Effectively Wild: A FanGraphs Baseball Podcast - Effectively Wild Episode 942: Should Baseball Teams Buy Insurance?

Episode Date: August 19, 2016

Ben and Sam talk to author, associate professor, and FanGraphs writer Nathaniel Grow about the financial ramifications of Prince Fielder’s retirement and how contract insurance works in baseball.

Oh, well, you want me, baby You gotta come to me I'm just like a stumbling field You just can't move me Take out some insurance on me, baby Ooh, some insurance on me, baby Well, if you ever have to say goodbye I'm gonna hold right over and die

Hello and welcome to episode 942 of Effectively Wild, the daily podcast from Baseball Prospectus Presented by our Patreon supporters and the Play Index at BaseballReference.com I am Ben Lindberg of The Ringer, joined by Sam Miller of Baseball Prospectus Hello Hello I am Ben Lindberg of The Ringer, joined by Sam Miller of Baseball Prospectus. Hello. Hello. We are discussing the most exciting topic in all of sports today, insurance, which is actually a question we get asked a lot. How does insurance work in baseball?

And we always avoid the question because we don't know how insurance works in baseball. We don't know much about it. Teams don't talk about it all that much. And it's sort of this shadow to the reagent market. We know all about contracts and signings and how much players get paid. And there's this corollary that teams take out insurance and that costs a lot of money too, but we just don't know a whole lot about it. So we wanted to have someone on who does know something about it. He knows as much as it's possible to know about it, which is not everything, but a good deal more than we do. His name is Nathaniel Groh. He's been on the show before. He's an associate professor of legal studies at the news somewhat lately because of Prince Fielder.

Everyone wants to talk about the impact of Prince Fielder's retirement on the Rangers, specifically as it relates to insurance. So you wrote a Fangraphs post about this, and maybe we can use the Prince Fielder case to explore all of the issues involved here. So this is a case where the team did have an insurance policy on the player. How does it work to the extent that we know the details? Yeah, so based on all the available media reports, it sounds like, okay, so originally most of your listeners probably remember this, right? But Prince Fielder's contract was originally signed with Detroit back in 2012. And then the Tigers traded him to Texas in exchange for Ian Kinsler. And so as part of that

deal, the Tigers agreed to send the Rangers some sum of money over the reigning years of his contract. So as it's being reported, the Rangers are going to get about $6 million of the remaining salary owed to Prince from the Tigers, the remaining $18 million roughly per year. Apparently, the Rangers are on the hook for nine of that, and then an insurance company is going to be contributing the other $9 million. Okay. So what other considerations do we have to know about this? There's a stipulation that he has to stay on the roster for a while. I get the impression that insurance in baseball is just very much a case-by-case basis or company-by-company basis. There's no real standard. Yeah, exactly. So some leagues like the NBA and the NHL, they've set up league-wide insurance

policies. So any team that wants to opt in and insure a large money contract, they can do that at a reduced rate. MLB, it's much more every team makes these decisions for themselves. And so teams, if they have a big contract like Prince Fielders and they feel like they want to get insurance on it in case a situation like this develops where the player is done for the rest of his career, they go out on the private market and try to buy it from an insurer. Those insurers are going to offer different terms

depending on the player, depending on the amount of risk that they view, depending on the salary. And I understand that usually the way these things work is the insurance company will say, we're going to do like a two to three year insurance plan. They don't want to just say, we're going to insure a 10 year contract for the entire 10 years because lots of bad things can come up over 10 years. So they try to do it in two to three year increments. Every two to three years, the team's got to go out and purchase a new insurance policy. And then like you said,

the insurance companies usually say that if you're going to collect, if the team is going to collect, the player has to remain on the active, not active roster, but on the roster. And in a situation like Prince Fielder's, that means during the playing season, he goes on the 60-day DL, it frees up a spot on the 40-man roster. But under the Major League rules during the offseason, anybody who's on the 60-day DL and is under contract for the following season, they have to be put back on the 40-man roster for a period of a few months. And so from the Rangers' perspective, there will be a slight competitive disadvantage here that if they want to get their nine million every year, they've got to keep Prince on the 40 man over the off

