In an insurance-based betting business some prize awards, typically only the large ones, are covered by an insurance policy. Hence, the operator pays a jackpot-dependent premium for the option to claim the amount of a large winning.
In a messenger-based business model the operator, most likely via a ticket purchasing service provider, will purchase the lottery tickets from the official lottery operator. For this service the operator pays a fixed margin in addition to the normal lottery ticket price. In return, any winnings on those tickets are passed to the operator. In other words, the operator is a sales agent for the official lottery, albeit with using a different sales channel or offering the countries which the official lottery does not cover – hence, the name.
Both business models are financial risk management or hedging methods.
Are these interchangeable business models? The answer is clearly no. Both models can be applied in conjunction to optimize the margin. For an individual bet it must be decided before the draw which hedging procedure is applied. Although some operators decide on a draw level which method to apply, it is noteworthy that neither of the two hedging methods require all bets from a draw to be passed exclusively to insurance or to the service provider for ticket purchasing. To understand this comment, we must delve into the pros and cons of each method.
Can every bet be insured, can every bet be passed to a ticket purchasing provider?
No is the answer to both questions, but for different reasons and this is an advantage.
As the name says, the ticket purchasing provider must purchase tickets. Consequently, if an operator wants to offer betting on an RNG-based draw, then there is no underlying official lottery and this model cannot be applied. For various reasons it may be interesting to offer bets on the partial outcome of more than one official lottery, then again there is no way to purchase. There are a few other cases which follow similar patterns.
No underlying lottery, no ticket purchasing.
If the insurance policy provides enough capacity, then bets for such games can be insured. The insurance-based model does not require a proper underlying lottery to exist. The essential condition to apply this model is that the policy provides enough cover. The jackpots of some of the big lotteries (Euromillions, US Powerball, US MegaMillions, Superenalotto) can exceed the insurance capacity of any existing policy. Quite a few operators have insurance policies up to EUR 50m, very few are covered up to slightly above EUR 100m.
Jackpots payouts higher than the capacity of the policy, not insurable.
Flexibility
Purchasing a ticket does not allow an operator to add features to such a game. In contrast, an insurance policy is a contractual agreement and thus, provides far greater flexibility:
- Not all prize tiers have to be insured.
- Even for an insured prize tier, not the complete amount has to be insured – self-retention.
- Fractional bets, multiples applied to payouts, limits applied to draws or draws in a time period can be agreed.
Flexibility – insurance wins.
Hedging costs translate into margin
The cost of engaging with a service provider who purchases tickets on behalf of the players is simple: It is the ticket price plus a fixed fee, typically between 5%-10%. Unless the operator can sell the bets massively above the ticket price of the underlying lottery (that price is usually known to the players), the messenger model does not yield high margins.
Most often only the two, max three highest prize tiers are insured, and quite often with some self-retention, the insurance model yields most of the time much better margins. Be aware, the premium is not a fixed fee, it depends on the prize award being insured. Hence, as the jackpots increase (most other prize awards, even if insured, are fixed amounts) the margins decrease. And even if a policy had unlimited capacity, above some amount which depends on the odds of winning the jackpot, the margin of the insurance model will be lower than the fixed messenger margin.
Margin – insurance wins most of the time, except for very high jackpots.