Professional sports are a big business. Revenue from the "big 4" leagues in the United States totals over $20 billion annually. From the player's perspective, average salaries in these leagues range from $1.3 million per year in the National Hockey League to $5.2 million per year in the National Basketball Association. Not surprisingly, the drafts in the leagues have become increasingly important as the revenue skyrockets. However, not only are teams trying to cash in at the draft, by landing a top new player who will take them over the top, but there are also thousands of amateur athletes doing what they can to cash in as well.

With so much research time and money being put into the draft, even the seemingly most minor details about amateur players can cause their projected draft positions to fall. Because potentially millions of dollars are at stake when it comes to first professional contracts, elite students in recent years have begun purchasing insurance coverage to protect anticipated earnings. One of these coverages is total disability, which, as the name indicates, protects players from the (financial) risk of a career-ending injury.

However, these types of injuries are not the only value detractors that prospective pro athletes must be cognizant of. In the 2013 National Football League draft, for example, the top draft pick (Eric Fisher, drafted by Kansas City) signed a $22 million four-year contract, with a signing bonus of over $14.5 million dollars. The 11th pick in the same draft, (D.J. Fluker, drafted by San Diego), plays the same position as the first draft pick, but signed only an $11 million four-year contract, with a signing bonus of only $6.7 million.

It wouldn't take a career-ending injury for a potential top pick in the draft to fall outside of the top 10. A disappointing season for their team, a lackluster final year in college, a minor injury or illness, or a myriad of nonathletic issues could also be the culprit. Elite level student athletes are starting to realize this, and have begun utilizing loss of value insurance contracts to hedge against injury-related drops in their draft stock. This coverage is designed to protect against the financial risk that the athlete's draft position will fall in the event of an injury or illness. Once purchased, the policy indemnifies athletes in the event that a subsequent injury causes them to be drafted below their projected positions.

Clearly, the first step for insurers in pricing this coverage is to determine the projected draft positions of players. Because of the proliferation of coverage of all the major sports, there are many "mock drafts" off of which policy pricing can be based. There are a number of well-respected and nationally known mock drafts from which an initial projected draft position can be determined. Insurers can either rely solely on a single mock draft, or, as various mock drafts show different success rates over the years, could calculate a credibility-weighted average of players' draft positions, with credibility weightings equal to the prior success of the analyst developing the mock draft.

The second input to determining the price is the amount of coverage, which could reasonably be estimated based on salary caps and/or signing bonus allotments as mandated by the professional association of the sport in question.

A third input would be the trigger point, which I'll define as the number of spots a player would have to fall before the insurance policy pays off. It's unlikely that, for something as unpredictable as a sports draft, this value would be less than 10. It'd likely require a significant drop in draft position to trigger coverage.

While not an entirely new concept, this type of policy was brought into the public light on April 28 by ESPN. Teddy Bridgewater, a quarterback for Louisville, purchased his policy for less than $20,000. At the point of purchase, he was projected to be the #3 pick in the draft, and the policy states that he will start to collect money if he falls any lower than pick #11 (because of injury). In the recent draft, he was the #32 pick overall--if he had been picked #33 or lower he would have been in line to collect $5 million, the total coverage amount of his policy. The actual expected difference between the #3 and #33 draft position is $15 million, per ESPN. ESPN's announcement also noted that "no player who has bought loss-of-value insurance for the NFL draft has actually collected." It does not appear that Bridgewater's slip in the draft was due to injury, so he likely will not be the first to collect from this type of coverage.

However, this draft season may yet lead to the first collection on a loss of value policy. Another promising player of the 2012 National Collegiate Athletic Association (NCAA) season who was hampered by injuries in 2013, former Southern Cal linebacker Morgan Breslin, was passed over in the 2014 draft. Breslin has since signed an undrafted free agent contract with the San Francisco 49ers, but he could become the first player to collect on a loss of value policy. One news story reported that he stands to collect as much as $750,000 to $1 million on a policy he took out in 2012. It remains to be seen whether the injuries meet the criteria of the policy provisions and Breslin is compensated for his losses.

Obviously there's very limited market capacity for this type of coverage, so you would expect premiums to be high. Currently, the NCAA does not provide this coverage to athletes, so they must look to the private market. Further, while premiums are likely high, the NCAA does not permit athletes or their families to take out loans to pay for the loss of coverage. This is because, under NCAA regulations, a loan for the loss of value insurance would be considered an "extra benefit" given to the athlete, as it isn't readily available to the general student population. These restrictions also prevent the possibility of a nonfamily member purchasing this coverage for an athlete.

However, if the family or the student can afford the coverage, it is likely to be a good investment. If, for example, Eric Fisher was a projected #1 draft pick and had suffered a minor injury that dropped him to the #11 pick in the draft (or lower)--assuming the drop met the negotiated coverage trigger--he would be at least partially indemnified for the loss of earnings, and would easily recoup the initial premium costs.

Loss of value coverage is an intriguing option for those who can afford it, and can help prevent the potential loss of millions of dollars caused by a minor injury. As more and more money is spent at the draft, and on professional sports in general, it would be wise for all elite-level student athletes to consider hedging against the risk of loss that is due to draft position drops. After all, the teams in the league are hedging their bets, why shouldn't the players hedge theirs?