season, which might hurt him a little bit in the rule five draft, etc. What from the insurance company's perspective is the benefit of having him be on the 40 man? That's what I've been trying to figure out. So it's not 100% clear to me. There's one possibility is that they want, you know, that Prince Fielder has absolutely no, you know, what we'd say in the law, there's no privity of contract. He's not under contract with the insurance company. And so there's nothing that the insurance company can do to force him to undergo, you know, an annual physical to make sure he's still disabled, that sort of thing. So it's possible the insurance company wants Prince to still be under active contract, you know, closely aligned with the Rangers so that the Rangers can require him to undergo annual physical testing to

uphold, you know, a potential provision, you know, possible provision in that agreement. One thing I was kicking around the other day in my head, this might not make any sense, so you guys tell me if I'm wrong. It might be possible that what the insurance company is worried about is that, so the Rangers release Prince Fielder, right? Because he's apparently finished for his career. If he miraculously recovers and two years from now wants to start playing again and signs a major league contract, it's possible, you know, then in that case, whoever signs him would be getting him at, you know, then in that case, whoever signs him would be getting him at, you know, the minimum salary, right? And that the Rangers would be responsible for the rest of it. It might be possible that the insurance company's worried

about that situation where they're paying the Rangers and yet Prince is playing for somebody else and is actually now making, you know, like the concern over that minimum salary obligation might be playing some role here, but I'm not entirely clear why they're worried about him staying on the 40 man. I just know that they want him to stay under contract. He's not to be released. And when you say that the insurance companies tend to like to only do these contracts for two or three years and then, you know, renegotiate them or re-up them. Does that mean that the coverage only extends for two or three years of Prince Fielder's contract that in 2019 or 2020 or sometime around then, the Rangers are back on the hook?

So good question. And so again, the way I understand it is that the answer to that is no. There's kind of two ways to look at that time frame. So Prince Fielder gets traded in 2013. And so say the Rangers that offseason take out a three-year contract, if during those three years under that insurance policy, Prince suffers a catastrophic career-ending injury, they are covered. The team is covered the rest of the contract. But the insurance policy only covers injuries sustained within a three-year period of time.

So if he gets a career ender within that first two to three years, it's covered. But after three years, the insurance policy lapses, and now the Rangers have to decide, do we want to go out and sign a new insurance policy to ensure the fourth, fifth, and sixth years of our relationship with Prince Fielder? The rates might go up at that point. He might have developed injuries that the insurers are less likely to agree to insure, those sorts of things. But they're apparently covered for the rest of his contract because it was a three-year

policy insuring any injury that occurred over those three seasons. And then this is probably a stretch, but I do want to cover all of our bases here. Can the Rangers trade Prince Fielder right now? Since he is technically active, since he is technically on their roster, could they trade him in one of those sort of like— I mean, since they are paying $9 million to him, could they trade him in one of those like Bronson Arroyo, Francisco Liriano salary dumps where they give some team a prospect to pay the other $9 million?

Who would get the insurance money in that situation? Or can they not get that insurance money? So that's a really interesting question. It is not. No, it's not. It's not. It's barely interesting. It's not really interesting. Well, it's interesting to me, at least. So a party of one, right? I think that the answer is they could trade him, but that no team is going to do that because the insurance policy, as I understand it, is between the Rangers and the insurance company. Meaning if Prince Fielder gets traded to some other team, that insurance policy is not going to be transferable. It doesn't move with Prince Fielder.

That new team would have to now go out and get a new insurance policy, And at this point, he's going to be uninsurable, I would imagine. So I don't think there would be a lot of any team taking him on would basically be taking on an $18 million salary obligation. If Ben will let me keep going, I have an even less realistic one. So let's say that, you know, okay, so we go back to 2012 and the Tigers signed Prince Fielder for this contract. Could the Mets buy an insurance policy on him? I mean, is it conceivable that you could, if some insurance company is out there offering these deals, figuring they're profitable to them, could a team get like a, basically like a, I think, isn't that what a collateralized debt obligation is? Could a team bet on Prince Fielder, like legally or under the CBA? Again, I appreciate that this is not a question that probably needs to be answered for us to enjoy baseball, but I am curious.

