Betting markets in everything: hurricane damage futures

by on September 5, 2006 at 11:28 am in Economics | Permalink

…if you think the damage from this year’s hurricane season, as calculated by the Insurance Services Office, will top $10 billion, you can, as of close of business Friday, buy a contract on HedgeStreet for $32.80. If damage tops $10 billion, you get $100 back. If it doesn’t, you get nothing.

Here is the article, via Chris F. Masse.

mkl September 5, 2006 at 12:29 pm

Swiss Re was quoting $20B/single event for 32-34 on Thursday. Which makes 32.8 for $10B/season pretty attractive.

Matthew Ponder September 5, 2006 at 5:09 pm

I don’t really like the idea of betting on someone else miss fortunate but in the end that is what all is about. In my class we have been discussing PPF and this is probably different but I don’t see much of away to make much money on this more just for someone who wants to have some fun. But don’t companies play this game when they are figuring out where they should ship more hurricane supplies I know in my old town when Fran came Home Depot jacked up the prices on generators because of there such high demand 9 days with out power people will pay. I think it is an interesting concept though.

Jason Briggeman September 5, 2006 at 8:52 pm

Matthew, every bet is a bet on someone’s misfortune…even if it is just the house’s.

Doug September 6, 2006 at 10:07 am

There has been an active market for “Industry Loss Warranties” (ILWs) for some time. The contract will pay out if the industry loss “strike” is exceeded for any single event.

Currently, you can buy an ILW for Florida Wind, all US, California Quake and others. There are fairly high minimums, though, since institutions and insurance companies play in this market.

A $10 billion Florida Wind ILW costs just over 30% of the purchased coverage, which is more expensive than the hedgestreet contract, since the HedgeStreet contract covers the entire season. (Source: http://www.lanefinancialllc.com)

scott korfmann September 6, 2006 at 11:03 pm

By starting a market where you bet on the out come of hurricane you are opening a door for disaster. The assumption behind this market is that people have no control over the amount of damage a hurricane could cause. Many victims of Katrina believe that the government purposefully blew up the levees (again) in New Orleans in order to reduce the amount of flooding in the wealthier neighborhoods and isolate most of the damage to the poorer parts of the town.

Imagine if say some large terror organization sees a futures market opening up on hurricane damage as a financial opportunity. By placing a few explosives on some levees and betting heavily in the futures market, they could insure that millions of damage would incur and they just financed their organization.

This scenario is definately a stretch of the imagination, but my point is that when people stand to profit of other peoples misfortune bad (man made) things will eventually occur. And the economic reprocusions could be devastating to a city such as New Orleans.

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