Prior to the meltdowns in credit default swaps, mortgage bonds and various derivatives, most people regarded insurance as a fairly sedate business. The actuarial analysis that goes into predicting when people will die, crash their cars or have a fire requires exceptional statistical skills, but most people's eyes glaze over at the thought. So why not take a little look at the wilder side of insurance? (Learn all the essentials of this industry in our Insurance Tutorial.)
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Specialty Lines - A Quiet Name for a Wilder Segment
Some of the most interesting (and amusing) policies in the insurance world are grouped under what the industry calls "specialty lines". While terms like life insurance, car insurance, and flood insurance pretty much mean exactly what they sound like, specialty lines is more like industry code for "a large disorganized jumble of weird, idiosyncratic and yet still lucrative insurance policies".
Sell 'em for Parts
One of the most famous sub-categories of specialty lines insurance is body part insurance. Plenty of people have heard the stories of singers like Bruce Springsteen or Celine Dion ensuring their voices (or vocal chords) or actresses like Heidi Klum, Tina Turner and Betty Grable insuring their legs. Sometimes the performer takes the initiative, while in other cases it may be a company doing so - in the case of Heidi Klum, Braun - now part of Procter & Gamble (NYSE:PG) - took out the policy when Ms. Klum signed on as a celebrity promoter.
This type of insurance is relatively common - or at least common enough that Lloyds of London has a body-parts insurance specialist, if not several. (For related reading, check out 5 Bizarre Insurance Policies.)
When Promotional Stunts Go Wrong
Another major category of specialty lines insurance is backing up various corporate promotional stunts. Perhaps you remember when Pepsi (NYSE:PEP) had a contest with a potential payout of $1 billion. The chances of winning the $1 billion were extremely small, however Berkshire Hathaway (NYSE:BRK.A) stood behind Pepsi just in case.
These do not even have to be large promotions. A Nebraska car dealership once offered a $10,000 rebate to buyers who bought a car in December if it snowed on Christmas Day. Lloyds of London wrote a policy worth $1.5 million for that promotion, and it certainly made the local news at the time.
Just Plain Weird
Of course, some of these offers are not nearly so squeaky clean. Singer David Lee Roth took out paternity suit insurance from Lloyds of London so that he could live the rock star life with one fewer worry. No word on what the premiums were for that policy, but I would have hated to be the underwriter.
More recently, Berkshire Hathaway disclosed an insurance policy they wrote for a French client whereby they would have paid out about $30 million if France won the World Cup.
Although some of the media reports talked about this in terms of "the mother of all World Cup bets", the reality is probably more sedate - I doubt it was some wealthy French businessman looking to make a wager with Warren Buffet; rather, it was probably another promotional backstop. For instance, Carrefour, the large French retailing chain, had a promotion that would have given rebates to flat screen TV buyers if France had won the Cup; clearly a large potential outlay for a low-margin business.
Risk Is Risk
Investors in insurance companies with specialty lines business, like Berkshire Hathaway, WR Berkley (NYSE:WRB), CNA Financial (NYSE:CNA) or XL Capital (NYSE:XL) need not worry. These stories are exceptional and they stand out precisely because they are so unusual. What's more, I am not aware of any major losses incurred by an insurance company because of any of these odd policies. Besides, at the end of the day, insurance is all about assessing and pricing risk, so as long as the underwriters know how to value an arm or a leg and discount the possibility of a $1 billion payout, the premiums certainly will not hurt the bottom line. (Find out how to save on your insurance in Top Tips For Cheaper, Better Car Insurance.)
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