I'm trying to think back to like the big short. I think that is a CDO, right? And so I do think that that would be, so like a CDO type situation, I don't know that there's anything under the cba that prohibits that sam i know you read the cba in its entirety more recently than i did so you might remember better than me i think the big issue with a team like the mets taking out something a policy on prince fielder is just that these insurance contracts cost a lot of money i don't know that there's anything in the cba that says they can't do it, but it's not like these insurance policies are cheap, right? So that would be a pretty risky gamble from the team's perspective. And some of these premiums can run, as I understand it, up to like 10% of whatever's being covered. And so if the Mets wanted to get an insurance policy

that would pay them $9 million a year, if Prince Fielder suffers a career-ending injury, that could cost them $900,000 a year, potentially. Is that a reasonable financial gamble for them? They'd have to have a pretty good idea that he's about to implode, I think, for that to make financial sense. I'm glad we have you on the record now on that very important issue. I wonder if the insurers are good at insuring baseball players.

I don't know what kind of actuarial tables here they're working from. I don't know what sort of disabled list information they're using to predict these players' injuries. Like, I wonder if teams are getting a good deal, teams are getting a bad deal, if insurers are overcompensating because it's hard to predict who's going to get hurt. I mean, from what we know, there's kind of like a pre-existing condition penalty as there is with any sort of insurance. So if you've had some sort of operation before, then your policy will cost more. But otherwise, it seems like sort of a shot in the dark. Yeah, I think that's what's one of the things I think is really interesting is what, you know, what are the models that they're using to try to figure out what the risk is and everything here.

I know that when this, maybe not when it first started, but one of the big cases that kind of shook things up was Albert Bell back in the early, late 90s, early 2000s when he signed that deal with Baltimore and then got hurt. The insurance company was left holding the bag on something like 30 out of the 35 million or something like that. And I think that that was kind of a wake-up call to the insurers. And from what I've read, and I'm not an insurance industry expert by any means, but from what I've read, the insurance industry kind of went under when a change in outlook around September 11th when some massive claims, you know, got called in. And so I think that the industry has gotten more conservative. And so as I understand it, you know, in some that the industry has gotten more conservative. And so as I understand

it, you know, in some cases, this insurance has gotten more expensive. The durations that they're willing to go for have gotten shorter. They've been willing to say, if you've got a pre-existing injury, we're not going to insure it. So, you know, one thing I talked about in the piece was in some ways, kind of morbidly, the Rangers got lucky here in a sense that if Prince had, since he'd had that neck injury a couple years ago, he might not have been insurable anymore. No insurance company may have been willing to touch him after the Rangers' current policy lapse, at least for another neck injury. And if after this year, their insurance policy lapped and they'd been unable to get a new

policy on his neck, and then he has this reoccurring neck injury in 2017, they might have been left out in the cold holding the bag on the whole thing. So I definitely think that the insurers realize that these career-ending injuries aren't common, but when they happen, we could get hit with a huge claim. And I think that they're trying to be conservative in those regards, as I understand it. Yeah, I don't know if this is still true, but Stan Conti tells a story about how he basically got a big edge on all the other trainers when he was with the Giants, because he discovered this book that the insurance companies put together where they had collected all the injury information throughout baseball, and no other team in baseball was doing that. So they were really the first ones

to drive injury data in baseball. And when he got that, he says, I'm quoting here, a piece that Molly Knight wrote, I look inside and it had everything, time lost, DL dates, dollars lost. It was unbelievable. Conte immediately called the company to get every addition he could get his hands on. At that point, I was the only trainer interested in any of this stuff. I assume that if they had an information edge, they don't anymore, which makes it, the insurance company says, which makes it sort of odd to me. And now I've got a long windup for my question. Makes it sort of odd to me that teams do this because we've talked on the show and I've written about how baseball teams essentially are insurance companies when it comes to extending players.

