Showing posts with label indemnity insurance. Show all posts
Showing posts with label indemnity insurance. Show all posts

Thursday, October 25, 2012

How Can Spike TV Afford a 10 $Million Cash Prize? They Can't.

Spike TV is offering largest cash prize in TV History
 for the proof of Bigfoot, but can they afford it?

As you may have heard, Spike TV plans is offering $10 million to pre-selected contestants if they can prove Bigfoot exists on their new reality show, 10 Million Dollar Bigfoot Bounty. This is the largest cash prize in TV History. The last cash prize milestone was the singing competition show, X-Factor.

$10 Million is a lot of money, even for 10 Million Dollar Bigfoot Bounty's successful Emmy® Award-winning producer Jon Kroll ("The Amazing Race," "Big Brother"). So who ponies up the cash? If not Spike TV or the producers, than who? You may guess, Lloyd's of London, the prize insurer, but not exactly. When a prize is insured it is called indemnity insurance.

This is how indemnity insurance works, it is also called "hole-in-one" insurance. Say you want to give $10 million dollars for someone who get's a hole-in-one at a tournament your hosting.  The odds of an amateur golfer hitting a hole in one are about 1 in 12,500. These are low odds, acceptable odds, to an insurance company. So, instead of paying for the prize yourself, you get insurance for the $10 million dollar prize, paying only a small affordable fraction called a premium. 

True, if the golfer does indeed get the hole-in-one the insurance company pays the prize. The thing to remember though, insurance is a numbers game, where the odds favor the house. In theory an insurance company can charge as low as $800 dollars for a $10 million dollar hole-in-one prize to break even. 

Probably not, because the insurance company does not want to break even, they want a profit. Although it would be safe to say Spike TV probably paid a smaller premium than usual for a $10 million dollar indemnity insurance. Why? Remember the 1 in 12,500 odds of getting a hole-in-one? We would bet the odds of proving Bigfoot are even smaller. 1 in a million? 1 in 10 million? The lower the odds of  winning the prize, the lower the premium for the indemnity insurance.

So overall, the $10 million dollars is not really there, if an insurance company can afford to insure a $10 million dollar hole-in-one prize for only $800, we are sure they can find an acceptable number that would be affordable to a TV network asking contestants to do something that has never been done.  

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