Disability insurance coverage is important for professional athletes and sports teams as it can mitigate the financial impact of injuries on players and their teams. Players can benefit from income replacement and lump-sum payouts if their careers are temporarily disrupted or ended by injury.
The impact of an injury can be significant for both professional athletes and their teams. A key consideration is the potential loss of earnings if athletes sustain injuries that prevent them from playing and being paid. For players, one way to mitigate the financial impact of an injury is to take out insurance. Some athletes benefit from group disability plans organized by player associations or their teams. If they do not have a group plan or the group coverage is insufficient, players may also take out their own insurance. Sports teams also have to protect themselves financially as they may be obligated to pay a player under a guaranteed contract, even if the athlete cannot play because of an injury. Third parties may also need insurance if, for example, they have sponsored an athlete as part of their marketing efforts.
Protection for Players – Disability insurance for individual athletes
Disability insurance is a good risk-transfer strategy for individual athletes to mitigate the financial impact of disruption to their careers caused by injury, which could be long term. Without insurance on which the player is the beneficiary, the risk to their future earnings could be catastrophic, especially if the player cannot embark on an alternative career because of the injury.
The cost of insurance varies with the probability of athletes sustaining injuries and loss in their earnings. This also varies for different sports based on physical intensity, number of games played and the length of the season. For example, the National Basketball Association (NBA) has 30 teams with a maximum number of 15 players per team, totaling 450 players in the league. Each team plays 82 games for a total of 1230 games in the regular season. The National Football League (NFL) has 32 teams and each team maintains 53 players on the active roster per game, which adds up to 1,696 players in the league. Each team plays four pre-season games plus 16 regular-season games for a total of 320 games, but this does not include playoff games.
Players typically receive basic group disability insurance plans negotiated through the collective bargaining process by their respective players associations, such as the National Football League Players Association (NFLPA). However, limits on available payouts are not large enough to maintain a star NFL player’s lifestyle for an extended period of time or indefinitely if the player sustains a severe career- ending injury. For an active NFL player who becomes disabled during 2016-2020, for example, the total annual permanent disability insurance benefit is $260,000 per year for each year he is unable to play if the disability results from NFL activities. The permanent disability benefit for inactive players is capped at $135,000 per year if the disability occurs within 15 years of the player’s last credited season.1 This annual benefit is payable to the player for life or until the player has recovered from the injury.
Individual athletes can purchase additional disability insurance for themselves (with themselves as the beneficiaries) when (1) adequate coverage is not provided by the insurance programs negotiated on their behalf by the players association or (2) the coverage limits are low and may not compensate for catastrophic injuries. In 2015, for example, NBC Sports reported that Russell Wilson – NFL quarterback for the Seattle Seahawks – purchased an insurance policy on himself to pay out in the event of a career-ending injury.
The four-year minimum base salaries for NFL players in the 2018 draft was $480,000 in Year 1, $555,000 in Year 2, $630,000 in Year 3 and $705,000 in Year 4.2 It is estimated that insurance premiums for a rookie player (Year 1) in the NFL could range from $20,000 to $40,000 annually for a disability insurance policy. First- and second-round draft picks (usually signed for large contracts and bonuses) as well as veteran players with successful careers are better positioned and may value insurance more as their income may not be limited to base salaries alone; some players also earn significant income through bonuses, product endorsements and advertising.
Protection for Businesses: Disability insurance for Sports Teams
For professional sports teams, losing a key player may result in paying millions of dollars in guaranteed remuneration to the injured athlete who cannot play. Sports teams can protect their businesses against financial losses caused by injuries to their players by purchasing insurance coverage for player contracts whereby the team is the beneficiary and will be able to recover some remuneration paid to the player from the insurance company in the event of a long-term injury. The NBA and the National Hockey League (NHL) have insurance plans that cover a significant portion of the amounts teams in these leagues are contracted to pay their players.
This type of insurance is especially important in the NHL, NBA and Major League Baseball (MLB), in which players are usually offered fully guaranteed contracts, which stipulate that a team has to keep paying a player’s salary as long as the contract is in force, even if the player is injured. The premiums are based on the insurable value of the player and the risk of injury. For example, in August 2014, ZENMoney Insurance estimated that the annual insurance premium for an income-protection policy on soccer player, Cristiano Ronaldo, would be about $1.2 million annually based on an insured value of $200.0 million3. The premiums for such insurance can be reduced by setting limits to payouts from the policy.
