What is prize indemnity insurance?

Prize indemnity insurance, sometimes referred to as hole-in-one insurance, is indemnification insurance for a promotion in which participants are offered the chance to win prizes. It gives companies the ability to offer special contests and promotions with attractive prizes like cars, vacations, and fat cheques, while transferring the risk of the prize to a financially bound insurer.

Instead of hoarding cash to cover large prizes, organisations can pay a premium to an insurance company. This premium is calculated on the value of the prize and the statistical odds of someone winning it. The policy’s coverage limit is equal to the insured’s potential loss, which is the financial value of the prize. It also protects the prize winner because it acts as a guarantee that the insurer will pay for the prize.

“It’s a risk transfer,” explained Robin Lang, Tokio Marine vice president, promotions division. “A lot of brands will use this in order to be able to tout a large prize like a million dollars … basically to get a consumer to react and incentivise them. They don’t want to be on the hook for the million dollars, so they purchase an insurance policy to take on that risk. They pay a premium and then if that certain feat happens … then they win that prize and the insurance policy pays out.”

Insurance companies will not take on every prize risk. For example, they won’t take on a million-pound risk if the odds for that happening are highly likely. If they did, they’d be left out of pocket and out of business.

Why purchase prize indemnity insurance?
Prize indemnity insurance can be an excellent marketing tool. Companies can offer high-value prizes to entice new customers, build brand loyalty, and generate buzz around an event. As Damian Kerin, regional manager entertainment, AGCS Asia & Pacific, told Insurance Business: “Use of prize indemnity is a sign that insurance buyers are using contingency insurance to its full potential as a viable business tool to drive increased sales and revenue.”

Who sets the guidelines?
There have to be strict contest guidelines when it comes to prize indemnity insurance. The guidelines must be clear and the promoter or sponsor must abide by them if the want to make a successful claim. Claims can be denied if the insurance company deems a participant had an unfair advantage.

Hole-in-one insurance
One of the most common forms of prize indemnity insurance is hole-in-one insurance. This is coverage purchased by a golf tournament host or sponsor and it reimburses organisers for the cost of a hole-in-one prize should one of the golfers hit a hole-in-one during a specific tournament.

According to the National Hole-in-One Registry in the US, the odds of the average golfer making a hole-in-one are 12,000 to 1, and the odds of a PGA Tour player hitting a hole-in-one are 3,000 to 1. These odds are low enough to insurers to offer prize indemnity for hole-in-one contests.

Other popular forms of prize indemnity insurance
While hole-in-one golf shots are the most common prize indemnity trigger, there are lots of other popular products, many of which include audience participation in sports. For example, a lucky ticketholder might get the chance to attempt a half-time rugby conversion, half-court basketball throw, crowd cricket catch, or a soccer crossbar challenge, with the chance of winning a brand new sports car or significant cash prize.

March Madness
March Madness is a US college basketball single-elimination tournament, which consists of 68 division one teams that compete in seven rounds for the national championship. The first tournament was held in 1939 and the madness has ensued annually ever since. March Madness is one of the biggest events of the year for the prize indemnity insurance markets, as companies seek to cash in on the popularity of the tournament by offering large prizes.

The most popular product in March Madness is ‘perfect bracket’ – picking the correct result in every NCAA basketball game. The odds for guessing the ‘perfect bracket’ are often quoted as 1-in-9.2-quintillion. In fact, the average American is reportedly more likely to become president than record a ‘perfect bracket’. Now they’re the sort of odds insurance organisations find appealing.

Probability games versus skill-based contests
Insurers tend to prefer probability games like the March Madness ‘perfect bracket’ to skills-based contests like a hole-in-one, according to Tokio Marine’s Lang.

He told Insurance Business: “If it’s purely probability risk it really is just calculations. It’s all probability and statistical. But if it’s skill-based promotion – like your hole-in-ones or your half-court shots – we have a rating matrix based on years and years of compilations of number of attempts and the number of times somebody made a half-court shot in, like, 10,000 attempts. We have a historical database of the number of times this has happened.

“We would prefer, and I think most insurers would prefer, a probability game. Because we can calculate our expected loss, what we can charge. It’s pretty straightforward when it’s probability games. But it helps to diversify and it makes things more interesting with the different types of games we insure.”