Prize Indemnity Insurance: A Comprehensive Model

Organizers of highly competitive athletic competitions must consider many logistical challenges; one that is often overlooked is securing the prize money that the contest awards should a competitor set a new world record at the competition. Prizes offered for these events are quite large – typically, tens of thousands of euros or more. However, many insurance companies will jump at the chance to insure the race organizers, offering to pay the award should a competitor set a new record in exchange for a premium. This is referred to as prize indemnity insurance. We developed a flexible and robust model to determine when contest organizers and insurance companies should agree to prize indemnity insurance, using elements of probability, statistics, economics, and traditional insurance theory. Our model takes into consideration all relevant factors, including the economic value of insurance, risk values of insurance, the budget of the organizing committee, the nature of the sport in any specific event, historical performance of competing athletes, and even the risk tolerance of the organizing committee. In particular, our combined model estimates the probability of a world record being set in a given event, considering historical probabilities and the competitiveness of athletes in an event, considers the budget and risk tolerance of the organizing committee, and recommends the set of events for which insurance should be purchased to mitigate to an acceptable level the risks of an organizing committee, given the uncertainty in whether a record will be set.