Major League Baseball scores with workers’ comp cost reduction program

Workers’ compensation claims could foul up any company, and Major League Baseball is no exception. After recognizing that injured players were one of the biggest exposures for its baseball teams, MLB decided to create a league-wide insurance initiative to more effectively manage its workers’ compensation premiums and losses, according to Anthony Avitabile, MLB’s director of industry risk management and financial reporting.

After Sept. 11, 2001, Avitabile said baseball was like other industries that faced a hardening of the insurance market. For 2002 renewals, the organization confronted significantly higher premiums, with aggregate premiums at about $54 million, up from about $18 million. So, MLB decided to create a league-wide insurance program — rather than have each club handle its own insurance — to protect member clubs from the unexpected, better manage premium dollars and make clubs more profitable.

Team challenges
MLB, however, faced many obstacles, Avitabile recalled. First, member clubs are competitors on the field, and the sentiments continued off the field with clubs not enthusiastic about cooperating in a league-wide program, he said. Also, some clubs had corporate owners who managed insurance, so the clubs did not have to. “They were comfortable with that scenario,” Avitabile said. Many brokers and insurers were not fans of a consolidated program because they could lose business with the change. Then, “history was not on our side,” he said. Avitabile said that the league had previously tried to create a group insurance program, a captive in Bermuda, but had failed.

Finally, Avitabile said, timing was not on MLB’s side to create a league-wide program. “Information was not readily available, no process had been established, and there was a tight marketplace,” he said.

Covering its bases
Nevertheless, like an athlete in training, MLB persevered with the regimen. The three bases of MLB’s insurance program were:

• First Base (Phase 1): Implement league-wide insurance program to reduce cost to member clubs and improve coverage.
• Second Base (Phase 2): Provide incentives for good behavior.
• Third Base (Phase 3): Create and implement best practices.

In the first phase of creating the league-wide program, MLB hired a consultant who was familiar with the business, brokers and carriers, Avitabile said. Then, the company formed a committee of club chief financial officers and people cynical of the league-wide program to garner feedback. That helped MLB realize areas of importance.

For example, MLB initially tried to eliminate company cars for scouts. But after resistance from the clubs, the organization found that scouts had relatively minimal salaries, so a company car affected how hard the scout worked to find good players for the teams, and kept the perk.

With the information, MLB issued a request for proposals to provide the optimum program and guarantee certainty of delivery, Avitabile said. That led to a league-wide insurance program that now covers about 6,600 major and minor league players at a lower cost.

Avitabile said the program has scored big with the member clubs. Coverage and limits have improved, subsequently improving teams’ cash flows, he said. As part of the program, baseball teams face large deductibles for their primary casualty requirements and significant collateral requirements. However, previously teams often had to obtain letters of credit for their collateral requirements. With the league-wide program, trust arrangements can be used for the collateral requirement. That alone saved about $7,000 per club, or $219,000 per year, Avitabile said.

Meanwhile, MLB continues to provide incentives for teams to further reduce costs and share best practices. An injured player checklist helps identify patterns on injuries and timeline for recoveries on players that have been released. Previously, clubs did not always consider workers’ comp costs when making roster decisions; they would release an injured player if they needed to open a roster spot without realizing the costs associated with that decision.

Now, Avitabile said clubs “think about the costs involved in releasing a player when they are no longer under [the team’s] control” so they can track their medical improvements. The clubs also investigate off-season injuries to determine whether they are deserving of workers’ compensation.

“Our clubs’ most important asset is certainly our players, and this gives [the clubs] the opportunity to make sure that they manage that as effectively as possible,” Avitabile said.

Hitting the home run
As proof of the league-wide insurance program’s success, Avitabile said it has significantly reduced costs in the more than three years that the program has been in place.

In 2003, projected renewal costs without the league-wide insurance program were projected to be $121 million. Today, it’s saved $37 million in premiums, he noted. Workers’ compensation losses were reduced from $25 million per year to $14 million per year. In premiums and managed losses, he estimated MLB has saved more than $40 million.

Overall, “the losses are not below but beyond our expectations,” Avitabile said.

Avitabile was a keynote speaker at the 2006 Risk and Insurance Management Society Inc. annual conference in Honolulu.

Topics Workers' Compensation