Prize indemnity cover a must for businesses offering incentives related to sports events

News that some of South Africa’s biggest retailers are running promotions linked to the outcomes of major sporting events has received mixed reactions, with many commentators – mainly on social media – questioning the business rationale behind these campaigns.

Local online retailer Takealot has confirmed that it will give back about R10 million in refunds to customers, following a Samsung television promotion that promised buyers a full refund of the promotional purchase price should the Springboks clinch victory in the Rugby World Cup final.

Similarly, retail giant Pick ‘n Pay said it would refund qualifying orders made through its delivery app from 30 October to 17 November 2023, should the Proteas win the 2023 ICC Cricket World Cup. To qualify for the full refund, an order must be valued at over R500, but there is no limit to the number of orders that can be placed or their value.

While South African consumers are no doubt happy to take advantage of such promotions, many have questioned the wisdom behind these offers, considering that the retailers are betting against huge odds and stand to lose millions of rands if the team in question wins, as in the case of Takealot.

However, not everyone agrees. Melita Thurling, Head of Liability and Special Risks at ITOO Special Risks, says these types of promotions are great for business as they lead to a tremendous amount of publicity and drive brand loyalty, which is ultimately good for the bottom line.

“We must look at the bigger picture, which is that such promotions create great opportunities to promote a business and build brand loyalty among your customer base. It is therefore also an effective way to retain existing customers and attract new ones to your brand, so the positive impact on your business is likely to outweigh the cost of the promotion,” says Thurling.

Yet, she notes that a protection mechanism is available to businesses that want to offer consumer incentives linked to the outcome of sports events in the form of an insurance policy. By underwriting the prize or promotional refund, the insurance policy enables retailers to achieve the same goal but at a fraction of the cost of the actual prize or refund, the cost being the premium payable.

“The prize or promotion can be underwritten by an insurance policy that provides protection to a business should its contractual liability to pay out a prize or refund be triggered. In other words, if the sports team performs well and achieves the goal which triggers the pay-out as agreed, the amount that the retailer has to refund is covered by the insurance policy,” says Thurling.

“The insurance premium works out to a fraction of the promotional prize or refund and allows the insured to boost interest in their brand around a sporting event. The insurer uses statistical models to calculate the odds and rate the risk. A similar example is a prize for a hole-in-one at a corporate golf day or pro golf tournament, although with a hole in one, the prize is awarded to the golfer, with a promotional prize indemnity, the payout is not to the athletes but to the promoter to refund those who qualify in terms of the promotion.”

Thurling notes that earlier this year, iTOO paid out R750 000 to the organisers of the Comrades Marathon, having underwritten the prize money awarded to the athletes who broke the men’s and women’s down run records at this year’s event.

iTOO underwrote 100% of this prize money for the men’s category and 50% for the women’s category.

Thurling says that iTOO’s decision to underwrite the prize money had allowed the marathon’s organisers to raise the value of the prizes, without having to shoulder the financial burden of having to pay out in the event that the records were indeed broken.

“Prize indemnity or promotion insurance is a crucial mechanism that enables organisations to promote their brands on the back of wildly popular sporting events and put-up huge prizes and incentives without having to carry the risk,” she says.

She points out prize indemnity insurance is available from special risks insurers such as iTOO and applies to events where there is an element of uncertainty and circumstances where there might not be a pay-out. The value of the prize is the policy cover limit, and the premium is dependent on the value of the prize and the statistical odds.