When Shohei Ohtani, the two-time American League most valuable player, signed his 10-year, $700 million contract with the Los Angeles Dodgers, my first thought was that the structure sounded rather like life insurance.
Okay, that was actually my second thought. My first thought was that my Pirates are dead meat forever and ever. While they delighted me in my youth with superstars Roberto Clemente and Willie Stargell and won World Series in 1971 and 1979, the Pirates' entire payroll is about 25% less than the Dodgers can afford to pay this one player. We're done.
Moving on....
The resemblance to life insurance occurred to me because Ohtani will collect only $2 million of his massive salary each year for the next decade. Then, from 2034 through 2043, he will collect $68 million a year. Ohtani will surely generate enormous revenue for the Dodgers in the coming years, which they can then use to make the real payments to him when they come due -- just as life insurers collect and invest premiums for years or even decades before paying a death benefit.
But the Ohtani contract sparked some thoughts about other ways that insurers can be more creative about financing, and I suspect many of you will have much better ideas than I do.
Let's first acknowledge the obvious: Insurance, as an industry, is extraordinarily sophisticated financially, ranging all the way from the work that actuaries and underwriters do in evaluating risk to the analysis that private-equity firms do to determine what buying a book of business from a life insurer will do to let them finance other ventures.
But there still seem to be a lot of opportunities that are being missed. For instance, the whole world is moving toward subscriptions. I no longer buy my software from Microsoft; I subscribe to it. Car companies are selling subscriptions even to capabilities such as heated seats. So why is so much of insurance tied to annual contracts? Why not monthly subscriptions?
Even if an insurer wants the premium paid up-front, why not help line up financing for that small business that may not be able to comfortably pay for a full year of coverage in advance? Plaintiffs' attorneys are providing financing for a whole range of lawsuits against insurers. Why shouldn't insurers take advantage of financing in other ways?
Creative financing seems to be showing up in the natcat world, as some reinsurers are retreating and as enterprising folks are finding ways to issue catastrophe bonds that will cover at least slices of the exposure. I hope those efforts continue.
I also suspect that there are a great many more opportunities for captives for those willing to tackle the complexities. I'm thinking, in particular, of the opportunities for employers providing healthcare coverage. As health insurance premiums continue to soar, employers can do much better if they can take matters into their own hands.
There are surely many other opportunities, too, if -- within the restraints of regulation -- we see our balance sheets and financial expertise as a competitive advantage and use it to its fullest.
I should caution that it's possible to get too cute with financial engineering. When Chunka Mui and I had 20 researchers spend two years looking into the reasons for major corporate failures for our book "Billion Dollar Lessons," we found that financial engineering was one of the seven strategies most often lined to catastrophe.
I'm actually hoping the Ohtani contract turns out to be too cute by half. (Yes, I'm a Dodgers-hater of long standing.) He is deferring the vast majority of his salary so the Dodgers will still be able to hire talent around him, increasing the chances for titles. But you have to assume that a 29-year-old who's had some injury issues won't play for the full 10 years of his contract, at least not at full potential, and, in any case, you'll have a decade afterward in which the Dodgers will be paying $68 million a year to someone who's sitting at home with his feet up on an ottoman. So the Dodgers could be facing a wasteland of a decade or more.
No, my Pirates still won't have a chance. But maybe my daughters' Giants will.
Cheers,
Paul