The group life and disability insurance sector has been slower to adopt predictive analytics than other lines of insurance. One reason for the sector’s lag is because insurers often have limited information on who they are insuring. However, there are still many ways to incorporate predictive modeling technology to improve results. Milliman consultant Jennifer Fleck provides some perspective in her article “Group insurance ‘Project Insight’.”
In this ESPN article, Wallace Matthews discusses the insurance policy on the contract of A-Rod, the New York Yankees all-star Alex Rodriguez, and displays the connections between the insurance policies on athletes’ contracts and catastrophe (CAT) insurance. While the actual details of the Yankees’ policy covering A-Rod’s contract are not disclosed, the discussion shows several commonalities with catastrophe insurance.
• Event trigger: Much like the early signs of a hurricane, the surgery required on Rodriguez’s hip is the first notification to the insurer that there is potential for a claim.
• Indemnity trigger: Based on information from the insurance firm Team Scotti, Rodriguez would have to miss at least one entire season before the team could collect on the policy, acting like the traditional indemnity trigger. Depending on the policy, the indemnity trigger can be anywhere from missing 60 regular season games to a full season on the shelf, as in Rodriguez’s contract. While acting like an indemnity trigger, it is more likely that the reason for the inclusion of this clause is to prevent minor injuries from triggering a claim.
• Policy limits: There are several policy limits hinted at in the article that could limit the amount the Yankees stand to collect on the policy. From a financial standpoint, contracts are typically insured for 50% to 80% of a player’s salary, although others are fully insured or include signing bonuses prorated over the life of the contract. The length of these policies also plays a role in determining the total recoverable portion of the player’s contract, which for Rodriguez includes another five years that may not all be covered.
• Reinsurance: Just as any catastrophe policy is reinsured among several firms, policies on high-salaried players such as Rodriguez, David Beckham, and Peyton Manning are not held by a single entity. As Chris Lack of Exceptional Risk Advisers says, “No one would take that on themselves,” which is a plain way of explaining the shape of today’s catastrophe market.
The article also points out one key item that brings insurance on player contracts back to disability insurance: preexisting conditions. Amar’e Stoudemire’s chronic knee problems and multiple surgeries have prevented the New York Knicks from obtaining insurance on his nearly $100 million contract. While Alex Rodriguez is having only his first surgery on his left hip, it is not his first hip injury. Also, he has admitted to the use of “banned substances,” and anabolic steroid use is known to weaken connective tissue, such as the hip labrum. Ignoring these preexisting conditions would be akin to ignoring FEMA maps when providing flood insurance. While it is unclear what financial compensation the Yankees can recover from their policy, it is clear that losing A-Rod for an extended period of time may be catastrophic for the Yankees offensive production.