Via Marginal Revolution, football and hockey are running into insurance troubles due to head injuries. Insurance companies are pulling out of the market as it becomes, making it tougher for both schools and the professional leagues to obtain coverage:
In insurance parlance, traumatic brain injury is a “long-tail claim” that might take years to develop, then pay out indefinitely in the form of costly legal fees (to defend lawsuits and pay off settlements and judgments) and medical bills (to support disabled former players).
“Thirty years from now, you could be on the hook, and that’s a very difficult situation for an insurance company to be in,” said James Lynch, chief actuary for the Insurance Information Institute in New York. “This is why the industry is concerned about it. You want to be able to box up that risk.”ESPN.com
The potential exposure for insurers is incalculable. After listening to a presentation on brain injuries and insurance at the annual Casualty Actuarial Society convention in Las Vegas, William Morrissey, a vice president and actuary for CNA Insurance, told the panel, “I’m wondering how big of a sleeping giant this is.”
I love insurance stories, since actuaries are the sabermetricians of the finance world. In theory, insurance companies should not stop covering risk; they adjust their premiums to the risk. That is happening, too:
ESPN.com
Another recreation department, in Hawkins County, Tennessee, decided to keep tackle football this year, even though its longtime insurer refused to cover the sport. The department found a new carrier under a policy that drove up overall insurance costs 27 percent to more than $13,000. The department’s director, Tim Wilson, citing falling participation and rising costs, predicted that youth football will disappear within a decade. “We have insurance now, but who knows for how long?” he said.
Insurance companies are mostly refusing to offer coverage, which means their actuaries do not have a handle on the risk. In general, insurance saves you when a low probability, high cost event occurs. Either the actuaries have a poor model for the probability of head injuries, or they believe it’s no longer a low probability event.
Something like this happened in baseball back in 2004. Insurance companies declined to insure any contract longer than three years against injury. It was really the first shot against longer free-agent contracts, and the owners were very willing to go along with it. The market did adjust, and by 2007 longer term contracts were back:
Last night whle we were talking to Bill James, I asked about insurance on long-term contracts. It was my understanding that insurance companies wouldn’t go longer than three years anymore. Bill thought that was right. He also told us the Red Sox talked about insurance on Matsuzaka, but he never heard how that worked out. He gave us two reasons why so many long term deals were offered over the off-season.
1. The GMs who made the deals probably won’t last until the end of the deal, so it’s going to be someone else’s problem.BaseballMusings.com
2. The Red Sox expected the cost per season to go up more than it did. Instead, teams extended contract length. Bill’s feeling is that many of these teams don’t expect to get contributions from these players toward the end of their contracts. Instead of paying the same money over five years, they’re paying it over seven or eight.
The upshot is that businesses find ways around these problems. Insurance companies forced more risk onto teams, which probably lowered the amount teams are willing to pay players. Time will tell how the NFL and NHL deal with the head injury insurance problem.
