Risk management and insurance

Key topic

It is important for athletes to identify and manage potential risk as well as  recognize different types of fraud so that they can take measures to protect themselves from such risks.   Athletes can protect themselves and their personal finances in a number of ways whether that means buying different types of insurance to cover basic and sport specific needs, protecting their wealth and their family or limiting the disastrous financial effects of a divorce. This lesson outlines the elements of risk and insurance. It also discusses the concepts associated with risk and insurance and offers advice as to how student athletes can treat these elements at different points of their lives both within and outside of sport.

Learning objectives

• Understand the different types of risks and insurance
• Develop a good understanding of the process and outcome of these elements
• Discover how to treat risks and insurance in your life both on and off the field
• Protect your NIL from being used by unauthorized parties and the steps you need to take to prevent that

Introduction

Insurance is a form of risk management. When you buy insurance, you pay a relatively small amount of money called a premium on a regular basis either monthly or annually to an insurance company. By paying the insurance premium, you protect yourself against a large, unpredictable expense called a loss or claim that you might incur if something bad like an accident, illness, or injury happens to you. Basically, insurance transfers the risk from you to the insurance company for a fee.

Essentially, insurance is an agreement that states something is protected if it is damaged, hurt, or stolen. If anything happens to the insured item that’s covered by the policy, you can receive funds from the insurance company to have the item replaced, fixed, or you may receive a cash settlement.  People purchase insurance to have protection against the “what ifs” in life. You never know when you may get some type of illness, break your leg, or need medication. It’s important to have medical insurance to cover these costs. In the same manner, you need to insure your car to protect it against any damages that may occur during an accident.

Insurance protects your financial future by reducing your risk. If you have an accident or a major health problem and no insurance, you could be faced with a potentially large bill to pay. If you’re unable to pay that bill, your credit score will be adversely affected, you might even have to declare bankruptcy. In addition, insurance provides extra protection against lending. Having insurance makes it more likely that you will get a loan, and it is required most of the times when you apply for a loan. In today’s age, having insurance is vitally important, both to your personal well-being and to your finances.

The definition of risk and how to protect yourself

Risk is the potential of gaining or losing something of value. It can be defined as the intentional and voluntary interaction with uncertainty.  Risk is the consequence of an action taken despite uncertainty. There are so many risks out there: the risk of getting sick, risk of injury, risk of a car accident, risk of a house fire, risk of theft, risk of losing your job, etc.

There are also so many different ways of protecting yourself from risk and these depend on the personality of each one of us. Economists argue that we all have a risk appetite, which falls in one of three categories: risk-averse, risk-neutral and risk-seeking. Let’s watch this short video before continuing with our lesson:

What is risk appetite?

A risk-averse individual is one who prefers to preserve what they have instead of gaining big. Such individuals tend to go for low-risk options and therefore more stability. These individuals tend to place their bet on the safe side; options that have a more or less guaranteed outcome.

As opposed to risk-averse individuals, risk-seekers opt for gain over what they currently have. They are simply more interested in making a generous profit despite the increased risk that such options tend to come with. That does not in turn imply that they do not understand risk. Quite the opposite. They are willing to face a higher risk, if it comes with the promise of higher gain. For example, these individuals may invest in start-ups which run the very obvious risk of not making it, but if they do, the profit is usually substantial.

Finally, we have the risk-neutral individuals. This category is not in any way placed in the middle of the previous two; it is not the best of both worlds. Risk-neutral investors are those who do not understand risk, or at the very least, do not take it into account when making decisions. If the individual considers only gain without accounting for the inevitable accompanying risk, then they are risk-neutral. They might be described as less rational than others.

Action steps – Exercise 1 (4 minutes)
Having watched the video and discussed the three types of risk appetite, please answer the following:

• How do you rate your individual appetite in terms of the above different types of risk taking?
• Give us an example which can support the above

Now, let’s look at some of the ways we may protect ourselves from risk.

Risk Avoidance – When you avoid becoming involved or withhold from a situation to avoid risk

Example: Joel is a professional basketball player who loves clubbing. His friend Jack invited him to go out with him at the best club in town. Joel is excited and tells Jack he’ll join him but later feels it is a bad idea because the team code of conduct he has signed, requires him to be home by midnight the night before a game, or else he could face a fine and other forms of disciplinary measures. Although no one might see him when he is out clubbing, Joel decides not to go out with Jack and sends him a text to let him know he’s decided not to go.

Risk Reduction – When you take measures to reduce your overall risk in a given situation

Example: Jenny has had an ACL injury early in her career. In order to reduce the risk of having the same injury again she has been strictly following all the advice her strengthening coaches have been giving her over the years. Now after a career of 15 years she is still ACL injury free.

Risk Sharing – When you take measures to share your risk with another, through insurance or risk transfer

Example: Ken knows that an injury can affect the level of income he will earn in the future and can shorten his career. Although he is insured by his team, he adds extra Long-Term Disability, Career Ending and Draft Protection insurance because the team’s insurance only covers the term period of his present contact. The plan he chose ensures a certain amount of income should injury shorten his expected career period.

