Prediction markets can hedge risks insurers struggle to price

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 35:52

   whether it's hedging, existing positions. Can you give us some examples of different applications of prediction markets that people have not hit the mainstream yet? One example, you know, and every time around hurricane season, we get a lot of calls from people that live in the Keys and they want to basically buy our hurricane. contract. They're buying a hedge against hurricanes hitting their city. And it's super interesting because historically what they do this is they go to state-regulated insurance, right? They go to the insurance company and the insurance company insures their home against a hurricane. But there's sort of like two issues with that. One, it's an inefficient marketplace. And it's a little bit goes back to how when I started the company, when we were like structuring these trades around Trump

2. 36:40

   or Brexit, like there's one pricer, which is the insurance company. And you usually don't get a very good price and oftentimes they don't pay out the policy whereas having it in an open marketplace enables competitive bidding right so if ed wants to buy this hedge you know scott or other people can basically be you know competing for that market so you can get price improvement the number two issues for this specific like use cases like insurance companies have pulled out of the keys because they've had a lot of trouble and a lot of difficulty pricing hurricane risk it's been like a very difficult thing for them to put in their balance sheet. Usually they reinsure it with reinsurers, but reinsurers have pulled out of the market. And so this is a very good alternative that people basically go to. And we see this in a bunch of other places, like, you know, the

3. 37:26

   Fed interest rates, inflation, geopolitical events, bills passing, where kind of regulation could negatively impact an industry or other. And we even see a lot in sports. I mean, sports, the reinsurance or insurance industry for sports is around $10 billion today, $9 to $10 billion today. And same sort of thing applies. So for example, there's a lot of teams that have big bonuses that are due at the end of the season if they achieve certain milestones. And a lot of teams like to insure against those performance bonuses. And they do it oftentimes with reinsurers, but the prices are really bad. And so now that they can basically offload it on an exchange, they get better pricing and they get more efficient pricing. They actually know what the fair price should be for this thing. And that's generally a good thing because it increases

4. 38:08

   liquidity in the ecosystem for all these types of use cases. We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com slash subscribe.