Sportspeople behaving badly…

By Sam Richardson 02/11/2012

A New Zealand insurer is to offer corporate sponsors insurance to protect sponsorship of sports in the event of behaviour that is harmful to the sponsor’s brand, according to this article from today’s New Zealand Herald. From the article:

Following a host of celebrity implosions, corporate sponsors are being offered insurance against their investments going bad with disgrace, non-appearance and lack of performance.

As the sponsors of shamed cyclist Lance Armstrong abandon him in droves, insurance brokerage Apex General is offering local sporting organisations and film-makers protection for the value of their sponsorship.

It is providing cover for a range of sponsorship costs including non-appearance, death, disability and disgrace and performance bonuses.

Apex general managing director James McGhie said this was new to New Zealand for sponsors looking to protect their investments.

The company’s sports cover also gives protection against things such as non-appearance causing financial loss and a dive in reputation that sees their investment’s value fall.

Okay, so bad behaviour cannot be condoned from recipients of sponsorship, but the relationship is, to me, a fairly simple one – a sponsor sponsors an athlete because they perceive the sponsorship to be worth at least what it forks out by way of the sponsorship. If the athlete stuffs up, causing the sponsor to re-evaluate the worth of the deal to them, then the sponsorship ends if the sponsor perceives the deal to no longer meet its benefit-cost criteria. The waters do murky somewhat when you have long-term deals, but the relationship is fundamentally the same. The deals are full of risk for sponsors, but the incentives at play work pretty well. Choose wisely and they work for you – make a bad choice and you suffer the consequences, as is the case with any business deal gone bad. The saga of sponsors pulling out from Lance Armstrong in the wake of recent developments is a case in point.

Introduce some form of insurance into this relationship and you are fundamentally changing the game. Anyone that has studied introductory economics will be aware of the issues surrounding insurance markets, in particular asymmetric information, adverse selection and moral hazard. The moral hazard issues in this arrangement strike me as being problematic – if you are a sports team and your sponsor takes out insurance against your potential future behaviour being less than desirable, how does that alter your incentives when compared to a deal without insurance? Without insurance, it is in the best interests of the sports team to behave in a way that does not harm the sponsorship arrangement for fear that they may end up losing it. With insurance, the incentives change – teams no longer have the same incentive to preserve their end of the deal, thus the likelihood of misbehaviour increases. And what for the sponsors? Do they enter into deals with safe, trustworthy, dependable and successful teams or athletes, or do their incentives change as well? Instead of lower risk sponsorships, there is likely to be a move towards more risky deals.

Talk about opening a can of worms…