Batter Up

• Ronald J Panko
• February 2001
• 

by Ron Panko

Professional baseball contracts are becoming so big that mainstream disability insurers do not have the capacity to cover the risks, according to sources in the insurance industry and Major League Baseball.

As a result, the baseball teams themselves are taking on large amounts of risk, and they may need to turn to alternative markets to unload some of it.

Two recent free-agent signings stunned the sports world as the contracts roughly doubled the previous highest annual salaries of the game. Alex Rodriguez, a 25-year-old shortstop for the Seattle Mariners, signed with the Texas Rangers for $252 million over 10 years. Outfielder Manny Ramirez moved from the Cleveland Indians to the Boston Red Sox for $160 million over eight years.

As in most long-term contracts, the money is guaranteed to the athlete or his estate even if the athlete suffers a career-ending injury or dies. Major league teams with these huge liabilities mitigate the risk through purchase of disability and life insurance, but the mega-contracts are for more money than disability insurers are willing to cover.

"Our problem now is that there's not enough capacity in the world to insure these big contracts," said Tim Eshelman, executive vice president and co-founder of American Specialty Insurance Services Inc., an 11-year-old firm based in Roanoke, Ind. Eshelman's company acts as a broker for teams in the purchase of disability insurance and runs a life insurance program covering 400 to 500 baseball players.

Teams currently can buy only about 33% to 40% of the disability risk for contracts of $100 million or more, and even then the coverage is good for only five years, Eshelman said. "Since A-Rod [Rodriguez] has a 10-year deal, the Rangers will have to hope that he's still insurable five years from now," he said.

"It's becoming a very difficult insurance situation with such high limits on a single person," Eshelman added. "One loss would make the results very bad. It would take a lot of premium to make that up. From the insurance side, it's a difficult thing because there's no real spread of risk."

Falling Behind

The insurance industry has struggled for many years to keep up with the growth of major league salaries, Eshelman said. "Twenty years ago, it was a big deal for a club to have $2 million of disability insurance," he said. "Now it's $100 million, and it still has the same number of people to insure. It's hard to figure out how to rate it to make an underwriting profit."

Not every baseball team faces these huge risks. The poorer teams simply don't agree to long contracts or big salaries. Some, like the Minnesota Twins, sign most of their players to one-year deals, Eshelman said.

But those teams with marquee players, high attendance and big television contracts are very competitive and can afford the stratospheric salaries. They self-insure part of the risk.

"Insurance is basically not available on the larger contracts," said Marty Greenspun, chief financial officer of the New York Yankees. "But with modern medicine, we don't see many career-ending injuries anymore." He added that clubs are increasingly willing to accept the loss of a player's service for parts of a season and are shifting to catastrophic policies with larger deductibles.

Eshelman said disability premiums will vary by the position and age of the player, but he said teams would typically pay $2 million to $3 million in premiums for a five-year, $80 million contract. Life insurance, meanwhile, is no problem for the clubs. That's because the cost of life insurance has fallen in recent years, and the teams need only insure the player for the length of the contract.

Capacity is a big problem for disability insurers, agreed Mike Price, president of Entertainment and Sports Insurance Experts (ESIX), in Atlanta. But one basketball player--which Price declined to name--has been insured for disability to just under $100 million. ESIX facilitated the coverage, which involves two insurers and several reinsurers, Price said.

The cost of life insurance is less than $1 a year per $1,000 of coverage using 10- or 20-year level-premium term policies, Eshelman said. So even a huge player contract might typically cost a team $40,000 or $50,000 a year for life insurance on the player. "That's a no-brainer, and it's something we arrange for them," he said.

No Greater Risk

Although professional male athletes have increasingly made headlines for their misbehavior, from drug abuse to car crashes, they are not worse life insurance risks than other insurable young males, according to a recent study by the Lincoln National Reinsurance Co., Fort Wayne, Ind. Lincoln Re compared mortality from 1970 to 2000 among professional players of basketball, baseball, football and hockey. It found that athletes died from violent causes more often than the general insured population, but less often from medical causes. Moreover, few star players were among the athletes that died.

Price disagreed that life policies are easier to broker than disability. The main problem with life policies is to line up enough insurers and reinsurers to cover the risk. Kevin Garnett, for example, a basketball player with the Minnesota Timberwolves, is insured for $120 million. A contract that size could require three or four direct writers and multiple reinsurers. Under these arrangements, each direct writer takes on only a small amount of the risk and cedes the rest to its reinsurer, but many direct writers use the same reinsurer, Price said. "Then we have to find a different set of reinsurers, and there aren't that many reinsurers out there," he said. "What you typically have is one reinsurer that takes most of the risk, maybe $50 million to $75 million, and then you piecemeal the rest, sometimes with overseas reinsurers like Zurich or Lloyd's."

Another life consideration for insurers is having their risks concentrated in one place. A single insurer, for example, would not want to provide life protection for Chipper Jones, John Smoltz, Tom Glavine and Greg Maddux, Price said. All members of the Atlanta Braves, they would represent a total of about $500 million of risk.

Despite the growing problem, Major League Baseball has not yet delved into alternative risk arrangements, Greenspun said. The National Basketball Association and the National Hockey League have league-wide disability contracts with offshore captive insurers, he said, but baseball does not. "The time may be coming for clubs to look at the problem collectively," he said.

Alternative markets are an option "many of us are looking at," Price said. These entities, such as Bermuda-based captives, raise capital by recruiting individual investors. They are willing to take on the risk that traditional insurers won't cover, because they believe they can earn money not only from assuming risk, but from investing capital, he said.

Price predicted that teams eventually would be able to obtain full coverage for the Rodriguez and Ramirez contracts. "The question is how quickly and how effectively," he said. "The amazing thing about the insurance business is that it always manages to rise to the occasion when this happens.

"But sometime, someone is going to kill the golden goose," he added. "One of these highly paid players is going to go down, and he could take a reinsurer out of this game, and then we won't have a reinsurer to go to."