from Amazon
Tuesday, January 19, 2010
Insuring player contracts
Gammons reported:
Everyone in the business understands that the Mets did not insure Beltran
But what does that mean exactly? How does insurance work? I had a thread on this two years ago where I quoted a great article (go there and read the whole thing):
Each team pays a premium based on the salaries of its five highest-paid players, but is free to allocate that coverage how it wishes. Typically, a team will extend coverage to as many as seven players, Daly said. Coverage kicks in when a player misses at least 30 games. Beyond that, individual teams are free to pursue additional coverage, but the heavy premiums make it a losing proposition. To insure a player under the league program, it costs about 5 percent of his salary. To insure additional players, it would cost substantially more.
So, if your top 5 contracts total say 60MM$, you buy insurance totalling 60MM$. Say that costs you, I don’t know, 2MM$ in premiums. You then decide how to spread out that level of coverage (60MM$) over as many contracts as you want. You might cover the whole team, or just the 5 players. This is a pure arbitrage opportunity. Again, presuming that this is like a “group rate”, then the teams simply would cover most of their pitchers, and any of their regular players who are injury prone. Everyone else is self-insured (meaning that the teams cover the insurance themselves… they simply keep paying players for not playing).
It’s pretty straight forward how an insurance company would set the premium rates. If over the past 10 years they’ve had to pay out an average of 50MM$ per year (inflation-adjusted), then they make sure to set the rate at close to that (and make a profit). So, teams spending an average of 2MM$ each does that. And, then in order to make sure that the Yanks pay more than the Marlins, you make it proportionate to their payrolls somehow. (All numbers for illustration only.)
There is really no big reason that you need to go to an insurance company. It really only helps in the catastrophic cases, like ARod having a career-ending injury early on in his contract. As long as one team is not disproportionately affected, then insurance doesn’t really help or hurt in the grand scheme of things. As I noted, pitchers are a huge risk, so that’s where the coverage should go. But if all teams do this, then the arbitrate opportunity is gone (insurance companies will eventually pay out “too much” realizing that the market place is covering injury-prone players, and so, they up the premiums).
Anyway, this post is a little disjointed, but hopefully you followed along.