In a sector where rates have held up well, due in part to limited appetite to write such business, Amanda Lewis discusses the art and science of prize indemnity cover.
At the time it seemed like a good idea. Promoters for a catering trade fair, looking to raise the event's profile, opted for the tried and tested 'guess the number' competition by filling the boot of a new car with cutlery and asking delegates to guess how many items were used.
Someone was promptly despatched to buy boxes of cutlery that were then emptied into the boot of the prize car. Not an easy competition to win you would think, and one based on pure chance, but the organisers became increasingly concerned when multiple winners came forward with the right answer.
So, what was the problem? The empty cutlery boxes — complete with volume details printed on the side — were left near the car and it didn't need a maths degree for passing delegates to come up with a reasonably accurate guess.
An uncertain outcome
For an insurer offering prize indemnity cover, that's the worst kind of scenario. Insurance for this type of risk will have been provided on the basis of set terms and conditions with the expectation that the organisers will do all they can to ensure the competition is run without compromising the critical 'chance' element of the game.
If conventional games such as these have the potential to go wrong, what chance does an underwriter have for successfully providing prize indemnity cover as the trend grows for ever more complex, technology-charged and lavishly rewarded prize competitions?
Prize indemnity cover indemnifies the organiser of a competition against their legal liability to provide a prize. A critical aspect of the competition is that the outcome must be uncertain: the prize cannot be guaranteed. Insurance covering sponsors for contractual bonuses, for example, is often mistakenly seen as the same thing but the critical difference is that an outcome in this scenario is certain — that's to say, a prize will be won by someone, but hopefully not the team or individual insured.
Competitions eligible for prize indemnity cover can come in either mathematical or non-mathematical forms. The classic 'hole in one' at a golf competition is non-mathematical. The odds cannot be measured and the only guide an underwriter can use is the historical record on the course.
However, when it comes to a mathematically based game, such as rolling the dice, where the odds of throwing six sixes can be calculated, the underwriter's job becomes more akin to that of an actuary.
Still prepared to gamble?
Without a doubt, demand for prize indemnity insurance has increased in recent years as sales promotions have become more sophisticated. Buyers can range from sales promotion consultancies, to commercial lotteries and charities where the prospect of putting up a substantial prize might — without insurance — be beyond their financial capabilities. The downturn in this sector has also not been as savage as might have been expected as people have tended to protect their leisure spend and are still prepared to gamble.
Generally insurers provide prize indemnity cover under their contingency book and, while rates have taken a battering on the more traditional lines of cancellation and non-appearance, prize indemnity has held up well. This is partly due to a limited appetite to write such business.
Some see it as simply gambling with an unwelcome potential for total losses. But if managed well and underwritten with a bit of imagination and common sense, it can provide a useful counterbalance to the more traditional contingency risks.
That is not to say there is no potential for difficulties. As with the catering trade fair example, competitions of this nature have the potential to go spectacularly wrong with very expensive consequences. And sometimes it is no accident.
Fraud is an ever present risk; remember the 'coughing major' on the TV game show Who Wants To Be A Millionaire? The onus is on the organisers to take all necessary precautions and the insurer may also appoint a specialist risk manager to monitor the specific mechanics of a competition, to ensure it is being run in accordance with the competition's agreed terms and conditions.
Place your bets
Another high profile example to recently hit the headlines was the crossbar challenge run by premier rugby union club Saracens. Having had two winners of the £250 000 prize in the last two years, the competition has proven to be unusually lucrative for contestants. There are no suggestions of cheating or fraud but one of the winners kicked the rugby ball in socks only: was this variation allowed and should the kick have been a place kick or drop kick as opposed to a simple punt? It is critical that the insurer and organiser agree these details in advance.
Organisers allowing the competition rules to be compromised at the last minute can lead to dispute between insurer and insured. Again, the key is to ensure good communication and, if a process can be established that allows contact with the insurer for last minute changes to be approved, so much the better.
Prize indemnity cover will always seem a bit fringe, a little like gambling, and it is not without some irony that the biggest threat to insurers is likely to stem from the bookmakers. With lower overheads and lower margins, their ability to offer a competitive product similar to a prize indemnity cover is becoming more of an issue for insurers.
It is up to the insurance industry to keep up with the creativity and complexity of the prize competition business if it wants to maintain its presence in this sector.
Amanda Lewis is class underwriter for contingency at Aegis London
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