WHEN Alex Rodríguez, baseball’s highest-paid player, announced last month that he needed hip surgery, it wasn’t just the New York Yankees that groaned. The biggest share of the resulting financial pain may well be felt by Team Scotti, the lead insurer on his ten-year, $275m contract. If Mr Rodríguez can recover by midsummer, the firm will escape unharmed since most policies do not pay out until a player has been sidelined for at least a few months. But if his injury drags on, it could make it harder for teams to get coverage—and thus harder for athletes to extract similarly lucrative contracts in the future.
As salaries in professional sports have soared over the past few decades, so has the price tag associated with the risks inherent in such strenuous physical activity. Athletes in sports like golf and tennis often buy their own insurance, though those with recurring conditions have trouble getting coverage. But sports teams that offer guaranteed contracts face huge losses if stars are injured, even only temporarily. As a result, the economics of the business are now shaped by insurance markets just as they are by TV contracts or ticket sales.
To secure affordable rates for temporary coverage, North America’s National Basketball Association (NBA) and National Hockey League (NHL) set up leaguewide insurance plans. By pooling risk, insurers are able to project claims better and can be confident they are not just covering the most injury-prone. The NBA’s policy, run by the BWD Group, costs a modest 4% of salaries, though it is obligatory only for a club’s top five players and has limited exclusions for pre-existing conditions.
Such a scheme is possible only in a highly regulated system like the NBA’s, which caps individual contracts and requires teams to spend at least $49m a year on salaries. In contrast, stars in sports like European football can earn far more than any single insurer is willing to cover. Moreover, clubs with small fan bases tend to avoid big contracts, and thus have no desire to join a leaguewide plan. That forces teams to rely on one-off policies, which charge higher premiums, are riddled with exclusions and rarely last over three years.
One big risk for insurers is moral hazard. Players insured against a career-ending injury may have little incentive to make a comeback if they have already received a payout; clubs with temporary disability policies have an incentive to keep a player sidelined until he is fully healthy. Jeff Moorad, a former boss of baseball’s San Diego Padres, recalls a debate over Chris Young, a pitcher recovering from a shoulder injury in 2010. “As a matter of principle, we didn’t stand in his way, and he came back and contributed,” he says. “But the accounting department much preferred that he stay on the disabled list.”
The bigger hazard may be underestimating the chances of pricey athletes getting hurt. According to Jonathan Thomas, an underwriter at the Watkins syndicate at Lloyd’s of London, investors disillusioned by the 2008 financial crisis have flocked into insurance, causing too much capital to chase too few policies. “Multi-year policies and reducing rates are a pretty lethal cocktail,” he says. “The coverage [teams] can get, given the largesse that they give to young men with comparatively little investigation, is extraordinary.”
Source :The Economist.
Date : 26/01/2013