When they give these like long deals to Jonathan LeCroy or Sal Perez, they're essentially acting as insurance companies for those guys' careers. They're saying, we can afford it if you collapse, if your career collapses, and we end up paying $12 million or whatever. But you can't. You're only one person, and you want to be set for life. And so you take a lot less than you're probably worth. And as your insurance company, we get the premium. And the premium is marginal dollars gained. And baseball teams are huge companies. They're billion dollar companies who can,

you know, really realistically pretty easily sustain a loss of 10 million or 12 million or even 30 million dollars. It might they might be hard for a GM to sustain it because his owner might not want to up the budget, but they can afford $9 million extra for Prince Fielder over the next few years. And it feels really weird that they would pay these premiums that are clearly and obviously, unless they're the smartest baseball teams ever in insurance, and these are the dumbest insurers ever, it's clearly a money loser for them. That is what all insurance is. You spend more than you are likely to get back in the aggregate, but you do it because you can't sustain the loss. And yet they can sustain the loss. So why do they do this? Yeah, that's a good question too. I mean,

so some teams don't, right? Like the Red Sox apparently do not insure contracts as a general rule. And so I talked in a piece about when Pablo Sandoval got injured this year, they are on the hook for that whole thing. And they just have a team policy. We're not going to take out insurance contracts or insurance policies on contracts. You know, I think other teams, you know, at the lower end of the salary spectrum or, you know, an owner who's more tight fisted or more conservative, they might say, well, for our biggest contracts, the ones that we maybe, you know, payroll wise, we couldn't recover from as easily, you know, maybe they think it makes more sense to do that. I think some of it comes down to the cost too and what they're insuring. You can get up to 80% of the salary, 50%. How long do they have to stay on the DL? Those sorts of things before,

you know, the policy kicks in. There's ways, as I understand it, that the teams can try to lower the cost of the premium, just like with anybody's car insurance, right? The less it covers and the higher your deductible is, the lower the premium you pay. But I think it's a good question of why teams are doing this. Apparently, a lot of teams do it a lot.

And I saw a stat that back in 2002, league-wide, the policy premiums were running at $55 million back in 2002. And as far as I can tell, there's no indication that this trend has decreased in the interim. And so there's, you know, probably teams are spending in the $100 million range every year on this stuff. And maybe they think it makes sense, you know, the one time that Prince Fielder gets hurt, the Rangers are glad that they've been paying X number of hundreds of thousands of dollars a year. But I do think it's a good question of why these teams that are so big

and are so, you know, sophisticated are making these bets. Yeah, that's funny, because this episode was inspired by a question from one of our Patreon supporters, Greg Colgan in London, Ontario. And he asked, with insurance being so expensive, is there a way in the future for rich teams like the Yankees or Red Sox to exploit this by signing injury risk players and, you know, doing that more than small market teams could afford to do? By the way, if you aren't interested in insurance, you can blame Greg for this entire episode. But you'd think that would be happening maybe, but it is not happening at all. The Red Sox evidently never take out insurance, which has come back to bite

them in the pub of all case. I mean, I guess you could look at it either way, right? So like the Red Sox are not taking out insurance, but on the flip side, maybe they're more willing to sign a player because they feel like they could eat the loss. Kind of like Sam was saying, you know, that the Devil Rays, to use the obvious example, couldn't eat that salary, right? And there's also, I know, been in some cases in the past where teams, the length of the contract offer they've been offering a player is hinged depending on the availability of insurance. If they're uncomfortable going to a fourth year with a player