Risk Retention – When you accept a given risk and budget to prepare for that risk

Example: George is a soccer agent. His client Thomas is 17 and just has just signed a big contract with one of the top 5 clubs in Europe. Thomas although talented, is also very careless in what he says to the press and through his social media posts. George feels that this might put Thomas’ endorsement deals into risk so he convinces him to take insure against loss of endorsement for his sponsorship/endorsement contracts.

Basic insurance needed by everybody

There are several basic categories of insurance. Four of the most common forms are Health, Liability, Property, and Life.

Health insurance is insurance that covers the whole or part of the risk of a person incurring medical expenses. Through health insurance you are protecting your health, your quality of life, your ability to earn a living and your family’s future.

Liability (Third Party) Insurance protects you from having to pay for damages or injuries caused to other people. For example, if you have a car accident and cause damage to the other person’s car, you may be held liable for the cost to repair the car; or if the other person is injured in the crash, you might be held liable for their hospitalization and/or medical expenses. If someone slips and falls on an icy sidewalk that sits on property that you own, you could be held responsible for that person’s injuries. But if you have liability insurance, much of the expense for these damages is transferred to the insurance company.

Property Insurance covers loss or damage to your physical belongings. For example, you would buy property insurance to cover your house in case it’s damaged in a fire or flood. It’s also important to insure your belongings if you rent an apartment or house. Home contents insurance protects the items and belongings in your rental property if anything happens to the property. For example, home contents insurance would protect your belongings from theft or from damage caused by deterioration of the building (like leaky pipes or roofs). If something happens to your belongings, the insurance company pays to fix them, or you are reimbursed for the purchase price.

Life Insurance is an agreement between you and the insurance company where you pay a regular premium so that, if you die, the company will pay a specified sum of money to the person(s) you choose. Life insurance may provide a lump sum payment to the family which will help them to maintain their standard of living. Also, there are insurance policies that could replace your income and cover your mortgage. A person who is the breadwinner of a family usually buys life insurance to make sure their survivors and dependents are secure if something happens.

Some life insurance policies will build up a cash value and that can be another form of substantial savings which may allow you to borrow against the total benefit. That means life insurance can play a role in your financial planning as well.

Insurance for sports professionals

Insurance programs are not geared towards the very specific conditions of the pro athlete’s life; athletes might be continuously outperforming their insurance packages as they achieve greater visibility, expand their income flows, buy additional assets, gift property to family, etc. Any, and all of these factors can affect the insurance needs in many and unpredictable ways, hence leaving the athlete financially vulnerable to losses after an incident, theft, lawsuit or accident. Moreover, pro athletes, like other celebrities and public figures, are more likely to be targets of crimes such as burglaries, identity theft, kidnap or extortion situations, and are more likely to travel extensively internationally.

It is furthermore, commonplace for professional athletes to purchase cars and housing for family members or even close friends and associates. Although this is something to be commended mostly, it’s equally important to be clear about ownership structures. That is because, the more assets an athlete has under their name, the higher the liability risk. Plus, if the athlete is legally the owner of the home, but not its primary resident, there could be insurance implications.

Not to worry though, as there are a number of tailored insurance types that are available to athletes which we will explore one by one. These include:

1. Personal Accident Insurance

• Temporary disability injury
• Career ending injury
• Loss of value insurance
• Accidental death

2. Loss of endorsement coverage

3. Sports Travel Insurance

• Injuries out of state and abroad
• Medical coverage out of state and abroad

4. Kidnap, Ransom & Extortion Insurance

Let’s go over the above types of insurance in more detail so that you can understand how they help athletes hedge against certain athlete-specific risks.

Personal Accident Insurance

An injury can be critical to an athletic career and it can be a financially debilitating event. Temporary Total disability insurance is designed to respond if a professional athlete is temporarily unable to play due to an accident, injury or sickness and it normally covers their sports regular income which is lost due to an injury. In the event of a career ending injury such insurance usually covers a lump sum to compensate for the athlete’s future earnings.

Loss-of-value insurance protects against the risk, in certain situations, of injuries preventing athletes from realizing their expected future financial gains. For instance, a college athlete protege, who is projected to be the top Draft pick for the pros but suffers an injury in the senior year pre-Draft, resulting in a much lower draft pick can insure against that contingency in economic value. Accidental death insurance will grant a lump sum benefit to the athlete’s estate for accidental death.

Loss of Endorsement Coverage

Professional athletes usually have endorsement deals therefore they need to also consider loss of endorsement coverage. Serious injuries and illnesses can impair their ability to meet performance expectations which can reduce their exposure and post-game endorsements. Also, the trigger for coverage may be “media coverage of conduct or alleged conduct that generates adverse publicity or public contempt.” If the professional athlete’s status is affected due an event that causes them negative publicity, the loss of an endorsement contract can have a huge impact on their income, so it is recommended that athletes prepare for that contingency with the right type of insurance.

