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Injury Protection

Down for the Count

Insurance payouts may help take some of the sting out of the loss of two Yankee star pitchers.
By: | July 23, 2014 • 5 min read
Topics: Claims | Underwriting
Pitcher

Insuring Major League Baseball player contracts is big business.

The MLB spends in excess of $55 million in annual premiums to obtain individual player contract protection policies and the premiums charged for these policies are not cheap.

Rates run as high as 10 percent of the annual value of the player’s contract to secure coverage for between 50 percent and 80 percent of the total contract value.

Most player contract policies today are written for three years and provide coverage at a 70 percent level, which means that a team may only be able to secure $70 million of insurance coverage for a $100 million contract.

That threshold varies, depending on the size of the total contract as well. For example, a $200 million contract might be insured at a level below 50 percent.

This is, of course, of special interest now to the New York Yankees, who may find themselves submitting eight-figure insurance claims due to injuries to ace pitcher C.C. Sabathia and rising star Masahiro Tanaka.

It’s possible that the Yankees’ premiums for Sabathia totaled about $13.1 million, meaning that it’s safe to assume the insurer is not simply going to write a check for over four times the premiums without a fight.

Sabathia, who had been sidelined since May 10 because of degenerative damage to his right knee, will miss the remainder of the 2014 season as he is scheduled to undergo arthroscopic debridement knee surgery.

On July 12, the Yankees announced that Tanaka has a partially torn ulnar collateral ligament in his pitching elbow which could keep him out of the lineup for six weeks and possibly longer.

Individual Policies

Unlike baseball, which requires teams to purchase individual policies for player contracts, the NBA and the NHL each have league-wide plans for their teams. By pooling risks in this way, insurers are able to project claims more accurately and thus reduce the premium costs to less than 5 percent, instead of 10 percent in baseball policies.

MLB player policies work this way: If a player’s multi-year contract is insured for the first three years and the player sustains a career-ending injury during that initial policy period, the insurer will pay off on a percentage of the total contract value.

However, if the player gets through the first three years without injury and the team wants to maintain insurance coverage for that contract, the club will have to secure new coverage for the remaining years of the player contract at a higher premium based on new underwriting criteria such as the player’s increased age and any new medical issues.

In January 2014, Tanaka signed a seven-year, $155 million deal with the Yankees, which pays him $22 million in each of the first six years and $23 million in the last year. If insurance was purchased, a claim could reimburse the team for a percentage of the remaining monies due the pitcher this season.

If, Tanaka’s injury turns out to be career-ending, the Yankees could potentially recoup between 50 percent and 80 percent of the total amount of the deal (less salary paid to date), depending on the type of insurance coverage purchased.

As with most insurance products, the premium cost for MLB player contracts is tied to a number of underwriting factors such as the length and total value of the contract, the player’s age and injury history, and whether there is any history of substance abuse or use of performance enhancing drugs.

As for Sabathia, the remainder of his seven-year $161 million deal signed in 2008 requires the team to pay him $23 million this year and in 2015; $25 million in 2016; and there is a $25 million vesting option for 2017, including a $5 million buyout that becomes guaranteed under a plan that is tied to the health of his pitching shoulder.

If Sabathia is unable to pitch again because of his current knee injury — as opposed to a shoulder injury — the Yankees will be obligated to pay him his full salary through 2017.

Little is known about the insurance coverage purchased by the Yankees for these pitchers, but some sources have reported that if Sabathia cannot pitch again, insurance would pay out about $58 million — which is 80 percent of the $73 million owed him for the 2015 through 2017 seasons.

Those same sources have also reported that the Yankees might also receive an additional $10 million insurance payout, which would be 65 percent of what is left on Sabathia’s $23 million salary for this season.

It’s possible that the Yankees’ premiums for Sabathia totaled about $13.1 million, meaning that it’s safe to assume the insurer is not simply going to write a check for over four times the premiums without a fight.