because they're really worried about his injury risk and they know they can't insure him for more than two or three years. So there might be like subtle ways that some teams, especially at the larger end of the payroll scale, try to leverage that advantage to their benefit. So this is sort of off topic, sort of on topic, but it seems like one of the potential trends in baseball over the next few decades might be players taking out more insurance policies on themselves. The way that the salary structure works, of course, all the risk is, so much of the risk is early in their career, but so much of the earning power is late in the career. And you can think up lots of scenarios where it might make sense for them to take out insurance

policies on themselves. And that does happen from time to time through we hear about it usually through their agent, Scott Boris. Do you know if that type of policy is significantly different in any way from the ones that teams get? I've never seen one. So I am speculating more than, you know, any actual concrete knowledge. I'm thinking about like what I read about the Max Scherzer insurance policy, right, during his last year with Detroit. I think a lot of those, as I understand, at least in that case, wasn't that policy specifically just for his elbow, if I remember right. So like if he blew out his knee or something like that, he wasn't going to get coverage. So they might be a little bit more targeted in that respect so that the player doesn't have to pay as much than a total, you know, head to toe, any injury anywhere on the body,

like the team might be more inclined to get. You know, the other difference, not that it's, I'm just trying to think the other difference is that there it's paying out some estimate of how much the salary, you know, the future salary obligation is going to be. So it's more of like a negotiated, how much do I want to spend? How much, you know, coverage do I want to get if I'm getting this? Whereas on the team side, it's much more, we know what the cost is going to be. And if we want to recover 50% of the salary, I guess there's not as much flexibility on the team standpoint to negotiate it, if I'm making any sense. And what do you think the outlook is for MLB doing this as a group? There

are some reasons why it's harder or makes less sense for baseball than it does for the sports that are already doing it. But is it plausible? Yeah, it's definitely plausible. I know that MLB has talked about it, but has not really done anything yet. And I think there's probably two kind of, like anything with labor and baseball, there's kind of two competing battles that have got to be waged. One is between the owners themselves. Do they want to agree on something? Because there's a lot of different financial interests at play within the 30 among the 30 teams. And then, you know, what are the players going to say? Is the union going to go along with something like that? So, you know, from the team's perspective, you know, some teams right now don't

ensure any like we already talked about, don'ture player contracts. They might say, well, why do I want to pay in and, you know, start, you know, contributing to a league-wide policy that I have no desire to use right now. On the other end, you know, a poorer team might say, I'm less likely to have the high salary players that would require insurance. I'm less willing to spend a sum of my finite pool of revenue to contribute to a league-wide insurance policy that's mainly going to benefit other teams. At both ends of the salary scale, you might have some pushback among major league teams. I think that's probably one reason it's more common in the NBA and the NHL is there you have salary caps, you've got salary floors.

It's kind of everybody's within a certain range. And everybody's more or less, roughly speaking, on the same page salary-wise. Whereas in baseball, the payrolls, there's enough difference that that could, you know, make it difficult to get consensus league-wide. The other part of it then is the union. It would probably have to be collectively bargained. The union would have to sign off on it. I could see the union pushing back on that. I could see them saying that anything that takes money away, you know, the teams are contributing now to an insurance pool,

might take away money from the total pool of money that are going to the players, and they might be hesitant to sign on to something like that that could decrease the overall amount of money going to the players. On the flip side, you could say that maybe having insurance available on a cheaper basis would make more teams interested in bidding on free agents and it would increase the salaries going to them that way. So it would be interesting to see if MLB really decides to push it, whether the union would decide to sign on or if they'd fight against it. And there's a potential antitrust tie-in, right? You wrote the book on that topic. So maybe this could leave MLB more susceptible

to a challenge to its antitrust exemption. Yeah. So I saw Jeffrey Kessler, the sports labor lawyer who's represented the NBA Basketball Players Association and the NFL PA and stuff and litigation. I saw him say that if MLB just did this unilaterally and didn't involve the union, that then the players could sue for collusion under the CBA and that they could say, you know, that this is the owners teaming up and imposing something anti-competitive on the players. And, you know, as a lot of the listeners are probably aware, there was a huge collusion issue back in the 80s and cost the owners a lot of money.

