Could Hurricane Betting Make You Money?

Aug. 30, 2010— -- 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.

His new online trading platform lets people place bets on where hurricanes, like Hurricanes Danielle or Earl, make landfall.

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."

Profits From Hurricane Bets Could Supplement Insurance Money

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.

Anyone Can Buy, Sell Hurricane Risk Landfall Options

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.

HuRLOs Tested With Wealthy Investors

While other weather-based financial products already exist, Horowitz said they're intended for bigger corporations and institutions that employ sophisticated trading strategies.

The HuRLOs are meant for small businesses and homeowners who are willing to trade in the hundreds and thousands, not the millions upon millions.

"I wanted to come up with a very simple product where the most a homeowner can lose is the amount they put up for that option and [a commission or processing fee]," he said. "Nothing's going to come back and bite you."

He also emphasized that no matter how many people buy an option for a given region, the least a person could make in a payout is $600.

For two years, he said, the HuRLOs were actually traded by wealthy individuals and institutions through a test hosted by the Chicago Mercantile Exchange. But now Horowitz has his sights set on securing the approval of U.S. regulators to open up the market to the general public.

Risk Expert: Despite Value, Economic Climate Could Stall Approval

Al Selius, a New York trader with the hedge fund Securis Investment Partners, focuses on insurance risks and said he placed a few thousand dollars worth of trades when the options were available through the mercantile exchange--to test them out.

"I think there's definitely value in this for small businesses, for people vacationing and people [living] on the coast," he said. "The hardest thing I see with the product though is will it get enough people involved in doing it? Getting people signed up and on there is the hardest part."

But, so far, Horowitz seems to be succeeding in getting people in the risk and insurance fields on board.

Robert Meyer, co-director of the Risk Management and Decision Processes Center and the University of Pennsylvania's Wharton School of Business, said he was impressed after testing the HuRLOs using Wharton students as participants.

"It basically fills a nice gap and, in many respects, it's like a win win win all around," he said. "When we presented in front of insurance companies they liked it because it takes the heat off of them a bit."

He said he's hopeful that the HuRLO becomes a real financial product but worries that the current economic climate could stall federal approval.

In 2007, he said, regulators would likely have backed this kind of product without a problem. But given the economic meltdown and the role of sophisticated, hard-to-understand financial instruments, he said, regulators have become more wary and scrutizing.

"I just hope that when it comes to the review of this that they don't throw the baby out with the bath water," he said. "There are a lot of things that are out there that really are designed to just extract money from people and this isn't one of them. I think this is a product that really could potentially help people."