Playing the odds: Corporate sponsorship of athletes, teams and sporting events is on the rise, and insurers are taking on the risk. (Promotional Insurance Property/Casualty).

Some in the business call it sponsor insurance. Others use the terms "contingency insurance" or "promotional insurance." Whatever the name, it is a small, interesting niche of the insurance marketplace with growth potential.

The coverage is written mostly for companies that sponsor professional athletes, teams or special promotions tied to a professional event. Beer manufacturer Anheuser Busch, for example, has a season-long deal with the Tampa Bay Buccaneers in which it will pay $1 million to a different contestant each game, presumably a fan of the football team, if the Bucs return a kickoff for a touchdown at a home game. Busch pays a premium, and the insurer assumes the risk, said Lowery Robinson, president and chief executive officer of Atlanta-based Marketing Etc., which helped arrange the deal.

This kind of promotional insurance originated with hole-in-one insurance for prizes awarded during golf tournaments, said Robinson, who started in promotional insurance about eight years ago. He said it became popular with sponsors, such as a car dealership that might want to display a car at a local golf tournament and offer it as a prize for a hole in one. The premium cost might run about $200. "It's a good way to advertise and manage a budget," said Robinson. "You know what the premium is and how much you want to spend in marketing." Marketing Etc.--the Etc. stands for events, tournaments and contests--specializes in smaller promotional risks, and Robinson said he enjoys the creative part of the business. Typical of the company's business is season-long coverage for a minor league baseball team that awards a prize if a team member hits a grand slam--a home run with the bases loaded.

The Chubb Group of Insurance Cos., Warren, N.J., is involved in higher-risk coverages on athletes with large performance-bonus clauses in their contracts or with commercial sponsors that agree to pay for their endorsements based on how well they perform.

Measurable Goals

Chubb wrote its first performance bonus about 10 years ago for the National Hockey League's Buffalo Sabres, on star player Alexander Mogilny, said Eugene Williams, a Chubb vice president and worldwide entertainment manager. The team insured a bonus clause that would pay a large sum to Mogilny if he scored a certain number of goals in any one of three seasons. It was a high number of goals, Williams recalled, and Mogilny didn't earn the bonus.

Performance bonuses are "commonplace" now, because salaries are so high, Williams said. "People are trying to think of ways to induce players to play for them, or wear their shirt or sneakers, or use their golf ball," he said. "They're using the coverage rather than trying to swing the athlete in their direction based on 'x' dollars per year."

Interest in contingency insurance remained low for about five years after the Mogilny/Sabres deal, but then Chubb started to see a spike in that kind of coverage. "We've done quite a lot," Williams said. "We've paid our share in losses, but it's still a good class of business."

In order of business volume by premium, Chubb has written coverages in pro golf, the National Hockey League and pro tennis. It has also written business for the National Football League, Major League Baseball and the National Basketball Association.

Williams said Chubb has coverages on about 50 athletes. Over the past five years, it has written on about 200.

A few other companies have written this kind of contingency insurance, but most of them have had very poor results, Williams said. American International Group Inc. no longer writes the business, he added, and Chubb faces few competitors. Lloyd's also had been an active player, but the number of syndicates writing the coverage has dwindled to one or two from a dozen or so, Williams said.

No Actuaries Needed

The difficulty is that there is often no actuarial basis for the premiums, and insurers have to make up terms of the contracts as they go along. "One has to make reasonable, but pessimistic, assumptions," said Williams. "Companies have bad results through a combination of bad luck--large losses--and underpricing."

Chubb likes to write business whenever it believes it can turn the apparently nonquantifiable risk into something quantifiable, Williams said. For example, if a sponsor insures against a professional golfer winning any of the four major titles, Chubb is able to calculate the odds based on a variety of factors, starting with the player's likelihood of winning any golf tournament. "It's fun for me," said Williams. "It requires research in making the initial guess. We try to identify people who can help us with that initial evaluation."

A popular technique is for sponsors to craft deals with players who aren't ranked in the top 10. Premiums for these players are less expensive, and sponsorships are more affordable, said Williams.

Sponsors outnumber teams as buyers. Many professional sports teams don't buy insurance, because they often offer bonuses that players are likely to achieve, and if a player does exceptionally well, there is an accompanying financial benefit to the team, Williams said.