The evolving business of football: ‘insuring against the cost of success’

Have you ever considered that a football club may be financially worse off in the short-term for achieving promotion or winning a trophy?

You would be forgiven for dismissing this as a bizarre concept.

The idea some clubs need to consider insuring against the cost of paying players and managers cash incentives for winning a trophy, league title, or even gaining promotion may seem unusual. 

However, clubs are increasingly looking at ways to protect themselves from the financial risks associated with success.

To find out more about how clubs are using insurance to protect against increasing levels of performance bonus liability, I interviewed Saul Paine, Business Development Manager at Hedgehog Risk Solutions, who specialises in insuring contractual bonus liability in football and a number of other sports.

Background

Money and success often go hand in hand in professional sport, with successful performance bringing about significant financial gains. This is no more evident than in professional football, where wages at the top level have steadily increased over the last 10 years (Deloitte Annual Review of Football Finance¹).

With clubs and their wealthy benefactors continuously demanding better results, it is no surprise that performance related bonuses can create significant exposures that can run into the millions.

Performance bonuses have long been a part of football club culture and clubs have readily adopted player contracts that remunerate players for a job well done based on a wide range of conditions.

Player contracts now typically include bonuses linked to a number of conditional circumstances i.e. number of appearances, loyalty bonus, performance targets (e.g. goal scoring bonuses / clean sheets), as well as an additional share of the clubs bonus pool, which can be linked to a specified performance measure such as promotion, winning a specific trophy or qualifying for European competitions².

Saul provides some examples to illustrate this point:

“In 2012, the Independent³ reported that Man City paid £6.2m across the squad for winning the Premier League as part of their bonus incentive scheme, which also included separate bonus pools for the Champions League, FA Cup and Carling Cup, which in total amounted to just over £14m."

"This is not an uncommon as all clubs up and down the leagues will have their own bonus schedule with varying levels of liability and different structures”

"Such bonus schemes are not limited to the domestic game either. A large majority of the National Associations will have had a pre-agreed bonus schedule for the World Cup and other major international tournaments. For example, players in the German national team will have brought home more than just a winners medal in the summer, with each squad member picking up a reported bonus of €300k for their triumph in Brazil.⁴”

Whilst in most cases these bonus structures are designed to be offset against any increase in revenue or prize money, clubs can easily become over exposed financially even when they achieve success on the pitch. An infamous example being Portsmouth Football Club, when in 2010 having made the FA Cup final, they were not able to field certain players as they could not afford to trigger related bonus payments.⁵

Whilst the above demonstrates that these schemes can be successful there have also been situations where bonus schedules have had an adverse financial impact (see Portsmouth example above).

The Football Association stance on Bonus Insurance Schemes

In accordance with The Football Association (“The FA”), each club is required to submit their bonus schedules to The FA prior to the start of the season (Rules C 1 (b)(iv), The FA Rules and Regulations of The Association).

In 2012, The FA introduced the Bonus Insurance Scheme Policy (“BISP”) after they had“been made aware that clubs may wish to enter into insurance arrangements to cover contractual liabilities that would become payable should a particular competitive outcome occur, for example promotion bonuses to players." ⁶ The FA took “the view that such insurance arrangements have similar characteristics to a ‘bet’ and therefore may contravene Rule E8 in certain circumstances.”⁷

However, the suggestion that The FA consider this type of insurance similar to bet is dispelled in the policy as Saul points out that “it would seem the FA are keen to differentiate between their regulations on betting and insurance contracts in regards to performance bonuses.” The FA’s policy states:

“Following detailed consideration together with its stakeholders of the issues arising, and recognising the particular circumstances of clubs and their desire to mitigate their financial exposure, The FA has agreed that Clubs may be permitted to enter into certain prescribed arrangements as an exception to Rule E8.” ⁸

Saul adds, “This policy has been introduced as an exception to Rule E8 and it recognises that clubs should be able to manage their exposure through regulated insurance contracts, providing clubs fulfil each and all of the criteria the FA outlines in their policy. This includes the club receiving prior written consent from the FA (see BISP 3.3).”

Saul is strongly supportive of The FA’s approach on this matter, “The FA has been forward thinking in introducing such a policy. This policy ensures it is a regulated activity and that clubs are acting in the best interests of the game when they are entering into such agreements and have recognised that success can create significant financial liabilities.”

This ensures clubs are taking out insurance with Financial Conduct Authority approved insurers and are not entering into private financial agreements with wealthy individuals or private companies that are not financial services regulated (see BISP 3.2).

What is the benefit to clubs for this type of insurance?

