iC Group - In The News

Shift to online promotions creating greater demand for prize indemnity cover

by RUPAL PAREKH
Published on Feb. 13, 2006
Business Insurance

When Jean Irons-Dendy, a registered nurse and mother of two in Kirkland, Wash., pulled the $250,000 grand prize in a drawing sponsored by her gym last May, she wasn't the only one who won.

"It created a lot of excitement among our members," noted Victoria Krieser, business development manager for 24 Hour Fitness USA Inc., a San Ramon, Calif.-based chain of health clubs.

Random prize drawings, sweepstakes, instant-win contests and other promotions have long been used by companies seeking to boost visibility and build "brand affinity."

To shield themselves against the risks associated with promotions—particularly for large, life-changing prizes such as cash giveaways of $10,000 or more—most companies rely on prize indemnity coverage.

A contingency product originally written solely out of the London market, prize indemnity coverage is now also offered by a handful of insurance companies and promotional services firms outside of the mainstream property/casualty business. Typically, where the insured prizes are not guaranteed to be won, sponsors pay premiums equaling a fraction of the actual prize amount, and, just as insurers pay in the event of a claim, insurers pay in the event of a winner.

Not only do the policies protect a client's balance sheet from loss, but they also allow companies to run larger promotions, policyholders say.

"We would have run the same type of program but I don't think it would have been at the same level" without insurance, Ms. Krieser said. For 24 Hour Fitness, which insured the $250,000 cash giveaway—its largest ever—through Winnipeg, Manitoba-based IC Group LP, the availability of the insurance "definitely gives us the ability to build that bigger and better promotion," Ms. Krieser said.

Online push

Eager to cut costs and access the growing numbers of people connected to the Internet, companies have started moving their promotions online, experts say.

While paper-based sweepstakes and games of skill at sporting events "are still the bread and butter on the promotional side," delivery methods are increasingly incorporating technology, said William F. Hubbard, president and chief executive officer of Wakefield, Mass.-based HCC Specialty Underwriters—a unit of HCC Insurance Holdings Inc. formerly known as ASU International Inc.

"If you were to look at online games five years ago, you would see very few, whereas today a lot of the promotional offers we do are being delivered online, as opposed to using your traditional scratch-and-win game card," said Scott LaCroix, IC Group's director of underwriting.

"It's an opportunity-rich environment for advertisers and companies wanting to promote their products," said Lori L. Shaw, director, contingent products group of Aon Risk Services in Charlotte, N.C. While a broad range of industries sponsor online promotions, the most prolific are the consumer product companies, Ms. Shaw said. "Those kind of companies have a pretty significant budget, and they have a lot of experience doing national campaigns."

Northfield, Ill.-based Kraft Foods Inc., for example, ran an instant-win contest in which consumers who purchased participating Kraft products received unique access codes allowing them to play an online interactive hockey game; players were eligible to win prizes ranging from tickets to a National Hockey League game to $1 million cash.

Many consumer product companies that previously ran both traditional and online promotions "have now completely deleted the offline promotion," said Lisa Lantz, vp of SCA Interactive, a Dallas-based subsidiary of SCA Promotions Inc. that provides prize coverages for online promotions.

According to Ms. Lantz, online promotions often cost companies less than traditional print promotions. "They can start with an on-package splash, which doesn't take as much real estate," she said, in order to direct traffic to a contest Web site to play an interactive game or to enter a code to see if they've won.

Companies also like the ease of management offered by online interactive promotions, which permit changes to the program or contest up to the hour it goes live—in comparison to print materials, which require completion months in advance, Ms. Lantz said.

Online promotion formats further provide a fast mechanism to capture and track consumer data, enabling companies to compile databases of contact and demographic information.

Glendale, Calif.-based Nestle Inc., for instance, as part of a recent interactive promotion to market its brand, included a referral component allowing participants to invite up to three friends to play an online game by entering their e-mail addresses, according to IC Group., Nestle's insurer.

While moving promotions online can offer certain advantages over traditional paper-based contests, the use of cyberspace also ushers in a new set of risks, industry experts point out.

According to HCC Insurance's Mr. Hubbard, a key to running any kind of promotion is managing so-called "moral exposure"—the potential for fraud or a breach of contest rules—"but how you do that is different online than it is offline. That's an area that we who take risks on this have had to catch up (on) quickly," he said.

A prize drawing can be overseen in person, but online interactive contests add network exposures, requiring companies to draw on technology to prevent fraud.

Insurers say they are prepared to take on the risks associated with online promotions, but "systems have been set up to be put in place so that we can make sure that hackers or sponsors can't get in to obtain the prize," said Ms. Lantz.

One way companies can avoid potential internal breaches of contest rules is to use third-party technology that is unbiased to all parties involved, Ms. Lantz said.

Additionally, "risk managers and the companies need to really understand" the varying external security risks associated with online promotion, Mr. LaCroix stressed.

At minimum, companies need to make sure that they are using the most secure and up-to-date technology available, installing firewalls to ensure the confidentiality of customer information and housing online data on multiple servers. That way, "if one service provider goes down, you've got seven others as backups," Mr. LaCroix said.

Growing demand

As more and more companies turn to the Internet to promote their brands, the demand for online promotion insurance is growing, although smaller companies may opt to go "bare" and self-insure promotional risks, mostly due to cost considerations.

Prize indemnity insurance premiums can range for $10,000 or less up to $200,000 dollars for a huge offer, according to Mr. Hubbard. Rates vary widely, because clients can choose to ensure entire pools of prizes being offered or opt to retain the risk for smaller prizes and purchase insurance for just the top layer of grand prizes.

Still, Mr. LaCroix has noticed that for large-scale promotional offers that are run online, "the risk managers just demand that the insurance has to be in place because the exposure to their firm or their corporation is just too large."

"Anything that has a million-dollar prize attached to it is very unlikely that those go uninsured, no matter who you are," Mr. Hubbard said.