In the NBA, teams are mandated to insure at least five players (typically the highest-paid players). Teams will be eligible to receive compensation for part of the salary paid to a player if the player is injured and unable to perform for an extended period of time, depending on the terms of the insurance policy. In 2016, the Chicago Bulls had arranged for insurance and would have received a significant reimbursement for part of the salary paid to Derrick Rose after he missed the entire 2012-2013 season as a result of injury. It was reported that insurance covered approximately 40% of the athlete’s salary while he was unable to play.4
Source of Sports Disability Insurance for Pro Athletes and Sports Teams
Sports disability insurance coverage is a specialized product usually sourced through brokers, who engage specialty lines insurers (such as Lloyd’s of London) with the skill and capacity to provide this coverage. The NBA and other prominent leagues like the NHL and MLB are represented by BWB Sports and Entertainment, LLC (BWB), an insurance brokerage firm. Other notable clients of BWB include the New York Yankees baseball club; LA Galaxy professional soccer franchise; and the National Collegiate Athletic Association. The brokers negotiate insurance coverage on behalf of these various sports teams, associations and players with insurance providers. Insurance coverage takes effect after a deductible that is usually defined by a number of missed games. The policies can be limited by coverage exclusions for players that are injury prone or have experienced repeated injuries to specific body parts.
Customized Insurance for Stakeholders with Insurable Interest in Prominent Athletes
Besides teams and players, third parties may also use insurance to mitigate the risk of injury to specific players with which they are associated. For example, companies have endorsements on players that may become less valuable if the player is injured and cannot play. Policies could be purchased by stakeholders with insurable interest, who may sustain a financial loss resulting from a player’s injury or illness. A well-known example is the $1.0 million insurance policy obtained through Lloyd’s of London by Head & Shoulders (the shampoo brand) on the hair of Troy Polamalu, former NFL safety for the Pittsburgh Steelers. At the time, Polamalu was promoting the company’s products on some of its television and web commercials.5
Insurable Value of National Teams as Predictor of Success in the Soccer World Cup
Using a model based on the insurable value of a world cup team’s players, Lloyd’s of London successfully predicted the winners of the last two soccer World Cups. Developed by the Centre for Economics and Business Research, the model is based on the combined insurable value of the professional players on the national teams that competed in the tournament. The insurable value is an estimate of a player’s potential income until retirement based on current salary and endorsement incomes. The success of the model illustrates the ability of the marketplace to evaluate player performance and skills through financial value.
On June 12, 2018, the model predicted that the French team would win the World Cup. France had the largest aggregate insurable value at GBP 1.43 billion with an average insurable value per player of GBP 46.7 million. This team’s value reflected the high proportion of world-class players that were playing for Europe’s top professional soccer clubs as well as the relatively low average age of its squad of players. The next highest team was England with GBP 1.17 billion in insurable value at GBP 39.0 million per player, but it only finished in fourth place. The model is not perfect, however – Croatia, which was ranked ninth place on the Lloyd’s of London table with only GBP 0.47 billion in insurable value and just GBP 15.6 million per player according to the model, made it to the championship match.
Of the 32 teams in the 2018 FIFA World Cup, none of the teams below the top ten were able to reach the semi-final round. Among the top ten, only Germany was eliminated in the group stages. This suggests that the estimates of the players’ insurable values are useful approximations of their talents, but no guarantee of success.
For the 2014 FIFA World Cup, the model predicted on June 12, 2014, that Germany would win. Again, the winning team had the largest aggregate insurable value at GBP 641million and a value per player of GBP 27.9million. As in the 2018 FIFA World Cup, a team with a much lower insurable value (Argentina) made it to the final. The model was successful in that all four of the semifinalists were teams in the top ten list of insurable value; however, four of the top ten teams failed to make the quarterfinals in 2014. What is notable is the significant increase in the insurable value of the top teams and the average for their players in just four years.
For professional sports teams, disability insurance is part of managing the risks if players sustain injuries. The team’s purchase of insurance mitigates some potential losses related to injury through reimbursement of paid salaries to the team. Some major sports leagues in the United States offer guaranteed full salary on player contracts, which exposes teams to the risk of incurring material losses if a player is injured. The team’s purchase of disability insurance transfers some of this risk to the insurance company.
Individual athletes can also benefit from insurance policies on which they are the beneficiary if they are injured and cannot play. Group disability programs provided by professional sports leagues often provide basic disability insurance coverage, but individual players may purchase additional coverage, especially if they have higher salaries and other forms of compensation, such as endorsements.
Stakeholders with insurable interests can also take out policies on players, such as those it features in product promotion. In this case, any payout from the policy would be made to the stakeholder.
Sports disability insurance is a specialty line of insurance business written by insurance companies that have developed specific knowledge and expertise in this segment. A sports disability insurer’s exposure to financial loss caused by underwriting errors is significant as it is exposed to the risk of underestimating the long-term effects of injuries, such as concussions, as well as the manifestation of other prior injuries that may have gone undiagnosed in the past.