Want to make a buck betting on where the wind blows?
If entrepreneur Kenneth Horowitz has his way, you could be doing just that as early as next summer.
Traders buy and sell Hurricane Risk Landfall Options (or HuRLOs) that represented different regions of the hurricane-prone Atlantic and Gulf coasts. If a hurricane hits land in the region that corresponds to your option, you split the payout with others who make the same winning bet.
To spread the word about the new product, Weather Risk Solutions, Horowitz's Palm Beach, Fla.-based firm, is inviting people to place mock bets with play money (as much as $5,000 per account) on its website. But Horowitz hopes that federal regulators will approve the real thing in time for the beginning of next year's hurricane season.
"The big insurance companies that provide windstorm insurance, they're basically pooling money. That's how they offset a catastrophic loss," he said. "What I've tried to do is basically the same thing, but more on what I would call a retail basis – for mom and pop."
After his own Palm Beach, Fla. home was hit by two hurricanes in 2004, he said wanted to devise a way to help people in coastal areas handle the heavy post-hurricane expenses.
"It was pretty devastating. I had windstorm insurance like everyone else. I always understood I had a deductible and had to come up with my own money, but I was frankly flabbergasted that basically the entire outside of the house wasn't covered," he said. "That would be trees, the screened in porch, docks."
So Horowitz, who co-founded Cingular One, put his business savvy to work to create a system that would help people in hurricane-vulnerable areas make money to complement their insurance checks.
He said they divided the coastline from Maine to Texas into 75 landfall areas and created an option for each region. People can then buy options depending on where they think hurricanes will hit or depending on where they need coverage.
Say you lived in Palm Beach and worried that Tropical Storm Earl could be the first hurricane of the season to ram the U.S. You could buy an option for $17.44 and if the storm did indeed make landfall in that area you could make $1,004.14.
But you don't need to live along the coast to participate. To build liquidity and participation, Horowitz said, anyone anywhere can buy the options.
In addition to region-based options, a "no landfall" option is also available and could be attractive to businesses that start incurring costs when a hurricane is merely predicted, Horowitz said.
For example, companies that clear roads of debris after a hurricane start hiring people before the storm makes landfall. Even if the storm never hits, they still have people to pay.
Restaurants too could lose money after a storm prediction. Expecting a hurricane, restaurant owners might start boarding up the building. If the hurricane never reaches land, the restaurant still potentially loses out on several days of business.
"They have costs when a storm doesn't occur, that's why the no landfall option helps them to offset those costs," he said.