 20 years, as reflected by indices such as the Chicago Stock Exchange index, according to Mark Pearson, managing director of Accenture’s operations strategy consulting practice, and an author of the study.
“But this phenomenon is not just about the downside, because it has an upside as well, in that there is an opportunity to take market share if a company has the right tools in place to manage that risk,” he explained.
Business trends in recent decades have increased the importance of supply chain risk, Pearson said.
“We’ve spend the last 25 years globalizing supply chains, and applying concepts like just-in-time manufacturing, making our supply chains pretty lean, but also fragile,” he said.
To address the vulnerability, companies have developed strategies to respond to interruptions in the supply chain, with planning, analytics, and better visibility, Pearson said. Such strategies have included the creation of supply chain control towers.
According to Capgemini Consulting, a supply chain control tower is a central hub that captures and uses supply chain data to enhance visibility for short and long term decision-making that aligns with strategic objectives.
“These control towers,” Pearson said, “are fairly physical, and the concept is becoming very popular, due in part to some very good and well developed examples, coming out of the high-tech industry, such as Dell, for example.”
However, such control towers normally involve significant investments that run into the millions of dollars spent on technology and personnel, he said.
Executives also recognize the importance of vendor risk in shared services centers, which have increased in importance to organizations: 72 percent of leaders have increased their budgets over last the year, while 66 percent increased staff size, according to the Consero 2014 Shared Services & Outsourcing Data Survey.
Shared services executives rely on a host of vendors, ranging from law and accounting firms to software and other products.
“If vendors are unable to deliver the products or tools required, it creates difficulties,” said Paul Mandell, founder and CEO of Consero Group, based in Bethesda, Md.
“In addition, all kinds of legal risk exists when you have vendors handling data, if they’re not attuned to appropriate data security protocols. Another area of legal risk is rule violations by vendors, if they are making bribes across international lines,” Mandell said.
“Some commercial carriers offer insurance to cover supply chain risk, and compliance risk, but that will often only go so far when it comes to intentional violations of law. There may be financial compensation of some kind, but the damage to your relationship is hard to quantify,” Mandell said.
“Insurance companies are starting to build supply chain insurance products,” agreed Pearson, “but they don’t have a lot of experience. Whether it’s a soft or hard market, it’s a new market,” he said.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.