Major League Baseball found that it pays to take a team approach to purchasing insurance.
Instead of continuing to purchase insurance separately, Major League Baseball and the organization's 30 clubs decided to band together, set up a captive and develop a collective risk management strategy.
The results? Big cost savings, improved loss control and greater sharing of risk management best practices.
Major League Baseball has saved $40 million over the last three years after forming a captive known as MLB BASES, which stands for MLB Burlington Assurance Exchange Society. The captive is domiciled in Vermont and was launched in January 2003.
"Our strategy is simple. It's take high deductibles and use our captive to finance our retentions on a leaguewide basis," says Anthony Avitabile, the director of risk management at Major League Baseball.
Major League Baseball currently uses its captive for its workers' compensation and general liability programs and might use it eventually for some property risks as well.
"We felt our program should be put in place in the areas where every club is going to be purchasing insurance anyway," Avitabile says.
Major League Baseball is one of a handful of sports organizations that uses a captive for its insurance needs. The National Hockey League and the National Basketball Association, for instance, have been using leaguewide captives for some time.
USA Hockey Inc., the national governing body for the sport of hockey in the United States, set up a captive in August 2004 as part of its risk management strategy, says Bob Weldon, senior director of finance and administration for USA Hockey in Colorado Springs, Colo. The organization began exploring the idea of a captive shortly before the Sept. 11 terrorist attacks. In the hard market that followed, USA Hockey's general liability insurance premiums rose sharply even though its claims had remained steady.
USA Hockey, which provides a variety of insurance coverages for its more than 585,000 members, went ahead and set up the captive with the help of Aon. The captive, called HARP (Hockey and Rink Protection), is also domiciled in Vermont and is used for USA Hockey's general liability insurance. The organization may use it for workers' comp at some time in the future, Weldon says.
NASCAR, meanwhile, is currently doing a feasibility study to explore whether it should set up a captive, says Bill Harris, chief operating officer of Aon Captive Services Group.
The National Football League has a captive that writes annuities, NFL Players Annuity Insurance Co., and several other professional sports organizations are considering the use of a captive. "We've had some preliminary discussions with some other leagues," says Arthur Koritzinsky, a managing director at Marsh. Like Major League Baseball, other sports organizations could benefit from a group approach as well, he says.
"We think similar savings would be there," Koritzinsky says.
But the majority of professional sports leagues, so far, do not appear to have turned to captives to help them with their insurance needs.
"I think (a captive) makes economic sense," Harris says. "I'm surprised more of them haven't done it yet."
Major League Baseball's new captive was the brainchild of Jonathan Mariner, who joined the Office of the Commissioner of Major League Baseball as chief financial officer in 2002.
Mariner had previously worked as the CFO of baseball's Florida Marlins and the Florida Panthers ice hockey team, both of which were owned by Wayne Huizenga at the time.
"Through my NHL exposure, I discovered the NHL had a leaguewide captive, and also I learned that the NBA had a similar program," Mariner says. Although Major League Baseball had set up a captive many years earlier, it was not mandatory, and the program was not working. Mariner saw how other leagues had more success and realized that captive participation would have to be mandatory.
When he was with the Marlins, Mariner says, he suggested the idea of a mandatory leaguewide captive, but his predecessor didn't have the same perspective.
"Being in this chair, having had the notion before, seeing that it could work, and being in a position to make it happen, gave me the opportunity to pull it off," he says.
Although it was his idea, Mariner jokes that he made Avitabile do all the work.
This was less than a year after Sept. 11, and premiums were skyrocketing.
"It wasn't uncommon to be seeing 100, 200, 300 percent increases on various lines of insurance," Avitabile says.
Major League Baseball's risks had not changed, but the world had. "It's no secret--post-9/11, any time there's a venue out there that can hold 40,000 or 50,000 people, it's going to be something people would look at," he says.
Even so, Avitabile says, the market conditions were just a part of the reason behind the move to set up the captive.
"Our vision of this is as a long-term program. It's not to take advantage of leverage in a hard market," Avitabile says. "The real strategy is that on a club-by-club basis, it might be hard to predict what any year is going to look like, especially in workers' comp and general liability. But if you take a look at 30 clubs, plus our league office, it's a lot more predictable over time."
MLB started doing the legwork in mid-2002. It put together a task force made up of club CFOs and the league office. The task force decided in August 2002 to work with Marsh and then began a mad scramble to pull together volumes of underwriting data by early December.
Assembling the data was just one of the challenges the group faced. The task force also found that some insurance markets weren't all that enthusiastic about the endeavor.
"There's a lot of markets out there that might have been writing about a third or half of our clubs' business," Avitabile says. "They might have been comfortable with those 12 or 15 clubs, but might not have wanted to write all 30," he says.
Other markets, he says, may have been skeptical about the project. "Given the size of the project, I'm sure there were skeptics out there that opted not to quote, thinking that it might not happen," he says.
The task force presented an actionable program to the CFOs of all 30 clubs in early December 2002. One of the catches, however, was that participation in the captive was mandatory for all clubs.
MLB's voluntary captive had worked during the '80s in a hard market, but as the markets changed, clubs that were able to get insurance outside of the captive did so. The captive ended up a victim of adverse selection. Only the clubs that couldn't buy on their own participated in the captive, and so it had been recently dissolved, Avitabile says.
A few clubs initially objected to the requirement that they participate in the captive because they were owned by large conglomerates that handled the purchase of their insurance.
Nevertheless, two weeks after the early December meeting, the ownership voted overwhelmingly in favor of the captive.
The results over the past three years have been a home run for the MLB. Major League Baseball's total cost of risk in 2002 was $54.9 million and was projected to reach $81.9 million in 2003 before the implementation of a captive. Instead, the total cost of risk in 2003 was just $54.3 million.
"In the first year, the real savings came in the economies of scale," Avitabile says.
In 2004, the total cost of risk was $58.6 million, and in 2005, it was $52.9 million. The actual losses, however, won't be known until the losses for those years are closed out.
"The program is closing out its third year now, and while the losses, by some measures, are still green or young, we have, year over year, beaten our loss projections in both workers' comp and general liability. And every dollar we beat it by is a dollar saved," he says.
The other big bonus has been the new focus on the organization's loss-control efforts.
Because the organization now takes high deductibles and uses the captive to finance the retentions, there's more incentive to control losses upfront with improved loss-control measures, and on the back end through better claims management, Avitabile says.
When the deductibles are low, he says, "it's easy to lose sight of loss control and claims management because you're not feeling it when you pay your premium up front."
"Once you change the dynamics of your program and you start to retain a lot of risk, every dollar you are able to reduce your losses by is a dollar that is in your pocket," he says.
Another benefit has been the sharing of best practices among the clubs. The clubs get together once or twice a year to talk about their best practices and learn from each other.
"The mandate is that every club participates and sends a point person," Avitabile says.
The captive recently completed its third year of operation and each year brings new opportunities for improved loss control and cost savings.
"I think we're improving year over year," Avitabile says.
Major League Baseball has found that by joining together to form a captive, it was able to structure more efficient, cost-effective insurance programs while strengthening loss control efforts leaguewide.
"I think it is the way to go and that we'll see more and more of it over time," Avitabile says.
is a writer living in New Jersey.
March 1, 2006
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