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Hurricane futures
Here is the home page. This is just getting started, but I predict it won't take off. The people who most care -- shanty owners in the Caribbean -- are unlikely to make bets or use the forecasts. Nor will people find this fun betting as they did the Michael Jackson trial. But I would be happy if you proved me wrong.
Thanks to Carrie Conko for the pointer. By the way, go back to Alex's addendum to his flu post, in case you missed it.
Posted by Tyler Cowen on August 23, 2005 at 03:12 PM in Economics | Permalink
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Comments
Wouldn't the owner of a caribbean resort be interested too? I'm going to Puerto Rico next week, and they assured me that I could cancel my reservation if there was a hurricane.
Posted by: John at Aug 23, 2005 5:52:01 PM
It's not "just getting started". Although these guys have a few new wrinkles, various form os of "catastrophe derivatives" have been around for at least twenty years, and the general view of the market has been that they prefer to do insurance underwriting the normal way; catastrophe "futures " (actually, I would have called these "hurricane options" since they have a fixed cash-or-nothing bet and you can't lose more than your original stake) are a solution which has been in search of a problem for years.
Would it not just make sense to call up the Lloyd's Market in the morning and get quotes for each of the areas where they're hoping to trade futures?
Posted by: dsquared at Aug 24, 2005 2:54:16 AM
Actually, I think this is pretty new. The market is not trying to predict the likelihood of hurricanes in a given season or their magnitude. It's just trying to predict where, exactly, a given hurricane will make landfall. It might be possible to reverse-engineer that data from Lloyd's prices (I don't know), but wouldn't that be a relatively messy task? And it'll be interesting to see if this group is able to do a better job than, say, the NWS at predicting where the hurricane actually hits.
The other thing to note is that right now this market is invitation-only, and that only meteorologists and other weather experts are participating. (I think they may open it to the public later.)
Posted by: James Surowiecki at Aug 24, 2005 9:25:54 AM
wouldn't that be a relatively messy task?
Not really. "Hullo, can you get me a quote on $10m of hurricane reinsurance for the town of Buggle, Florida, please?" x about two dozen times. I keep considering getting off my arse and putting together a "global warming index" based on prices of long-dated buildings insurance in the Ruhr floodplain.
Posted by: dsquared at Aug 24, 2005 10:23:53 AM
Flood insurance in the US is heavily politicized. Insurance companies
are forbidden to go out of business in many areas of the United States
for that reason.
Posted by: wkwillis at Aug 24, 2005 2:56:16 PM
Other (possibly larger) groups that would find this useful are those in the oil and natural gas industries. The value of the commodities potentially hedged probably far exceeds that of resorts or shanties.
Posted by: Mitch Berkson at Aug 24, 2005 10:18:02 PM
Hurricane Futures is not an insurer or reinsurer, even though it has attracted interest from people wishing to hedge their exposures. We have turned them away because our design is to have traders predict where a storm will land rather than where they don't want it to.
The reinsurance data mentioned, carefully collected and tortured, would talk. But it would answer a different question than the sort we are interested in, namely, where people think a given hurricane will strike. Analyzing reinsurance data can tell us about expected damages, but that would have to be combined with vulnerability information (e.g., geography, tides, population, infrastructure, etc.) to tease out landfall probablities, and even then it wouldn't offer that in real time. So, it would be a bit messy, and having another, more direct way of looking at the question is helpful. Just because catastrophy derivatives are not widely used doesn't mean we can't learn from them.
Thank you for your interest in Hurricane Futures.
Posted by: David Letson at Aug 31, 2005 11:18:01 AM
hurricane is getting fiercer nowadays, look at the recent hurricanes, it is better to get insurance
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