Sports Travel Insurance

Athletes, particularly those that travel frequently both nationally and internationally, either because of the nature of their sport (e.g., tennis), or due to their team’s commitments (e.g., basketball players), need to be covered for a variety of scenarios including medical expenses incurred due to an injury while abroad.

Kidnap, Extortion and Ransom Insurance

We have witnessed a marked rise in terrorist incidents and transnational crimes in the past couple of decades, with public figures and well-known high net worth individuals as the targets and would-be targets. A number of professional athletes have built admirable wealth (and fame) and they are thus more prone to kidnap, ransom and extortion.

This new phenomenon not only broadens the base of incident probability in respect of kidnapping and extortion, but it creates unique needs for coverage that had previously been unavailable. Kidnap and extortion are not just financial crimes. The impact to the athletes and their families who are directly affected can be even more severe. The protection offered under this type of insurance covers kidnap ransom, extortion related bodily injury or death, property damage, malicious detention and hijack.

Action Steps – Exercise 2 (10 minutes)

Ask students to identify which of the above types of insurance they may need in the future and why. Continue with a discussion on how loss-of-value insurance can be useful for athletes in prospective drafts and also discuss the need for loss of endorsement insurance in view of the change in NCAA regulations allowing athletes to commercialize their NIL.

Choosing the right insurance agent

Selecting the right independent insurance agent to take care of your insurance needs should not be a hasty decision. You are looking for a long-term relationship with someone you can trust. We set below 5 things to look for when choosing an insurance agent so that you make sure that you select the right agent.

1. Make sure that the insurance agent understands your needs, your goals and what your objectives are.
2. You want to work with an agent who can provide you with both coverage and cost options.
3. Check out whether the agent works with reputable insurance companies.
4. Look for an agent with credentials and professional designations such as Certified Insurance Counselor (CIC), Chartered Property and Casualty Underwriter (CPCU), Associate in Risk Management (ARM). To maintain these credentials, insurance agents must take continuing education classes, which means that they are up-to- date on the latest trends and product offerings of the insurance industry.
5. Ask for referrals from family, friends and colleagues and you should particularly ask about the agent’s customer service and follow-through tactics.

Safeguarding the assets and lifestyles of the wealthy and famous, requires tailored recommendations, privacy and expertise that can only be achieved through  an  advisor whom the person trust and has the required insurance broker qualifications. Normally, the insurance company will not pay if the insurance policy is not correct or has issues. Many people choose insurance based on the cheapest rates. But going for the lowest rate can cost more in the long run for those who select a substandard company that  doesn’t  come through when they need it. Insurers recognize the need for expanded, special coverage and offer enhanced policies to provide the level of protection needed for the unique assets and lifestyles of athletes.

During different phases of your life, your career whether an athletic one or not, will develop and transition, and so will your insurance needs. The right agent will proactively manage your insurance program and adapt it to the changing realities of your life.

Protecting your Name, Image & Likeness from unauthorized use

The name, image, and likeness of athletes are an asset with potentially large commercial value. As the potential for sponsorships and endorsement grows, so do the opportunities for unauthorized use and profit by third parties.

The right of publicity, otherwise called personality right, refers to the individual’s right to control the use of their likeness, name and identity for commercial use. A company or person cannot use an athlete’s name or image for monetary gains without permission or contractual agreement. NIL rights are the expression of a personality in the public domain. The provision of NIL rights in law enables the definition, valuation, commercial exploitation and protection of NIL rights associated with a person. Unauthorized use of the sports celebrity brand can be manifested in a number of ways including:

• Trade mark infringement through direct use of the athlete’s registered trademarks
• Dilution of the mark by using look-alikes of the athlete’s distinctive and famous marks
• Unfair competition and false advertising
• Use of web names or domains containing the athlete’s name or distinctive logo such as Ronaldo’s CR7 distinctive logo

Athletes can protect their sports brand by first identifying their relevant trademarks. Most often, the protectable trademarks of an athlete are their name, image and likeness. Once trademark rights are established in a name or likeness, the next step is to register these trademarks.  In the United States these trademarks can be registered with the USPTO

(United States Patent and Trademark Office) and such registration expands common law trademark rights to the entire United States. While in the United States the personality rights are to some extent recognized and protected, there are a number of countries including the UK, where there are no specific legal tools which define NIL rights or address the harmful effect of the unlawful use of a person’s image.

As the value of endorsement and sponsorship revenue of sports personalities continues to grow exponentially, the need to protect this type of revenue becomes more and more urgent

Lesson wrap-up

We covered a lot of ground today. We started by discussing what insurance is and focusing on risk; the different types and attitudes towards risk, as well as how to deal with it. We then discussed insurance, the different categories of insurance and its importance to everyone and athletes in particular. Finally, we zoomed in on how to protect your NIL from unauthorized use by third parties.

At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!