Rising Costs Driving Demand for Contractual Bonus, Revenue Protection Insurance

Rising Costs Driving Demand for Contractual Bonus, Revenue Protection Insurance

Hedgehog Risk announced that it closed on a strategic investment from SIG Insurance Holdings in late January. The Susquehanna International Group of Companies subsidiary took a ‘significant’ position in the sports and prize insurance specialist.

Susquehanna was presumably intrigued by the premium volume Hedgehog’s contractual bonus, revenue protection, and prize indemnity business can generate. The niche subset of the continency category represents a growing opportunity in the market.

As the money in sport continues to climb, the risk profile on investment follows. As is the number of stakeholders seeking to hedge their downside by linking payments to on-field success.

Historically, “sponsors were our primary client,” Saul Paine (US Lead, Hedgehog Risk) said. “However, professional teams and colleges athletic departments have also been buying performance-related policies in recent years, and corporates outside of sponsorship are increasingly insuring outcomes too.”

The London-based coverholder now helps to cover upwards of $100 million worth of niche risk associated with prize-related contests, incentivized player/staff contracts, sponsor endorsements or promotions, and relegation each year.

To clarify, contingency insurance protects against specific risks or unforeseen events, while disability insurance focuses on protecting policy holders in the event of injury or illness. But they tend to be closely accompanied by underwriters and providers.

Disability coverage (think: A and H) is an established market.

“Most insurance companies involved in the sports and entertainment sector offer disability of some kind. It’s a specialized product that has been around for a very long time,” Paine said.

Disability plus, which protects rights owners against a broader set of happenstances that can negatively influence player performance, is a newer product. Hedgehog Risk does not traffic in that type of sporting risk. 

“Our [contingency] products are a bit more explicit,” Paine said. They cover “the hit to the balance sheet that would occur if a highly touted team failed to make the playoffs or the hit to the balance sheet that would occur if a sponsor ran a promotion offering a million-dollar giveaway and it were to cash.”

Historically speaking, only a few niche providers offered policies tied to event outcomes.

“It’s a hugely undersold area of the market,” Paine said. That’s because “most general insurance brokers lack the expertise needed to price these risks collaterally in house; nor do they have the ability to build a pipeline of deals in the area.”

So, rights owners seeking out policies have often been faced with steep premiums for coverage from the general contingency market.

Hedgehog was formed in 2013 to fill that gap in the market. The London-based underwriter-broker offers prize indemnity, contractual bonus, and revenue protection insurance.

The former is not a new concept. Underwriters have catered to the ‘weird and wonderful’ for decades. Sports fans have all seen million-dollar March Madness bracket contests, half-court shots to win a free car, and offers to refund furniture purchases if the home team wins the Super Bowl.

However, the number of prize insurance policies being written is rising “as eye catching promotions are seemingly being adopted as a marketing tool [more often than ever],” Paine said. 

The range and capability of what is being insured in sport, along with the profile of who is purchasing these policies, has also shifted in recent years with revenues and risk profiles continuing to climb.

Companies across the industry now leverage contractual bonus insurance to protect against the ‘cost of success’. The product enables them to fix budget costs for the lowest dollar amount possible.

Bonuses in “player and staff contracts, and additional postseason expenses if the team advances far can [add up to] several million dollars,” Paine noted. 

Corporate partners with escalator payments tied to event outcomes or postseason performance are adopting policies too. 

“Yes, it's a fantastic problem to have a team or player you're sponsoring doing well,” Paine said. “However, that team going on to win the championship could potentially mean you're on the hook to write a check for a million dollars plus.”

Other industry stakeholders are buying revenue protection policies to hedge their potential downside. 

They are “ensuring negative outcomes, like a loss of revenue as a result of failing to do something,” Paine said. “That’s a growing space as well.”

Soccer investors fearful of relegation and unrealized incomes abroad are seeking out these nuanced policies (they don’t protect the entirety of the loss), as are media partners and ticketing companies uneasy about the prospect of a finals sweeps.

The agencies and sponsors negotiating sports partnerships are taking advantage of the category’s emergence too to reduce guaranteed payouts and/or become more competitive in the marketplace.

They have begun getting quotes to find out “if they put a million dollars towards an insurance policy, what can be written into [a prospective] contract as upside,” Paine said. Then they are going back to the team and saying, “we can’t meet your $10 million valuation, but we will give you $7 million and another $10 million if you win knowing the policy would pay out.”

At a certain point, there’s a tradeoff to be made for the organization.

Now, one of the giants is entering the space. Susquehanna is among the largest privately held financial institutions and quantitative trading firms in the world. Hedgehog is expected to serve as a strong pipeline of diverse sporting risk for them.

One that will only get stronger as they companies continue to grow the space together.

The capital raised will fuel Hedgehog’s growth in the U.S., U.K., and greater Europe. The company intends to expand on its lines of business and to be able to cover larger and longer-term risk moving forward.

Remember, SIG has the capacity to take significant amounts of risk on any number of events.

Look for even more stakeholders to be hedging their investments against on-field performance in the months and years ahead.