Underwriting and Exclusions

As contract values escalate, insurers are becoming more aggressive with policy exclusions and limitations. According to the former general manager of the Arizona Diamondbacks, “you can have a policy effectively excluded out from under you.”

Some pitcher contract policies exclude coverage for elbow and shoulder injuries. Pre-existing injuries are also generally excluded, which could result in another dispute over the Sabathia claim, since he had arthroscopic surgery in 2010 to repair a torn meniscus in the same knee.

It was in 2001 when the Baltimore Orioles filed a $27 million claim after Albert Belle was forced to retire due to an arthritic hip that insurance carriers began to increase premiums for MLB contract coverage. It is estimated that the Orioles received between $20 million and $23 million to cover the $39 million left on the last two years of Belle’s contract.

The Belle claim, coupled with claims arising out of 9/11, prompted insurance companies to become more cautious about the types of risks they were willing to insure and shortened from five years to three years the coverage term for baseball policies.

As with most insurance products, the premium cost for MLB player contracts is tied to a number of underwriting factors such as the length and total value of the contract, the player’s age and injury history, and whether there is any history of substance abuse or use of performance enhancing drugs.

There is a belief among insurers that a player using steroids is more likely to be injured and less likely to recover quickly.

Another truism of MLB player contract policies is that pitchers generally cost more to insure than position players because of the increased potential for injury to pitchers based on the physical stresses associated with throwing a baseball at 90 mph or 100 mph, and the different pitches that strain elbows and shoulders.

In addition to the physical issues, starting pitchers are also more expensive to insure because they are paid more. For example, the five starting pitchers on the Los Angeles Dodgers represent nearly 33 percent of the team’s $239 million payroll in 2014.

The availability of insurance can also play a role in whether a team even offers a player a new contract.

For example, in 2009, the Arizona Diamondbacks were looking to extend the contract of pitcher Brandon Webb for three years at a value of $50 million. Even though Webb passed a team physical, the Diamondbacks were advised that their insurer would not cover injuries to Webb’s pitching arm.

Based primarily on the inability to procure insurance for the contract extension, the team pulled Webb’s offer.

With the aid of hindsight, that decision seems prophetic because a series of shoulder injuries to Webb’s pitching arm sidelined him for much of 2009 through 2012 and, after several aborted comeback attempts, he retired in 2013.

Richard Giller draws upon nearly 30 years of experience to craft litigation strategies for complex commercial disputes. A strong advocate for policyholders, he focuses his practice on recovering insurance benefits from reluctant insurance companies. He has also authored over two dozen nationally published legal, sports and political articles. He can be reached at rgiller@polsinelli.com.
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Insurance Industry Challenges

Insurance Asset Growth Lags

Insurance company assets-under-management growth is weak compared to other global asset management.
By: | July 23, 2014 • 3 min read
Assets

Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.

One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.

Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.

Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.

The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.

“The lower growth has likely contributed to the under-investment, not the other way around,” he said.

But clearly, this is an area that needs to be addressed, he said.

Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.

The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.

“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.

In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.

The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”

Insurers’ “exposure to high-growth specialties was similarly limited,” it said.

Regulatory and Organizational Inefficiencies

That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.

This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.

Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.

The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.

Insurers should move to a more global model to address those issues, said Schwetlick.

“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.

Third-Party Management Benefits

The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.

“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.

“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.

“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.

Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Sponsored Content by ACE Group

5 & 5: Rewards and Risks of Cloud Computing

As cloud computing threats loom, it's important to understand the benefits and risks.
By: | June 2, 2014 • 4 min read
SponsoredContent_ACE

Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.

ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:

5 benefits of cloud computing

1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.

2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.

SponsoredContent_ACE

3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.

4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.

5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).

SponsoredContent_ACE5 risks of cloud computing

1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.

2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.

3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.

SponsoredContent_ACE

4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.

5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.

The takeaway

Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.

Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.

To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?

This article was produced by ACE Group and not the Risk & Insurance® editorial team.


With operations in 54 countries, ACE Group is one of the largest multiline property and casualty insurance companies in the world.
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