Saul is of the view that “for clubs with restricted financial resources, contractual bonus insurance is one way that clubs can offer bonus incentives that can have a significant impact on the motivations of players whilst controlling their financial exposure. For some clubs it will allow them to attract and retain players in which they are investing a lot of money in, whilst also protecting themselves financially when they are doing well. In that respect, when used correctly these schemes can help clubs to:

1. budget with certainty
2. limit their exposure and protect the balance sheet
3. incentivise players for specific competitions/performance objectives
4. reduce wage inflation on basic salaries
5. implement a more sustainable remuneration model
6. act inline with the principles of financial fair play”

I wanted to know if other businesses use this type of insurance. Saul assures me that “contractual bonus insurance is something that apparel manufacturers and sponsors have widely used to cover their liabilities linked to an ambassador’s performance, typically in golf or tennis - this has helped them determine what sponsorship agreements offer a better return on investment for them. From that point of view, sponsors appear one step ahead in the thought process as they seek to negotiate higher performance related deals with less of a focus on larger retainers, which may reduce the overall costs involved. For example, it is not uncommon for us to receive a call from a sponsor wishing to assess what coverage terms are available before or during the negotiation stage with athletes or clubs, in order to weigh up the costs of entering into a new sponsorship agreement.”

Effects of FFP and the growing interest in this cover

Clubs also now have to navigate the financial regulations when competing in European competitions and in their domestic leagues, which has made them more prudent in their financial management. Therefore clubs will increasingly be looking to different ways to protect against liabilities and access alternative means of finance. Saul’s view on how the insurance market fits into this is an interesting one:

“Certainly the introduction of FFP has brought the topic of financial sustainability and risk management to the fore and whilst it is relatively a new concept in football it is beginning to have an impact on how clubs are run both internally and also how they do business with other clubs. Take the recent transfer window for example; the FFP regulations made a noticeable impact in the window, arguably for the first time, as it was apparent clubs accepted they could only afford to invest what they generated in revenue. Real Madrid (€113m), FC Barcelona (€79m), Atletico Madrid (€77m), Chelsea (€94), Liverpool (€92m) and Manchester City (€62.2m) all recouped record figures for player income – that was in figures released by The Soccerex Transfer Review by Prime Time Sport.

Whilst there is no direct relationship between the emergence of contractual bonus cover and the introduction FFP it is certainly a product that resonates with UEFA’s primary objectives:

• to introduce more discipline and rationality in club football finances
• to decrease pressure on salaries and transfer fees and limit inflationary effect
• to encourage clubs to compete with(in) their revenues
• to protect the long-term viability of European club football
• to ensure clubs settle their liabilities on a timely basis 

As a result, we have certainly noticed a large increase in clubs taking an interest in this type of cover and taking stock of what options are available to them.

When you consider UEFA’s primary objectives you can begin to see why more clubs are taking performance related pay more seriously. This is an area that has received some media coverage in the past.⁹

For example, comments from Liverpool’s Managing Director, Ian Ayre, in 2013 about Liverpool’s shift towards a more performance related pay structure show that this is something that is on the agenda of clubs even at the highest levels of the game.¹⁰

With that in mind, I expect financial liabilities linked to a clubs performance will grow rapidly in a number of different areas over the course of the next few years and as result clubs should be looking more closely at the benefits contractual bonus cover can offer them.”

How other Football Associations in Europe regulate insurance policies?

One question that immediately sprung to mind during our discussion was ‘how does this approach compare to other leagues?’, Saul provided an example: “Whilst other football associations on the continent may require clubs to lodge their insurance policies with their association, not necessarily for approval but for full disclosure, there is no other recognised ‘Bonus Insurance Scheme Policy’ elsewhere in Europe, and therefore there is more flexibility for clubs on the continent to also insure against negative outcomes. This is something widely used by clubs in respect to relegation, lower league position, or failing to qualify for European competition. They also have the advantage of looking at insurance of this nature at any point in the season”.

Being cynical this does make me consider how this effects the integrity of European competitions where it is conceivable that and English club is playing a club where they have been able to fund a squad because they do not bear the same financial risk as they have offset their exposure to relegation or non-qualification. Although it may be unlikely, it is conceivable that a club in financial distress could be incentivised to lose to help ease liquidity issues; pay-outs from insurance policies of this nature can help clubs in such circumstances as they will receive the funds more quickly than those derived from the distribution of broadcasting or competition revenues.   

Other sports like cricket and rugby have also outlawed betting, for example in rugby the IRB regulations enforce a global ban on betting for ‘connected persons’ (see IRB Anti-Corruption and Betting – Regulation 6.1.4¹¹), something the RFU has readily acknowledged in their own regulations (RFU Regulation 17.1.4 - Anti-Corruption and Betting¹²).

Saul believes that we may see other national sports association and international federations make “the distinction between betting and these permitted insurance arrangements as an exception [BISP’s] as they look to regulate this activity through similar bonus insurance schemes”

Conclusion

Insurance is tool that is used widely to protect consumers and businesses alike. It seems The FA have been proactive and pragmatic in their approach to how football clubs can use contractual bonus insurance whilst protecting the integrity of the sport. As more money flows into sports across the globe it will be interesting to see how other governing bodies approach the regulation of insurance linked to performance related bonuses.

As always, your comments and feedback on this article are welcomed. 

Saul is Business Development Manager at Hedgehog Risk Solutions, a specialist sports insurer with particular expertise in managing financial risk linked to sports performance. Saul manages the companies football related business - specialising in contractual bonus cover and revenue protection, and has delivered insurance and risk management solutions for a wide array of professional football clubs from across Europe.

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