Rugby World Cup Highlights Role of ‘Bonus Insurance’

The mighty All Blacks are out; France the host nation is gone, and so is Australia, another pre-tournament favorite, as well as the surprising Pumas from Argentina. Current champions England will face 1995 winner South Africa next Saturday in the final of the Rugby World Cup.

To be sure the teams are playing for the glory of their respective nations, but there’s also a lot of money involved for the winning side. An article on the Lloyd’s web site (www.lloyds.com) notes that if the English players manage to retain the Webb Ellis Trophy they won in 2003, they’re in line to receive around £60,000 ($122,550) per man – over £2 million ($4.08 million).

“In some circumstances these bonus releases can be millions of pounds per player, and so clubs or national governing bodies or team sponsors may cover themselves in the event of success,” Lloyd’s notes.

The solution for those that have to pay those bonuses is “contractual bonus insurance,” which pays then predetermined amounts that an individual player, or group of players, may earn, should they meet or exceed certain goals. The coverage allows “a sponsor or owner to set the budget for the payment of bonuses, rather than having a large potential liability on the balance sheet,” the article explained.

There area a few problems, however – starting with how to price the coverage. Lloyd’s points out that most underwriters don’t have any more knowledge of what a player’s, or a team’s, potential performance is likely to be than the general public does, so they have to rely on the information provided by the sponsor or the employer. A full and complete disclosure of all the facts is required. The situation makes it “particularly challenging” in determining whether “the bonus will have to be paid out and therefore whether the policy will have to respond.”

Lloyd’s also quoted one sports broker who noted that no matter how much careful preparation is done, “there is always the possibility of the unexpected. It is what makes this type of cover such a specialist area but also one that can be rewarding and interesting for the underwriter.”

Clubs and sponsors can also buy contractual bonus insurance for loss of revenue. Danny Burns, Contingency Underwriter, Talbot Underwriting, told Lloyd’s: “This is for failure of a team to achieve an objective. ‘Had they achieved this result, they would have got X amount of revenue’.”

Bonuses can also be the subject of litigation. The dispute between the NFL’s Atlanta Falcons and their disgraced quarterback Michael Vick is the most notable current example, but there are others.

Lloyd’s also noted that “many clubs which pay high wages and big bonuses to star players will also seek to protect themselves against any financial impact of the players’ behavior off the field with a ‘Death & Disgrace’ policy, which has traditionally been underwritten for entertainment stars engaged by firms to promote their products.”

However, as sporting events and those who engage in them, come closer and closer to being entertainers, the lines between the two become increasingly blurred. Lloyd’s quoted another broker, who stated: “The wages and bonuses for global sports stars now rival the wages paid to the lead actors in Hollywood blockbusters. This is evident with the rising number of inquiries we have for Death & Disgrace cover. With so much media exposure, the financial risks have never been so great.”

Source: Lloyd’s