And, you know, Jeffrey Kessler believes that that would be maybe driving some of the caution from MLB. I don't know if I totally buy that. I think that if MLB really wanted to do it, they would probably just negotiate it with the players and work it out. I don't think that the fear of collusion is probably driving it, but you never know. And it's definitely possible that that's something that could come up and theoretically could get into litigation over antitrust and collusion and all that fun stuff. All right. So last question, based on what you know, what would you do? Because we all face the insurance question often in our lives, we buy some piece of electronic equipment.

Storeperson asks us if we want to buy insurance. I buy Amtrak tickets. Amtrak asks me if I want to buy travel insurance. I do not. But what would you do if you were whoever is in charge of doing this? And by the way, I guess we don't necessarily know who is in charge of doing this. Maybe there are different incentives in the front office. Like if a GM wants money to sign a new player or something, maybe he doesn't want to blow his budget on insurance because he won't be around maybe anyway when the team is having to pay someone who's not playing, that kind of thing. I don't know who on the team decides this. I don't know if it's the GM or if it's someone on the business side. So that's something I'd be curious about. But what would you do based on what you know?

Yeah, I think that that's actually a really good question, right, is who's driving the train here for that? My guess is in a lot of cases, it's probably an ownership decision rather than a front office management decision. You know, I haven't thought it through, but I could even see the GM saying, well, sure, I want insurance because then if something bad happens, I free up more payroll to go get a replacement, whereas the owner might say, no, I've got a fixed payroll. I'm not going to adjust it if somebody gets hurt.

It would be interesting to see how that dynamic plays out. Personally, I do not buy electronic insurance at Best Buy. I do not buy travel insurance. I do have house and car insurance. I think, kind of going back to what Sam said about why our team's doing this, I'm not an economist, but it seems to me that there's probably, the team would say, okay, if Prince Fielder goes down with his career-ending injury, we're going to be on the hook for $18 million, right? What do we think the odds of that happening

are? And if they run their numbers internally and they say, we think it's 10% that that could happen at some point. And they say, okay, well, we can get a 50% insurance policy for $900,000. You know, at some point the math just works out that they say that that makes sense to do it. And I think that that's why you see it in the high dollar value contracts. I think that, you know, I would guess that there's definitely some cases where if ownership is going to be really tight-fisted with money from a front office perspective, I would say, yeah, it makes sense to protect ourselves in a competitive standpoint. But then again, in other situations like the Red Sox, for the reasons Sam talked about earlier, it just might not make sense. Yeah, that's sort of, I mean, the question that I had about the Mets possibly getting an insurance policy on Prince Fielder, while, you know, unrealistic, that's sort of what I was wondering.

It almost I wonder whether this is less of the normal insurance situation and more like you have these two large companies. One is an insurance company. The other is a baseball team. And they both think that they know better than the other. And they are essentially engaged in a wager. they know better than the other. And they are essentially engaged in a wager. And so it might not actually be like an insurance plan where the company, you know, can reliably bank on scraping a little bit of money off over a long enough time because they have enough clients. But it might actually be more like a CDO where you have two competing philosophies on the value of a certain asset or the likelihood of that asset, you know, failing. And it makes more sense if you think about it that way. But then if it makes sense, then the Mets should get in on it, maybe. Anyway, that's all.

No, I think that's right. You know, and that's probably why I understand, you know, it's not even like teams have uniform policies here. Every case is a unique situation, right? And depending on how the market assesses the risk, they may say, even though, you know, ideally we would like to get insurance, the market is just pricing it too high and we don't think it's worth it. Or maybe there's some cases where they say, whoa, the market's way under, you know, pricing the risk on this guy. Let's go ahead and get the insurance because it makes sense financially. All right. Well, we have learned as much as it's possible to know about this subject right now. So we appreciate the tutorial. You can find Nathaniel writing at Fangraphs and tweeting at NathanielGro. Thanks. Thanks, guys. Appreciate it. All right. That's it for today. You can support the podcast on Patreon by going to patreon.com

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