Risk Transfer, Major League Baseball and Insurance

It’s a truism that insurance greases the skids for the entire economy; as a risk sharing mechanism, it allows businesses and individuals to move forward knowing they won’t bear the entire cost if something goes wrong. David Rossmiller’s ongoing coverage at his blog of the response of coastal states to a decrease in available homeowners coverage post-Katrina can be understood along these lines as the story of what happens when the availability of risk sharing of this nature is severely reduced. Another good example is here, in this story out of the New York Times today, of baseball teams’ decisions to obtain insurance covering them against the risk of a high priced player becoming disabled during the season; the insurance reimburses the team for some part of the contract still owed by the team to the player. Interestingly, much the same way homeowners insurance has become more expensive and less accessible in coastal areas because of recent hurricane losses, professional baseball teams have run into the same pricing and availability problem with regard to this type of disability coverage because of large losses recently paid out by insurers on certain former players who were unable to finish out their contracts. I guess both stories, the one in the Times and the one David has been extensively covering at his blog, evidence the same thing: the never ending tension between insurers’ recent loss history and the market’s appetite for ever more insurance, only at a price the consumer is willing to pay.