From the perspective of a risk management professional, the world is so dangerous and full of risk that doing anything at all seems impossible. How can a surgeon do his work when a mistake may be fatal and incite a lawsuit? How can anyone drive knowing that a crash may require repairs costing more than the value of the car itself?How can Michael Bay pump millions into the making of his next action blockbuster when the disappearance of the lead actor could sink the entire project?
In the world of risk management, insurance agents are heroes. Liability insurance covers hospitals in the case of major lawsuits. Driving without car insurance is illegal in most states. Boilerplate insurance policies keep the world humming along. And while insurance can seem like a stuffy industry, the Michael Bay example indicates that insurance agents can face more exotic tasks.
Hollywood movies need to insure leading actors and actresses in case an accident or unforeseen event keeps the star from finishing the movie. For this reason, Lindsay Lohan is almost unhireable in major films. Her history with drugs, rehab, and legal problems make her a liability that no insurance company will underwrite. Robert Downey Jr.’s similar history led him to be paid only $500,000 for starring in the first Iron Man movie. Nicole Kidman’s history of delaying shooting due to knee injuries drove up premium costs and nearly ended her acting career.
Insurance agents’ power over Hollywood extends over healthy, untroubled actors as well. Writing in Slate, Edward Jay Epstein notes that while the movie Tomb Raider starring Angelina Jolie advertised the actress as performing her own stunts, in reality:
If a scene could injure Jolie, the loss-control representative watched to see that she was trussed up in a double-wired safety rig or hand-held by safety men in green spandex suits.
The representative also required that the film’s director - who had a history of leg injuries - to direct several scenes remotely so that he would not slip on the “set’s wet floors.”
The insurer behind many Hollywood stars is Lloyd’s, the “specialist insurance market” that insures - among many other strange examples - the taste buds of food critics, the legs of models and actresses, and the vocal chords of singers.
Not your typical insurance
Lloyd’s of London began as a way for British merchants to insure their ships and cargoes against being lost at sea. Today Lloyd’s is one of the largest insurance markets in the world, and it still covers maritime matters as well as traditional areas like employer liability, real estate, and energy. But it has made a name for itself as the insurer of unusual assets.
Singer Dolly Parton has an insurance policy with Lloyd’s on her breasts. Lloyd’s has insured a whiskey company offering a reward for the capture of the Loch Ness Monster against the risk of someone actually doing so. If you’re transporting multiple elephants on a transatlantic flight, Lloyd’s can dig up the last policy it wrote to cover that. The company notes:
Animals feature strongly in Lloyd’s history. “We insured a two-headed albino rattlesnake that we could only insure against restricted perils because, believe it or not, the last one insured at Lloyd’s died. An apparent disagreement between the respective heads had fatal consequences when one head bit the other.”
Some of the insurance deals seem more like jokes or status symbols than serious financial decisions. Actress Jennifer Love Hewitt told an interviewer that she’d considered getting her breasts insured because "These things right here are worth $5 million!" Others seem more like publicity stunts. The press generated by a supermarket that insured the taste buds of a senior wine purchaser increased sales by 19%.
But the policies can have a financial logic. A singer who damaged his voice could see his income drop by millions of dollars a year. Many policies on celebrities’ body parts are actually taken out by companies. Razor company Gillette insured the legs of Mariah Carey to protect its investment in its “Legs of a Goddess” ad campaign featuring the singer.
The hard part is figuring out how to measure the risk and value of each asset. Car insurers can access large data sets on the value of different cars, the cost of repairs, and the likelihood of an accident. Nothing like that exists for a celebrity’s vocal chords or a transatlantic flight of elephants. How much are Mariah Carey’s legs worth to the ad campaign? And if she scars one leg, how much does that value diminish?
The case of sports
While the press loves headlines about million dollar insurance policies for celebrities’ legs or breasts, our research failed to turn up many examples of how these claims are settled. But we can see the difficulties inherent in such insurance with the example of disability insurance for athletes.
Like models, actors, and singers, athletes have a high income potential that depends entirely on their health. Although sports teams have disability insurance for players should they become injured, gaps remain. An injury in college could prevent a promising athlete from the expected millions awaiting his entry to the pros, while teams’ policies can fail to cover career-ending injuries from events outside of the season.
