Prize Indemnity Insurance

What is Prize Indemnity Insurance

Prize indemnity insurance is insurance for promotional events in which companies award attractive and expensive prizes to winners. They help offload the substantial risk involved in having to pay out the reward. Typical prizes at such events are cars, vacations or large cash payouts. Prize indemnity insurance is also known as Hole-in-One insurance.

Understanding Prize Indemnity Insurance

The prize indemnity insurance policy's premium depends on the prize’s value and the statistical odds that someone will win the award. Prize indemnity insurance also protects the prize winner by guaranteeing that they will receive the promised prize because the insurer has committed to paying for it. The policy’s coverage limit equals the insured’s potential loss, meaning the value of the prize.

Prize indemnity insurance makes it easier for companies to afford to offer high-value prizes to entice new customers and build customer loyalty. Such contests help to create excitement and increase awareness of a company’s brand. Types of events where the sponsor might purchase prize indemnity insurance include hole-in-one golf contests. Thus the reason prize indemnity insurance is sometimes called hole-in-one insurance. Other examples of high prize contests include half-court basketball shot contests, casino giveaways, car dealership key contests, and even customer rebates. The basis of the reward is an unknowable outcome, such as the outcome of a sporting event.

The prize indemnity insurance company helps the contest sponsor develop contest guidelines. The guidelines must be clear, and the sponsor must abide by them to file a successful claim with the insurer. For example, if the contest rules stipulate there must be two witnesses for a contest and only one witness observes the winning shot, the insurance company will not honor the claim. The contest sponsor will then decide whether to acknowledge its promise or refuse to pay. Further, the insurance contract is voidable if a participant has an unfair advantage.

Setting Premiums for Prize Indemnity Insurance

The prize indemnity insurance company uses statistical models to calculate the odds of a payout. Odds will vary by event. Competitions requiring an element of skill, as in a hole-in-one contest and those left entirely up to chance, as in a car dealership prize drawing, will have different odds of winning. Since not every contest will have a winner, there will be situations where the insurer will collect a premium and not have to make a payout. In effect, the insurer intends to receive more in premiums than it pays out in claims.

The typical premium for prize indemnity insurance is 3 to 15 percent of the prize value. If the prize was $10,000 cash, the premium might range from $300 to $1,500, depending on the calculated odds of winning.

Example of Prize Indemnity Insurance

The perfect bracket in National Collegiate Athletic Association's (NCAA) March Madness is an example of the logic behind prize indemnity insurance. The odds of having a "perfect bracket" or correctly predicting the winner in every game across seven rounds of basketball games is one-in-9.2-quintillion. Data used to arrive at this figure backdates to 1939, when the first NCAA tournament was launched.

In 2014, Quicken loans founder Dan Gilbert announced a prize of $1 billion to anyone who could correctly predict a perfect bracket. Legendary investor Warren Buffett's Berkshire Hathaway insured the bet. To date, there have been no claimants to the prize.