Insurance policies to fill these gaps have become more common. Whereas 15% of first round picks in the NFL draft had insurance in 1990, nearly every player drafted in the first round today does at a cost of $10,000 per $1 million of coverage. And about one third of NFL players have a policy, many of them from Richard “Big Daddy” Salgado, a former offensive lineman who offers insurance policies backed by Lloyd’s.
The logic of these policies appears quite sound, but their value is questionable. An Atlantic article investigating athlete disability insurance notes:
These guarantees cover "permanent total disability," meaning only policyholders who are never able set foot on a field or court again—not simply those who suffer injuries that may reduce their earning potential—can file a claim.
This often forces athletes to make hard choices. Take the example of Willis McGahee, a running back at the University of Miami projected as one of the earliest picks in the NFL draft. During his final season in 2001, he took out an insurance policy. In the final game of the season, McGahee caught a screen pass and took a hard hit that bent his knee and tore his ACL, PCL, and MCL. It was the type of injury that can end a career; the exact situation such insurance is meant to cover.
McGahee had the option to take a $2.5 million insurance payout. He declined, focused on his recovery, and entered the NFL draft. The Buffalo Bills took a risk and drafted him at the end of the first round. He spent his entire first season recovering, but he is now 9 years into a fairly successful career.
Willis McGahee represents the happy side of the dilemma of athlete’s disability insurance. Thanks to modern medicine, an injury that fully ends a career is rare. An article on the insurance policies offered by agents like Big Daddy Salgado pointed to a 10 year old case as the most recent example of an athlete benefitting from a policy.
The downside is that medicine’s ability to get an injured player back on the field, but not at his or her full potential, prevents these all-or-nothing policies from benefitting athletes. McGahee’s college injury likely impaired his NFL career, and it could have kept him from enjoying anything more than a short career as a backup. But since it is difficult for insurance companies to measure the reduction in a player’s future earnings from a debilitating but not career-ending injury, the protection these policies offer is extremely narrow.
The frontiers of insurance
Insurers of celebrities’ cleavage and other unusual assets face similar challenges to those facing insurers of athletes. It’s black and white whether Lloyd’s will have to pay the whiskey company offering a reward to anyone who captures the Loch Ness monster. But if Bruce Springsteen’s vocal chords face an injury that only partially reduces the quality of his singing voice, is he still entitled to the full $5.7 million value of his policy with Lloyd’s?
Taking stock of the risk in the first place is equally problematic. When a client of model Heidi Klum took out an insurance policy on her legs, Klum underwent an examination during which the insurers decided that her left leg was less valuable than her right leg because it had a scar. The underwriter of an insurance policy for a sailor attempting to float across the English channel in his bathtub insisted on inspecting the tub and inserting a clause that “the drain plug would stay in place at all times.”
Although Lloyd’s insists on its efforts to research the risks of every strange insurance request and come up with the right contract to cover every possibility, part of the reason the market works is that the policies are so rarely collected on. Lloyd’s dominance in the world of unusual insurance contracts also likely comes from its own unusual structure.
Although Lloyd’s is one of the biggest names in insurance, it is actually a marketplace for individual members to sell insurance. Each member or underwriter is part of syndicates that pool risk, but makes deals independently with clients face to face. The flexibility of making deals this way - rather than following the guidelines of a major corporation - helps explain Lloyd’s role in fulfilling strange requests.
It’s easy to dismiss the challenges of fulfilling these strange insurance requests as vanity projects or problems of the 1%. But expanding the borders of what insurance can cover is important for more than just athletes, singers, and celebrities.
Surgeons and classical musicians are equally dependent on one body part for their livelihood. Just as microfinance has worked to extend access to capital to low income people locked out of traditional finance, developing microinsurance could allow breadwinners making only a few dollars per day to get life insurance. And an important part of creating a new industry or market is figuring out how to insure it. Today as Elon Musk and Richard Branson lead efforts to make space commercially viable, insurance agents are quietly working out the insurance policies to cover their ventures.
Individuals and organizations protect themselves against risk in a number of ways including diversification and locking in prices and profits on a futures market. Insurance is one of these strategies that quietly keeps the world running. And whether by giving actors and actresses making a living off their good looks peace of mind, or an entrepreneur the ability to pursue his dream of making space tourism commercially viable, it can even enjoy some excitement from time to time.